The Long-Term Impact of Student Loan Debt

Student loan debt burdens borrowers in multiple ways. Not only does it reduce overall economic activity, but a heavy student loan burden can prevent responsible borrowers from purchasing homes or making other large purchases.

Without student loan debt, more individuals would pursue higher education to increase their lifetime earnings and close income gaps and strengthen our economy.

1. Decrease in Economic Activity

Student loan debt affects everyone in America. According to a new Data for Progress survey, over half of Americans say that student loan debt makes them less likely to buy things such as appliances or furniture, vacation packages, homes or take on second jobs; those without access may end up staying in jobs they dislike or forgoing opportunities such as starting their own businesses.

Student debt also limits savings for retirement and other long-term goals, according to research by Education Data Initiative (EDI). According to their research, those carrying student debt are 11% less likely to start their own businesses compared with those without student debt – a serious disadvantage given that starting one could provide young people with more economic opportunity while simultaneously strengthening local economies.

When an economy slows and interest rates increase, those carrying debt will find it increasingly challenging to repay loans and cover expenses. Furthermore, student debt carries more interest each month, creating a vicious cycle which could eventually contribute to less economic growth in the long term.

Though widespread student loan forgiveness might sound appealing, Moody’s Research notes that such action wouldn’t benefit as many assume. Much of America’s student debt already forms part of our national debt; cancelling these debts wouldn’t increase deficit spending further. Furthermore, those owing money might spend the extra cash they received instead of saving it away for future needs, further worsening income inequality and creating poor labor market outcomes.

2. Decrease in Homeownership

Homeownership rates are negatively related to student loan debt levels. Every increase of $1,000 in loans disbursed prior to age 23 reduces homeownership by about 1.8 percentage points among public four-year college graduates (assuming that students pay sticker price tuition fees). These results are in line with other studies and have passed validity tests.

Reasons behind higher student debt levels reducing homeownership are unclear, yet likely involve several different elements. For instance, those carrying student debt may find it more difficult to afford the down payment for a house and may opt to rent instead of buying; or make other sacrifices such as delaying marriage or children and/or cutting retirement savings accounts.

Higher student debt can make obtaining mortgage credit more challenging, as having larger loan balances reduces overall credit scores and leads to increased mortgage denials and decreased home ownership opportunities. Furthermore, having larger amounts of debt makes covering emergency expenses harder.

These findings may be troubling; however, it’s important to keep in mind that the homeownership effect of student debt tends to diminish over time as borrowers approach mortgage underwriting thresholds. Yet its effect on housing tenure choice could peak many years post college graduation and individuals may exhibit “habit formation” in their decision making regarding housing tenure choices.

3. Decrease in Retirement Savings

As many borrowers attempt to save for retirement while simultaneously paying down student debt, it can be challenging to save enough. They may end up making concessions like cutting back or stopping contributions to accounts like 401(k). Pausing retirement savings is never wise as it reduces investment earnings over time and leaves you with less of an inheritance when retirement arrives – it would be better if saving and investing as much as possible even if that means temporarily increasing payments on student loans.

There are ways you can still save for retirement while paying down student loans, however. One option would be taking advantage of matching funds offered through your employer’s 401(k) plan; otherwise you could also consider taking out an interest-only loan that will allow you to both cover student debt while investing for later.

An effective way to boost retirement savings is through contributing to a personal taxable savings account. Here, your money can be invested for long-term growth while reaping tax advantages as it grows over time. Moreover, consider starting an emergency savings account so as to protect yourself in times of economic stress like COVID-19 pandemic or future recessions.

4. Decrease in Credit Scores

Credit scores are an integral component of financial health for borrowers. Late or missed payments on student loan debt can have devastating repercussions, making it harder for individuals to secure employment or affordable housing, as well as garnished wages, withheld tax returns and withheld federal benefits; also making purchasing homes or opening bank accounts much harder for these 9 million defaulters (disproportionately Black Americans and those from lower-income backgrounds).

Student debt impedes decision-making when it comes to further education; 20 percent of graduates with more than $20,000 in student loan debt reported that it prevented them from seeking graduate studies. Furthermore, studies reveal that those carrying student loan debt are less likely to take positions that offer higher salaries or advancement opportunities in public sectors jobs – this has lasting repercussions for our economy and limits access to well-educated workers who bring valuable skills, perspectives and creativity into the workplace.

Student loan debt can also prevent retirees from retiring with enough savings; further compounding their financial woes because many student loan borrowers live paycheck-to-paycheck lives.

Numerous solutions have been put forward to combat the student debt crisis, ranging from systemic reforms like lowering tuition rates at public colleges to schools disregarding scholarships when students take out more loans than they can afford to repay back. But perhaps the best way to address high student debt and its negative economic repercussions is making managing loans simpler through Income-Driven Repayment or Public Service Loan Forgiveness programs.

5. Decrease in Social Security Benefits

65 million Americans receive Social Security benefits, with many counting on these payments to get by during retirement. When too much income goes toward paying student loan debt, however, their retirement can become precarious and quality of life decrease. Even worse: delinquent student loan debt can force Social Security benefits to be garnished by the government as part of an offsetting benefit measure known as benefit offset – an alarming trend estimated by recent estimates as growing rapidly between 2002 and 2016. It has even been estimated that beneficiaries have had their benefits withheld due to defaulting student loan default has increased five-fold between 2002 and 2016.

Many older borrowers weren’t in delinquency when they reached retirement age, yet have accrued substantial unpaid interest over time. Furthermore, they may be subject to the Treasury Offset Program which allows up to 15% of monthly federal benefits (such as Social Security payments) to be withheld – this can be particularly troubling if seniors didn’t save enough during their working years in order to compensate if a portion of their Social Security benefit gets withheld.

To address this problem, some lawmakers have proposed targeted debt relief programs which would forgive borrowers’ outstanding balances after 10 years of payments have been made. Others have advocated for income-driven repayment plans which allow borrowers to cap their student loan payment at 5% of discretionary income; The Biden Administration recently proposed such a plan which also increases non-discretionary income exclusion and eliminates capitalization of unpaid interest.

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