The wide impact of student loan debt and how to help the situation
The cost of student
loan debt is clearly felt by those directly involved, whether they are students themselves or family members who have taken out loans on behalf of the students. Student loan debt has a wider effect, however, with a large economic and social impact that spreads throughout the country.
“In a widely discussed brief last year (as widely discussed as briefs can be), data from the New York Fed suggested a macroeconomic drag due to student loan debt in the wake of the Great Recession,” according to Forbes Contributor Josh Freedman.
The brief also suggests that people who had more student loan debt were not as likely to purchase cars or homes as people were without a debt burden. This has a direct impact on the car and housing markets and a wider impact on the economy as a whole.
“Rising student debt levels are changing how millions of people approach major milestones and core financial decisions, affecting long-standing social and economic patterns,” states Kelley Holland in a contribution to CNBC. “Owning a home used to be a key marker of adulthood and maturity. But home ownership has plummeted among Americans under age 35, from 43.3 percent in the first quarter of 2005 to 34.6 percent in the first quarter of 2015, according to the Census Bureau.”
Due to student debt, first-time home buyers can only afford homes in the lower price range, which is limiting the market value of other homes. Builders and realtors are also being impacted due to the lack of market for higher valued homes.
People in their 20s are also delaying starting a family, a trend that has been going on for years. In the summer of 2015, the birth rate for women 20-29 hit a record low according to Pew Research. It isn’t possible to predict exactly what the economic impact of this trend will be, but it is clear that the social impact is already being felt, as the landscape of young parenthood already has a dramatic new look.
“Research has also found that the burden of student debt hinders innovation and entrepreneurship, a core component of the economic prowess of the United States,” states Holland. “Researchers at the Federal Reserve Bank of Philadelphia and Penn State studied the relationship between student debt and small business formation and found ‘a significant and economically meaningful’ link: more student debt led to fewer small businesses being formed.”
Experts have many ideas regarding how to improve the student loan situation. Due to the fact that the majority of student loans are federal loans, some experts feel that there would be less student loan debt overall if the balance shifted more toward private loans from financial institutions.
“First, private student loans arguably have the strongest consumer protection: a robust underwriting process that includes an ability-to-repay test,” says Richard Hunt, president and CEO of the Consumer Bankers Association, in a commentary on CNBC.com. “Government loans are subject to the Department of Education lending rules, which don’t require such a test.”
Another reason is that private lenders must provide a full and comprehensive disclosure of conditions and terms, and a summary of the full price of the loan over its lifetime. This can help students and their parents accurately weigh the costs and the benefits.
Students can also help decrease the burden they feel, as well as the larger social and economic impact of their debt, by taking the right steps to make home ownership easier sooner. A good start is talking to their financial institution about the steps they can take to reach a level at which they can be approved for a loan. This could include forming goals like saving up to a specific down-payment target. Then they can make use of one of the many free budgeting tools available online to help get their spending in check and save more efficiently.
Higher education is still a very important part of building a successful future. You can be in a better position to enjoy the rewards if you make thoughtful decisions about what type of loan to choose and practice careful budgeting to ensure that you can still meet all your life goals, like buying a home and starting a family.
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