Student loans are intended to help young people toward a better financial future. But recent analysis by CNN Money shows that not only can taking out excessive student loans be counterproductive to reaching one’s personal financial goals, but that the growing burden of student debt in the United States is affecting other areas of the economy, such as the housing market, as well.
A recent study estimates that the collective student loan debt of Americans aged 20 to 39 has caused home purchases to decline by 8% among the group. That’s the equivalent of $83 billion across 414,000 real estate transactions lost, according to John Burns Real Estate Consulting.
U.S. student debt now totals $1.1 trillion, making it the form of consumer debt with the second-highest balance (after mortgages). According to the Federal Reserve Bank of New York, the average student debt for a college graduate under 30 is $21,000.
Rick Palacios, director of research for John Burns, calculates that every $250 monthly student loan payment lowers its borrower’s ability to purchase a home by $44,000. And, as Palacios notes, about six million U.S. households pay more than $250 per month on their student loans.
It has been widely assumed that the student loan burden was slowing the recovery of the housing market, but the John Burns report is most successful attempt thus far to quantify the setbacks to this particular sector of the economy.
Student Debt and the Economy
Many kinds of debt slow the overall economy by dissuading consumer spending.
But student debt weighs more heavily on the economy than other forms of debt because the U.S. government backs the majority of student loans.
Because the creditor in this arrangement is the government — which in reality means taxpayers — that is where the burden will fall if students default on their loans, a scenario made more likely by mounting levels of student debt.
Student loans now account for 6% of the national debt. This sizeable chunk, according to analysis by Forbes staff, released in August, could lead to slowed economic growth, fewer jobs created, rising interest rates and lowered access to capital.
Are Student Loans Still Worth It?
Students looking at the daunting facts of educational debt may be tempted to ask if obtaining a college degree is worth taking on loans at all.
The simple answer, actually, is yes: A recent study released by the Brookings Institution’s Hamilton Project concludes that “a college degree — in any major — is important for advancing one’s earnings potential.”
But the finer details of how much to borrow and what kind of education to obtain are far murkier.
The Hamilton Project study shows that earnings vary widely depending on major, and research in the past several years has questioned whether borrowing more for an elite education, as opposed to attending a more affordable public school in one’s area, translates into better lifetime earning potential.
In weighing these options, experts are recommending that students limit their borrowing amounts by how much they expect to make after graduation.
It’s also important to make a plan for managing student debt, especially considering that students are often burdened by credit card debt and other financial obligations as well.
“Part of the rating process includes how many debt sources you have. By consolidating your debt it actually helps creditors who are potentially in a position to offer you a loan to look at you a little more favorably. Debt consolidation under one entity can improve the creditors’ perception of the client,” says John Diaz, Spokesperson, Debt Management Group.