Does Student Debt Work Against the Public Interest?

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Of late, the issue of an impending student debt crisis has generated quite a buzz in the media. Sen. Elizabeth Warren (D-Mass.) brought the issue into the spotlight when she took the discussion to Congress again this year, although she failed to get legislation through the infamously gridlocked Senate. Her proposal to lower interest rates on federal student loans was shot down despite the delinquency rate on the $1.11 trillion in outstanding student debt hitting 11 percent this May.

But delinquency isn’t the only problem associated with such a massive debt load. Studies carried out in the last couple of years have shown that the consequences of carrying significant student debt go much beyond the risk of repayment default. For example, student debt can severely impact the career choices that graduates make and the wealth that they create over lifetime. Furthermore, significant student debt burdens can disqualify people from mortgages and auto loans, which are often necessary to establishing a household.

But perhaps worse than anything else, student debt burdens have weakened the entrepreneurial spirit among young Americans. A study carried out by Brent W. Ambrose of Pennsylvania State University and Larry Cordell and Shuwei Ma of the Federal Reserve Bank of Philadelphia, published on March 29, found a one standard deviation increase in student debt for the number of one-to-four-employee businesses by 25 percent on average between 2000 and 2010. Simply put, higher student debt meant that fewer students were willing to take a leap and start their own business.

The reason this happened is simple. Small businesses and startups depend heavily on personal debt for financing. Personal credit health is important, and significant student debt can make an entrepreneur unattractive to lenders. “We find a significant and economically meaningful negative correlation between changes in student loan debt and net business formation for the smallest group of small businesses,” the study said.

An average graduate today has $24,437 worth of outstanding loans, a study by Christopher Avery and Sarah Turner found in 2012. But sometimes, averages can mislead. Avery and Turner also noted that average debt for students at public four-year colleges was $11,706 versus $19,726 at private for-profit colleges. This difference can be life altering, given the conclusions of a study carried out by Jesse Rothstein and Cecilia Elena Rouse for the National Bureau of Economic Research in 2007. The authors of that study wrote, “We find that debt causes graduates to choose substantially higher-salary jobs and reduces the probability that students choose low-paid ‘public interest’ jobs.” The study also showed that debt plays an important role in what major a student picks, based on an expected level of future income.

According to Bloomberg, tuition costs in U.S. increased 535 percent between 1985 and 2013. As tuition prices climbed, so did the size of the average outstanding student loan, and the duration for repaying student loans quickly followed, increasing from 7.4 years in 1992 to 13.4 years, according to the New Republic.

Logically, it makes sense to assume that if a student is going to be paying his or her student loans for so long, he or she may also choose to delay buying a first home or car. This is not just because the financial burden is so large, but also because the borrower may have to pay a higher interest rate, given that he or she is already indebted. This is one of the conclusions reached by a study carried out by Meta Brown and Sydnee Caldwell for the Federal Reserve Bank of New York.

“While evidence on the rapid growth of the student loan market has raised concerns about the effects of the associated debt burden on younger generations of U.S. consumers, the decline in student borrowers’ use of other debt during the Great Recession has overwhelmed the observed student loan growth,” that study said.

High student debt also has a dramatic effect on the savings of households that are repaying student debts. Richard Fry of the Pew Foundation found that households headed by a college-educated adult without education debt had seven times the net worth ($64,700) of households headed by a person with student debt ($8,700).

Beyond the financial consequences, high student debt is also pushing graduates to marry later in life or choose not to marry at all. Dora Gicheva from the University of North Carolina found in 2011 that an additional $10,000 in loans decreases the probability of marriage by at least 7 percentage points.

One of the most devastating impacts of the student lending snafu is that the loans are taken with an expected future income in mind. However, as we well know, the economic recovery has been modest at best, and employment opportunities for graduates are somewhat bleak.

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