School Debt Squeeze

Apr 22, 2013 by

graduation mortar boardsThough the U.S. stock market has largely, if tenuously, regained most of the calamitous losses caused by the 2008 financial meltdown, Joe and Jane Average haven’t yet seen much of an economic recovery. GNP growth has been anemic, at best, and the national unemployment rate is 7.6%—much improved from the peak of 10% reached in October 2009, but still a ways from full employment, and down in part because many have given up looking for work. Further, few are forecasting robust economic growth in the U.S. in the foreseeable future.

Is Student Debt Suppressing Growth?

I ran across an infographic recently on CreditCards.com that may provide a partial explanation for the U.S. economy’s extended period of sluggishness. Reflecting statistics gathered by the Pew Research Center, the infographic hints that exploding student debt may be squeezing out traditional consumption by newly employed former students. Check it out:

student loan debt growth

Student Debt Grows, All Other Debts Fall

From 2001 to 2010, under-age-35 households have been shedding (or avoiding taking on) credit card, vehicle, and mortgage debt. But at the same time, student loan debt has skyrocketed.

Economic Implications of Student Debt Squeezing Out Other Debt

Growth in credit card, auto, and mortgage debt—while not necessarily a positive for individual consumers—does reflect consumption and economic activity. Students graduating with huge debt loads into an economy with fair to poor job prospects would seem to translate to reduced consumption. As a group, under-employed, unemployed, and shakily employed young people may have little choice but to defer discretionary consumption in favor of groceries, gasoline, rent, and student loan payments. This necessary austerity may mean lower economic growth as students struggle to deleverage.

What Do You Think?

Does the economic recovery feel to you like a party that just won’t quite get rolling? Might the explosion in student debt over the past couple of decades be making economic recovery more challenging due to younger people’s financial challenges as they dig out of debt while fretting over employment?

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