How do student loans affect the economy?
Slower Economic Growth
According to economists, the repayment of student loans will result in a monthly reduction in consumer expenditure in the United States of up to $9 billion, or over $100 billion annually.
Both student debt relief and SAVE will enhance the economic status of millions of Americans with student debt: enable them to allocate more funds towards basic necessities, take career risks, start businesses, and purchase homes with the understanding that they will never have to pay more than they can afford towards ...
Student loans do not appear on your credit report and therefore do not directly affect your credit score. So, it's possible to leave uni with a large student loan debt but still have a good credit rating.
If you already have federal student loans, decisions made by the Federal Reserve won't affect you at all. However, if you're taking out a new federal student loan this year after the Fed raised interest rates, your loans will have a higher interest rate than those you took out last year.
Black and Latino borrowers are disproportionately impacted by student loan debt. Due to racial wealth disparities, most Black and Latino college students come from low-income backgrounds and can count on only a fraction of the financial support.
Are they a big benefit, or do they just add up to one poor investment? In reality, they can be both. Good student loan debt could deliver a college degree to help you climb the career ladder. Bad student loan debt can leave you ill-equipped for repayment, harming your finances for years to come.
Student loan debt slows new business growth and limits consumer spending. Broad student loan debt forgiveness may help boost the national economy by making it more affordable for borrowers to participate in it.
If the debt forgiveness program is permitted to move forward, at a time when consumer spending already is high, it could lead to more inflation, Jones said. “We certainly don't have a consumer spending problem right now,” he said.
Many experts and policymakers agree that both the rising cost of college and the existing volume of loans need to be addressed. They acknowledge that surging student debt is harming younger generations of students by preventing them from reaching their financial goals while exacerbating racial inequality.
Are student loans worth the risk?
With careful planning, student debt is worth it
But the data clearly show that incurring a carefully calculated amount of student debt to earn a marketable degree and enter a well-compensated, in-demand profession is very likely to pay off. In the end, it's a personal choice.
Student loans can be another example of “good debt.” Some student loans have lower interest rates compared to other loan types, and the interest may also be tax-deductible.
| Pros and Cons of Student Loans | |
|---|---|
| Pros | Cons |
| Can help you afford a cost-prohibitive education | Student loan payments can become financially crippling |
| Accessible to college students with no or limited credit histories | Default can lead to very serious consequences |
Secured loans, by comparison, are backed by something of value, such as a car or house, which can be seized if you default. But lenders can't seize a degree. So student loan interest rates are typically higher than secured loan rates because the lender's risk is higher.
“Substantial interest rate increases have major consequences for the cost of funding student loans,” said Waltmann. “While the government was always going to lose money on the fraction of loans that aren't repaid in full, it could previously expect to make a profit on the loans that are.
Student loan debt for Gen Z
66.7% of older Gen Zers had $20,000 or less in student debt in 2022. The largest percentage (28%) of college students aged 24 and younger have between $5,000 and $9,999 in Federal Direct Loans as of March 31, 2022. 6.8 million of federal student loan borrowers are 24 years old or younger.
White people, on average, are more likely to have mortgage debt than Black people, but Black people are more likely to have credit card debt (Dettling et al., 2017).
Americans own $1.77 trillion in federal and private student loan debt as of the second quarter of 2023. That's up 1.25% from the second quarter of 2022. $128.77 billion of that total through March 31, 2023, is private student loan debt.
Student loans help students pay for college, filling financial gaps and providing essential funds to cover educational expenses.
Paying back student loans may cause consumers to reduce spending to the point of causing another recession. About 43.4 million Americans have federal student loans, collectively amounting to $1.63 trillion of debt, according to the National Student Loan Data.
Why cancelling student debt is bad for the economy?
Advanced degree holders are also more likely to save their money than spend it and stimulate desired economic growth. Canceling student loan debt may result in higher inflation rates. Canceling student loan debt may also result in higher interest rates.
Regardless, one rule of thumb for student debt is that you should try not to borrow more than the first year salary you can expect in your chosen field. This means that if you expect to earn $38,000 in the first year of your career, you should try to borrow $38,000 or less for your degree.
- It Takes a Long Time. Even if you qualify for federal loan forgiveness, it can take a long time for your loans to be eliminated. ...
- Forgiveness Isn't Guaranteed. ...
- Your Debt Could Increase While You Wait. ...
- You Could Lose Out On Higher Salaries. ...
- You Might Be Taxed.
There could also be some stimulating impact, as the debt cancellation could free up borrowers' cash flow, and the additional spending may create more tax revenue. However, at the same time, this is also likely to be inflationary.
Borrowers with only undergraduate debt would qualify for forgiveness if they first entered repayment 20 years ago (on or before July 1, 2005), and borrowers with any graduate school debt would qualify if they first entered repayment 25 or more years ago (on or before July 1, 2000).
