How Student Loans Impact the EconomyJune 6, 2022
There are many reasons why college is so expensive these days. Less state funding, more on-campus amenities, and higher administrator salaries are just some of the reasons why the average cost of college has outpaced inflation for decades.
This higher price tag makes it difficult for regular students to graduate without debt. As student loan debt in the United States continues to increase, more and more borrowers are struggling to manage their debt burden. With an average student loan debt of $28,500 for undergraduate students and $65,000 for graduate students, that’s no surprise.
Student loans have a significant impact on borrowers after graduation, influencing every decision from where they work to how many kids they plan to have. Each successive generation is suffering from this pervasive, worsening financial restriction – and that’s bad news for an economy that relies on the buying power of its consumers.
Read below to learn about all the different ways that student loans positively and negatively affect the economy.
Positive Economic Impact of Higher Education
There are many reasons why a college education can benefit an individual – but it’s good for the economy as well. College graduates tend to be happier, healthier and wealthier than those with only a high school education. College graduates are also more likely to vote, give to charity, and volunteer.
But while some degrees come with a high income potential for graduates, others may leave borrowers worse off than if they had never gone to college at all.
Negative Economic Effects of Student Loan Debt
While graduating from college can result in a better, higher-paying job, graduating with student loans has more than a few drawbacks. Here’s an overview of the negative impact that student loan debt can have:
- Decrease in new business growth
- Lower rates of homeownership
- Lower net worth
- More difficulty handling a recession
- Less consumer spending
- Increased difficulty in saving for retirement
- More stress on social safety net programs
- Increased likelihood of delinquency
- Generational inequality
- Delays to traditional life milestones
Decrease in New Business Growth
As student loan debt increases, small business growth tends to decrease. Students with a lot of debt can’t afford the risk of starting a small business. And even if they want to run their own business, they’re less likely to qualify for a loan or line of credit if they have significant debt of their own.
They may also be unable or unwilling to work for a start-up that may go belly-up at any moment. Having student loan debt can make it harder to take job risks like working for a new company.
Lower Rates of Homeownership
A 2019 report from the Federal Reserve found that student loans are a huge barrier to homeownership and prevented 400,000 young Americans from buying a home between 2005 and 2014. Another study found that those who graduated with student loan debt had homes that were worth, on average, $103,000 less than those who didn’t have student loans.
When you apply for a mortgage, the lender will calculate your debt-to-income (DTI) ratio. They will add up your monthly debt payments and divide them by your monthly pre-tax or gross income.
To be approved for a mortgage, the maximum DTI ratio is usually 45%, which includes any future mortgage payments. Borrowers with high student loan totals may also have high DTIs, which can make it much harder to qualify for a mortgage. Also, if you have a sizable amount of student loan debt, it may be harder to save for a down payment, closing costs, and moving expenses.
Lower Net Worths
As college tuition has outpaced inflation over the last several decades, the number of borrowers with student loans has also drastically increased. A 2013 study from the Federal Reserve found that the average net worth for households with student loan debt was $42,800, while the average net worth for households without student loan debt was $117,700.
Less Consumer Spending
Borrowers with student loans have less disposable income than those without student loans. That can have a huge impact on the economy because these borrowers have lower rates of consumer spending than consumers without student loans.
More Difficult to Stay Afloat During a Recession
When you have student loans, you have more fixed expenses. This can make it harder in case you lose your job, have a medical emergency or if the country is going through a recession. When a recession occurs, people are often furloughed or lose their jobs. Losing your job can make it very difficult to afford your student loans, especially if you were already living paycheck-to-paycheck.
Increased Difficulty in Saving for Retirement
Because borrowers can have high student loan payments, it’s very difficult to save for retirement with student loans. And while borrowers can try to make up the difference after they’ve repaid their student loans or start earning more money, it can be hard to bridge that gap after years of not investing.
The power of investing comes more from how long your money is invested than how much you actually invest. If you can start early, you won’t have to contribute as much for the same result. But if you have to wait until after you’ve repaid your student loans, you’ll have to play catch up.
More Stress on Social Safety Net Programs
Borrowers with student loans are more likely to need and use social safety net programs like Medicaid, SNAP, and more. This means borrowers are more of a liability for the entire government, not just themselves.
Increased Likelihood of Delinquency
If you’re having financial trouble, you may end up missing student loan payments or even default on your loans. The consequences of not paying student loans can have a huge impact on your credit score. This can make it harder to qualify for other loans, especially a mortgage. It can also make it much more difficult to refinance your loans to reduce your debt burden.
Students Have Less Economic Power
Because student loans are so prevalent, students are finding it harder to graduate and start earning enough to buy a house, get married, and start a family. They can’t buy new cars as often or go on vacation. Instead, they’re funneling more money toward their loans than ever before.
In general, a good measure of the economy is if people are better off now than they were a generation ago. As student loans have outpaced inflation, it’s made it harder for generations to feel that way. Because college costs so much, borrowers are not better off than they were a generation ago.
Delays to Traditional Life Milestones
It’s a common trajectory: graduate from college, get a job, buy a house, get married and start a family. But for borrowers with student loans, those life milestones tend to come more slowly than for their peers who don’t have student debt.
Read more about this in our guide: Are Student Loans Keeping Millennials From Starting Families?
Student Loan Debt Relief Options
Make Extra Payments
If you want to pay off student loans faster, the simplest way is to pay more than the minimum amount every month. First, go through your expenses and income to see if you can afford to make extra payments. See if there are any expenses you can eliminate or reduce, and then put that extra money toward your loans.
You can also find ways to increase your income, like starting a side hustle, negotiating a raise at work or selling extra items around the house. If you get a windfall, like a year-end bonus or tax refund, put those extra funds toward your student loan balance.
Then, choose if you want to pursue the debt avalanche or debt snowball method of debt repayment. With the avalanche method, you pay extra on the loan with the highest interest rate. This results in saving the most on interest over the life of the loan.
For example, let’s say you have two student loans, one with a $2,000 balance and a 5% interest rate and one with an $8,000 balance and a 10% interest rate. If you choose the debt avalanche method, you’ll pay extra on the loan with the 10% interest rate.
The debt snowball method says you should pay more on the loan with the lowest balance. If you have multiple student loans, using the debt snowball method means you’ll knock out individual loans faster, which can make you more motivated to keep going.
Student Loan Forgiveness
There are many federal and state-based loan forgiveness programs that can help borrowers reduce their loan balance. While most of these programs are only available for those with federal loans, some are also available for those with private student loans.
Student Loan Forgiveness Resources:
- Non-Profit Employee Student Loan Forgiveness
- Student Loan Forgiveness & Repayment Assistance for Older Adults
- Native American Student Loan Forgiveness Options
- Student Loan Forgiveness for Nurses
- Student Loan Forgiveness for Doctors
- Student Loan Forgiveness for Teachers
- Student Loan Forgiveness for Lawyers
- Military & Veteran Student Loan Forgiveness
Student Loan Refinancing
Refinancing your student loans can have a huge impact on your loan balance. When you refinance, you can qualify for a lower student interest rate to slash the total interest burden and reduce your monthly payments.
For example, let’s say you owe $50,000 with a 10-year term and a 9% interest rate. If you refinance to a 10-year term and a 5% interest rate, you’ll save $12,366 in total interest over the life of the loan. You’ll also pay $103 less each month.
The benefits of student loan refinancing also mean that you can afford other important financial goals like saving for an emergency fund or buying a house. It may also be easier to get married or start a family.
Learn more: Student Loan Refinancing Guide
Save Money by Refinancing Your Student Loans With ELFI
When you refinance your student loans with ELFI, you can qualify for a lower interest rate.* To see how much you could save by refinancing, use our student loan refinancing calculator. Plug in your current loan information to see how much you could potentially save each month and over the life of the loan.
ELFI will also pair you with a personal student loan advisor, a dedicated customer service representative who will guide you through the entire refinancing process. ELFI has a 4.9 out of 5 rating on TrustPilot with more than 1,700 reviews.** ELFI does not charge any application, origination or prepayment fees.
**Score was obtained from Trustpilot’s website on 6/01/2022. All information is subject to change at any time. Please see Trustpilot’s website for current information.