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 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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  • John S @ Frugal Rules

    I think you may be on to a point Kurt. Student loan debt has gone crazy high over the last few decades and what former students could afford to do much when they’re graduating with tens of thousands in student loan debt. I don’t know that it’s the sole reason why things are the way they are, but it definitely is contributing to a certain extent.

    • No, surely not the sole reason, but perhaps a significant ball & chain on economic growth. And one that’s not going to ease anytime soon, unfortunately.

  • As you put it, student debt just might be a ball and chain on economic growth. The job prospects for younger people are simply not what it was a generation ago, at least in my opinion. However, tuition has gone up more than inflation and people seem to be carrying more debt in today’s dollars versus what people may have done in the past. Some of this is my perception, but it sure seems real.

  • Bob Gold

    Yes, the economic recovery seems anything but robust. I can understand how student debt can be a heavy weight for newer graduates just getting started with their careers. If getting the first “real” job is so difficult, it definitely means putting off consumption for these young people. Eating, paying rent and paying student loans payments can eat up a paycheck in no time, assuming there is a paycheck at all. It is sad to see how expensive a college education is for young people today.

  • Rich Uncle EL

    It’s unfortunate but true; during times of high unemployment many ex-workers go and take higher education to make themselves more marketable. Student debt needs to be resolved as it is a problem that will continue to get worse.

  • Brick By Brick Investing

    Student growth is absolutely stunting growth. How can individuals save, purchase houses, or invest if they are paying all their money to student loans. The next 5-10 years will be very interesting to see how this higher education debacle plays out.

  • AvaReed

    While the industry is ‘happy’ about college students’ ‘spending’ power from groceries, gadgets, high-end fashion/cosmetics etc… We need to do something…

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