Rising Student Debt Cripples Graduates, Threatens Economy

A college degree is supposed to be a liberating achievement that proves you have the skills and knowledge to pursue a career after four years of classrooms and final exams. Unfortunately, the cost of education has grown tremendously, and more often than not students leave college with astronomical amounts of debt, shackling them to jobs they hate and limited options.

The scale is immense — outstanding student debt has reached a staggering $1.4 trillion total, with the average recent graduate owing $35,000 each. Students pursuing advanced degrees often owe somewhere in the six figure range.

In theory, student loans make some sense. Students borrow money to finance their educations, which increases earning potential and should pay for itself; however, it rarely works out this way.

Paying off Debt the Rest of Your Life

We all know the job market is lackluster for new graduates. Wages haven’t grown in decades, which makes it increasingly difficult to make a dent in loan payments. Most young people delay traditional life milestones like buying a house or having a family because of this. This traps people in dead-end jobs, stress, and general dissatisfaction. It’s even worse for college dropouts, who didn’t get the degree and credentials but are still responsible for the loans.

Consequences worsen for those unable to make on-time payments. A financial hardship leads to years of a ruined credit score that further hinders the ability to participate in the economy. This isn’t an isolated incident, either — 3,000 people on average default on their student loans every day.

If unpaid, student debt sticks around for life. Under most circumstances, you can’t discharge them through bankruptcy. The government may even hinder Social Security checks to recover the money owed or place a lien on your house — that is, if you were able to buy one in the first place. Public service debt forgiveness is an option, but it’s possible for all people or all types of loans.

Alarming Indications for the Larger Economy

The repercussions of this debt could mushroom beyond consequences only for the individual borrowers. Given the sheer scale of outstanding loans and the probability that most will never be paid off, analysts look warily at the broader outcomes.

“Default and 90-day delinquency rates are about 11 percent,” a Citi Global Perspectives & Solutions report concluded. “To some this might appear eerily reminiscent of the mortgage crisis where delinquency rates had peaked at 11.5 percent in 2010.”

The parallels between student debt and the mortgage crisis aren’t exact, since in this case the bulk of the debt is held by the government and not banks and is therefore not leveraged the same way, but nevertheless, waves of defaults still have the potential for greater economic fallout.

“Rising delinquency rates imply that many young borrowers will find their access to credit and ability to save diminished at the outset of their economic lives,” stated a paper by the St. Louis Fed’s Center for Household Financial Stability. “This may present a significant headwind for the aggregate economy.”

Unfortunately, it seems that for now, student debt isn’t going anywhere. The cost of education is rising beyond baseline inflation, so while some schools have started to lower tuition and the idea of free public university has floated around for years, it’s going to take more than that to even make a dent in the damage that’s already been done.