My personal view is that the increasing reliance on student loans for financing college education is going to be a drag on consumption for some time
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Rong says he’s entertained the idea of joining the military, or moving to a state with no income tax, like Texas, so he can pay off his debts more quickly. I was just going to stay in New York after graduating, but now I realize there’s so much on my plate, he explains. When you take out loans, you’re taking years off of what you want to do and where you really want to be.
Student loans usually indicated a higher level of education, a higher salary, and better credit-worthiness
Students across the country are trapped by their debts and often unable to take advantage of the freedom that a college degree should theoretically afford them. Julia Handel is the marketing manager for celebrity New York chef David Burke. The 2012 Ithaca College graduate is making over $40,000 a year, which is better than many of her friends. But she had $75,000 in loans, and it’ll take her at least 15 years to pay off her debts. For now, Handel is officially on her parents’ lease but crashing with her boyfriend, pinching pennies and paying back $700 every month. She of going to culinary school, and at this point, she can definitely cross off the idea of renting her own apartment.
By the time Handel pays off her loans, she may be nearly 40. Whenever I do anything, loans are always in the back of my mind, she says. It controls what I do every day and what I spend my money on.
Student debt doesn’t just weigh heavily on graduates. Evidence is growing that student loans may be dragging down the overall economy, not just individuals. Think about it this way: if students have significant debts, it means they’re less likely to spend money on other goods and services, and it also means they’re less likely to take out a mortgage on a house. Consumer purchasing is the primary driver of the U.S. economy, and mortgages and auto loans play a huge role as well. There aren’t any comprehensive, hard numbers yet on how much of a drag student debt may be on the economy, but the associations definitely suggest that growing student debt is a drag on consumption, says van der Klaauw. This is still something we’re discussing. There are a range of views on this.
Knowing the kind of debt he’ll face once he graduates, Rong says he rarely goes to happy hours, and Handel says she’s much less likely to get regular haircuts, schedule doctor prompt doctors’ appointments, or buy the small things that add up-and, in aggregate, eventually prop up the economy and drive GDP growth. It’s the little things, she says. Putting off a haircut for a long time, getting more makeup, prescriptions, or doctors appointments, the things that I don’t even think cost money but end up adding up a lot.
It’s also become harder and harder to qualify for a mortgage if you have student loans, says Andrew Haughwout, another economist with the New York Federal Reserve. Banks tightened their underwriting standards after recession and are now much less willing to grant house and auto loans at low-interest rates, particularly for graduates with more debt than ever before. That’s slowing down the housing recovery and the construction markets.
In 2005, before the Great Recession, having student loans was a good indicator that a graduate also had a mortgage. Better-educated, higher-earning people were more likely to take have the capital and the wherewithal to take out a mortgage; but now, that dynamic has changed. Bigger debts mean college graduates are less likely to take out mortgages than they used to be, dampening economic growth. Now that’s kind of gone away, that relationship, Haughwout says. Knowing that someone has student debt doesn’t tell you very much at all about whether they’re going to have a mortgage in spite of the fact that it probably still signals higher level of education.