4 Ways High Student Debt Burdens Are Hurting the Economy

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As college tuition continues to rise, student loans are becoming a necessity for many.  Those loans, in turn, are causing high debt burdens, which is having a negative implication not only on college graduates but also the U.S. economy. A Liberty Street Economics report shows student loans have drastically increased in popularity over the decade, with the aggregate student loan balance reaching $966 billion at the end of 2012. In fact, student debt is now the second largest debt of U.S. households following mortgages, meaning it exceeds auto loans, credit cards, and home equity debt balances.

The report shows the average student loan balance among 25-year-olds has grown by 91 percent from $10,649 in 2003 to $20,326 in 2012. The bad news only gets worse. The Federal Reserve Bank of New York said that about 17 percent of borrowers were past due on their student debt by more than 90 days in 2012, up from less than 10 percent in 2004. The high debt, paired with increasing debt delinquency, isn’t good news for anyone. Here are four ways student debt burdens are hurting the economy.

1. It reduces disposable income

Disposable income is money that can be spent on goods and services, which is what helps other companies and organizations prosper. As student loans force people to cut back on their spending, it directly impacts businesses throughout the country. If people aren’t going out to eat as often, spending as much on clothes, or buying little things that add up over time, it’s preventing GDP growth. 

“The associations definitely suggest that growing student debt is a drag on consumption,” Wilbert van der Klaauw, an economist with the Federal Reserve Bank of New York tells TIME. “This is still something we’re discussing. There are a range of views on this. My personal view is that the increasing reliance on student loans for financing college education is going to be a drag on consumption for some time.”

It doesn’t just reduce disposable income for a few years, either. A recent Pew Research study shows that 37 percent of households headed by an adult under 40 have outstanding loans, with the average student debt burden at $13,000, compared to 22 percent in 2001. This means that student debt can significantly impact the amount of money that a household has over decades.