Is student debt good for anyone? The answer seems to be a resounding “NO!” Recent research reveals that high levels of student debt not only hurts students, but universities, creditors, and the greater economy as well. By stifling economic activity and dragging the savings rate in the United States even farther below the Golden Rule savings rate, student debt has the potential to greatly reduce the quality of life in the United States.
Before looking at the effects of high student debt, it’s important to understand where this debt comes from. A study by Mark Perry, a professor of economics at UM, found that on average, college tuition has grown at a CAGR of 7.45% since 1978. Compare this value to housing prices, which have grown at an average CAGR of only 4.3% during the same time period (WSJ: “Degrees of Value: Making College Pay Off”). Certainly, the average CAGR of incomes has not experienced such astounding growth, and some 40% of college graduates end up in low paying jobs that don’t even require a college degree (see my post: “Employment is on the rise, but is it the employment we want?”). Consequently, more and more students are forced into debt as they attempt to bridge the gap between income and tuition costs. Today, the average college graduate has $29,400 of outstanding student loans.
This rise in student debt has negative impacts on three main groups: (1) college graduates (2) creditors, and (3) universities. In this blog post, I will address the impact this debt has on college graduates (I plan on analyzing the other two groups in a later post). Certainly, the negative impact on graduates is obvious. Stifled by excessive amounts of debt, college graduates cannot pursue the “American Dream” as freely as they’d like. A study by the Consumer Financial Bureau found that many Millennials, because they are limited by student debt, delay home ownership, fail to save for retirement, and cannot take out small-business loans due to poor credit scores (USA Today: “Millennial’s ball-and-chain: Student Loan Debt”). While this is certainly a shame for graduates, this limited economic activity is also a shame for the larger economy. As we continue to recover from the Great Recession, limited economic involvement is not what we want to see; we want college graduates to buy houses and to save for retirement, as this type of activity makes economies thrive.
In this way, irony strikes again, as higher education seems to have the opposite effect as we would like. Rather than increase economic activity, universities, by creating student debt, are suffocating it – at least for Millennials. Furthermore, this post doesn’t even touch on the ways student debt prevents universities and creditors from contributing to economic growth. To me, Millennials’ limited economic involvement is a cry for reform. Somehow, students need to be able to attend college without crippling themselves with unmanageable amounts of debt. But while the problem is obvious, finding a solution certainly is not.