American families are carrying about $1.6 trillion in student loan debt, a massive burden that amounts to nearly 8 percent of national income, a share that has roughly doubled since the mid-2000s.
This week, Sen. Bernie Sanders, I-Vt., and some of his House colleagues unveiled a proposal that would cancel student debt for 45 million Americans and make public higher education tuition-free. The 2020 presidential hopeful said he would put a tax on Wall Street, raising an estimated $2 trillion over 10 years, to pay for the plan.
As lawmakers debate the merits of various proposals, it’s worth taking a step back to ask a basic question: What is student loan debt doing to the economy? Economists have been digging into this issue for several years.
Here’s a roundup of what they’ve found.
• Student loan debt is delaying marriage and family formation. A 2014 study found a link between a woman’s student loan repayment schedule and marital timing. A $1,000 increase in student loan debt, researchers found, lowered the odds of marriage by 2 percent a month among female bachelor’s degree recipients in the first four years after graduation. That finding has been bolstered by more recent research showing a similar trend.
Research has shown that marriage confers myriad economic benefits: For starters, married people, particularly men, earn more money. And children who grow up in two-parent households tend to be better off as adults.
• Student loan debt is hampering the growth of small businesses. A 2015 study by economists at the Federal Reserve Bank of Philadelphia found “a significant and economically meaningful negative correlation” between rising student loan debt and falling small-business formation. The mechanism isn’t hard to grasp: If you’re paying off a student loan, you’re less able to pull together the cash to start a small business.
The effect is significant: The increase of one standard deviation in student debt translated into a decrease of 70 new small businesses per county — a decline of approximately 14.4 percent. The authors note that small businesses are responsible for “approximately 60 percent of net employment activity in the U.S.”
• Student loan debt is taking a bite out of the housing market. This year, the Federal Reserve issued a report showing that student loan debt prevented about 400,000 young families from purchasing homes, accounting for about a quarter of the drop in homeownership rates in this demographic from 2005 to 2014. In addition to the obvious connection between debt payments and the ability to save for a down payment, the researchers noted that the rise in student debt increased borrowers’ odds of default, which has a major adverse effect on their credit scores and, therefore, their ability to qualify for a mortgage.
• Student loan debt makes it harder to weather financial crises. Another Federal Reserve report, this one from 2013, found that student loan debt jeopardizes the short-run financial health of households.
Most obviously, it found that households with student debt had a lower median net worth ($42,800) than those with no student debt ($117,700). More troubling, however, was the finding that the Great Recession took a bigger chunk out of the net worth of student-loan-indebted households: From 2007 to 2009, households with student loans saw 12.4 percent of their total net worth evaporate, while the net worth of those without student loans fell by 9.3 percent.
• Student loan debt is preventing young people from saving for retirement. A 2018 study by the Center for Retirement Research at Boston College found that while student debt didn’t affect 401(k) participation rates, it did affect how much young workers were able to sock away. “Those with debt have only about half as much in assets by age 30 as those without debt,” the report found.
• Student loan debt can cause graduates to give up on their dreams. A 2017 working paper found that “students with debt are less ‘choosy’ on the job market: They are more inclined to accept part-time work and jobs that are less related to their degree and offer limited career potential.” Earlier research showed that student loan debt “reduces the probability that students choose low-paid ‘public interest’ jobs.” New graduates with loan debt, in other words, appear to have an understandably greater interest in paying off their debt than in making the world a better place.
• The returns on higher education aren’t what they once were. Some commentators have sought to play down concerns over rising student debt by pointing out that higher degrees are associated with higher earnings and that, on net, a college education is still well worth the cost.
However, progressive economists have recently begun to challenge this view of student loan debt. A 2018 Roosevelt Institute paper, for instance, argues that researchers need to account for the across-the-board wage stagnation that’s happened since the 1970s: “To the extent that individuals see an income boost based on college attainment, it is only relative to falling wages for high school graduates.”
If a bachelor’s degree was an optional ticket to a better life in 1970, in other words, today it’s more like a baseline requirement for a living wage. The reason for this shift is that job markets have become more concentrated, giving employers more leverage to demand more skills and training from their workers.
A 2018 paper, for instance, found that employers in concentrated labor markets “upskilled” their job postings by requiring various skills and abilities that employers in less-concentrated markets didn’t ask for.
So while student debt was once largely confined to those who pursued graduate and professional programs to lock down careers with high earnings potential, rising tuition and changes in the labor market “have made it difficult for many to obtain a credential without resorting to borrowing,” according to the Roosevelt Institute report.