Stu­dent Debt: Save That Money

All Gifs cour­tesy of Pop­key

Stu­dent debt reached an all-time high in De­cem­ber 2016 with over $1.4 tril­lion owed, ac­cord­ing to the Fed­eral Re­serve.

This out­paces the na­tion’s cur­rent level of credit card debt by over $2 bil­lion. The vol­ume of this debt held by stu­dents is mas­sive, and it could have huge im­pli­ca­tions on how the fu­ture of the U.S. econ­omy will look. Every­thing from home pur­chases to buy­ing new cars and even sav­ing for re­tire­ment will be af­fected by this be­he­moth li­a­bil­ity.

One of the rea­sons stu­dent loan debt has soared to this new peak is the rapidly ris­ing cost of col­lege. When in­clud­ing the cost of room and board, the cost of col­lege since the mid 80s has in­creased around 2.73 per­cent for four-year pub­lic uni­ver­si­ties and 2.5 per­cent per year for four-year pri­vate uni­ver­si­ties like Maryville every year on av­er­age. This growth rate in­cludes in­fla­tion in the cal­cu­la­tion, so that growth is in ex­cess of the in­fla­tion we saw dur­ing that year. This growth in col­lege costs have in­creased the nom­i­nal (with­out in­clud­ing the ef­fects of in­fla­tion) cost of go­ing to col­lege by over 1120 per­cent. This un­prece­dented growth has out­paced the cost of health­care, food and hous­ing.

We have al­ready be­gun to see what af­fect this mas­sive amount of stu­dent debt is hav­ing on our econ­omy. Ac­cord­ing to a study con­ducted by the Fed­eral Re­serve in 2015, home­own­er­ship rates de­clined five per­cent be­tween 2005 and 2014. The largest seg­ment of the pop­u­la­tion who weren’t buy­ing homes were young house­holds. The rate of de­cline among house­holds be­tween the ages of 24 and 32 de­creased by nine per­cent. This is by far the largest de­crease by any seg­ment of the pop­u­la­tion that the U.S. has seen since the data has been tracked.

Claire An­glo, se­nior ac­count­ing and fi­nan­cial ser­vices ma­jor, con­ducted a re­search pro­ject about the im­pact on stu­dent loan debt on re­tire­ment sav­ings and the econ­omy as a whole.
Ac­cord­ing to An­glo, stu­dent loan debt is af­fect­ing how young peo­ple are de­cid­ing to live. “They’re liv­ing at home with their par­ents longer, not get­ting a mort­gage, which hurts the econ­omy, they’re not spend­ing as much,” An­glo said.

This can have an ad­verse ef­fect on the res­i­den­tial hous­ing in­dus­try which con­tributes to about three to five per­cent of the U.S.’s GDP. If these cur­rent res­i­den­tial trends of stu­dent loan debt con­tinue, the hous­ing mar­ket could see an­other col­lapse sim­i­lar to the 2008 re­ces­sion.

An­other area that stu­dent loan debt could neg­a­tively af­fect the econ­omy is through the auto in­dus­try which con­sists of about three to five per­cent of GDP. One of the pri­mary means of ac­quir­ing a car for much of the pop­u­la­tion is to bor­row money in or­der to get the car. This too is be­ing im­pacted by stu­dent loan debt.

An­glo said about mort­gages and auto loans, “A lot of peo­ple, based on my re­search, are not in­ter­ested in get­ting more debt be­cause there are many peo­ple $50,000 plus in stu­dent loan debt they have to pay off. So they don’t want to add on an­other $150,000 for a mort­gage. Or even a $10,000 car loan be­cause of that $50,000 stu­dent loan debt they have to pay off.”

Re­tire­ment and sav­ings ac­counts are also be­ing af­fected by stu­dent loan debt. “If you look, there’s re­search that shows that peo­ple who just come right out of col­lege and start work­ing, they’re not tak­ing ad­van­tage of the op­por­tu­ni­ties their com­pa­nies are pro­vid­ing like match­ing of the 401k be­cause they’d rather pay off their stu­dent loan debt first,” An­glo said.

This could force these bor­row­ers to re­tire later. An­glo said, “They’re los­ing out on a whole bunch of sav­ings from their re­tire­ment so they’ll re­tire later or they won’t have enough to re­tire at 65.”

The amount of stu­dent loan debt could also de­crease the sav­ing habits of bor­row­ers. “Sav­ings in gen­eral are de­creas­ing. That could neg­a­tively im­pact the stock mar­ket and bond mar­ket be­cause there’ll be less money flow­ing in from the peo­ple in their early to mid-20s to mid-30s,” An­glo said.

An­glo of­fered some ad­vice to any­one who has stu­dent loan debt, say­ing, “Make sure you un­der­stand the stu­dent loan you have, that will af­fect pos­si­ble things go­ing for­ward. Know the in­ter­est rate, know if you can de­fer it. The biggest thing is to try to save as much as you can out of col­lege.”

Sources: The Fed­eral Re­serve (here and here), We Are Hope Inc. and Trends.Col­lege­Board.org.