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Mitchell Liston

Professor Sarah Haak

English 1510

17 March 2018

The Affect of Student Loan Debt on the Macroeconomy

For years one of the main topics of controversy within the education system is the

overbearing weight of student loan debt. This debt can lead to long term effects of the financial

stability of post graduates over the duration of their lives. Not only is the effect on the individual

hard, but the strain of debt leads to lasting effects throughout the American economy. This debt

can affect the way people manage their ongoing debt whether it be student debt, mortgage debt,

credit card debt, etcetera. The overall picture of the economy is affected when people can’t get

their loans needed to buy houses and get a mortgage, the true backbone of the US economy. The

average age of a first-time homebuyer is being delayed as people are holding off till after their

debt is repaid. Student debt seems to weigh over the heads of graduates and increase stress in the

near years following their graduation. There are questions of is it really worth it to get a degree

for the debt that may follow.

Student loan debt has been vastly increasing in recent years. In fact, student loan debt has

quadrupled since 2004 amounting to 1.3 trillion dollars in 2017. This can have severe adverse

effects on the macroeconomic picture. As this debt continues to rise the number of students

defaulting on their loans is rising simultaneously. A trend in recent graduates is that with high

student debt people are putting off larger purchases like home and cars. Another major effect is

that entrepreneurs are not as willing to start their businesses because they can not afford to have
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more debt outstanding. This is slowing the growth of GDP because young people are delaying

purchases.

Student debt seems like a cost that may look insurmountable, however there is proof that

this debt does reward the student in the present value of their future cash flows. “The college

earnings premium has grown steadily over the past several decades and reached historical levels

in recent years. Compared to high school graduates, bachelor’s degree recipients typically earn

$500,000 more in present value over their lifetime – well above the roughly $30,000 of debt that

borrowers accumulate on average for that degree” (Black, Filapeck). To have this view of debt

you must look at your college experience as an investment instead of just another step in route to

professional career development. In today’s market we see that it is ultra-competitive and to

come out on top, financially speaking, a degree is needed.

Large amounts of total student debt hurt the macroeconomy in ways that aren’t as easily

apparent as the 2008 mortgage crisis for example. The affects that the debt has on the economy is

more of a slowing effect than it is the possibility of a bursting bubble. “The private financial

system is not exposed to student loan defaults in the way it was to subprime mortgages since the

vast majority of student loans are explicitly guaranteed by the US government” (Black,

Filapeck). Student loan debt is not inherently as risky as mortgage debt for many other reasons

including that the aggregate amount of debt is not as large as a percentage of income as mortgage

debt. This is not as to say student debt is easy to pay off, it is simply saying that the sacrifices

you take to pay off student debt aren’t as large as mortgage debt.
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Although increasing amounts of student loan debt may seem to be harmful to the

economy it is not as bad as some may seem. Student loan debt effects are much greater for those

who did not complete their education or went into a low paying career. Likewise, the groups of

people that take out debt and do not finish college are at a much higher default risk than those

who finish. Large accumulations of student debt does make people hold back on large purchases,

but those with debt and those without having equivalent levels of home ownership by their mid-

30s. The main hit on the economy comes from the first 10 years of the professional lives of

graduates. Home ownership for people 22-29 is at a record low and average student debt is at an

all-time high for the same age group.

Today’s interest rate environment is the lowest it has been since pre-recession. Typically,

with low interest rates means an increase in homeownership. However, recently homeownership

rates are decreasing, and this can be the cause of many factors. “fewer individuals in all age

groups purchased homes from 2007 to 2015. However, the decline in the percentage of

homeownership has been steeper for individuals in the under-35 age group and especially for

those who have outstanding college student debt obligations. The under-aged-35 group has

continued to see a decline in homeownership even as the housing market has begun to improve

in recent years” (Rose 73). The relationship between student loan debt and homeownership rates

are directly correlated and can easily be a detriment to the economy.

Homeownership rates are an important indicator of economic well-being. Generally,

when people become financially stable and can contribute a high amount of their income to a

home they choose to do so. This is because a house is seen as an investment, a current payment

in exchange for future cash flows. Mortgages are important to macroeconomic health because the

housing market is the biggest form of consolidated debt in the world. This is means that
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mortgages have a large stake in a country’s total gross domestic product (GDP). GDP is the total

sum of all goods and services produced in one year by a country and is a key economic indicator.

The reason that post graduated with accumulated debt is not able to get homes is that

many are not qualifying for a mortgage. With student debt levels per student increasing faster

than wages it is making students have a much higher debt to income ratio. The ratio must be a

0.43 to qualify for a low down payment federal housing administration loan. In fact, “However,

because student loans now account for a substantial portion of monthly expenses for a college

graduate, the average single student debtor has an estimated debt‐to‐income ratio of .49”

(Letkiewicz, Heckman 90). This is especially scary considering that 46% of first time home

buyers finance their houses through these types of loans.

The other possible reason for low homeownership rates for young adults is that with the

student debt repayment people may not be able to pay off their uncollateralized debts and have

poor credit scores. With these bad credit scores people are unable to qualify for their loans this is

especially important in recent years to the great recession where lenders tightened their lending

policies due to new rules and regulations in mortgages.

There is a major problem with student loan debt that can go unseen when not thoroughly

discussed. This is that “recently graduated students will be taking their talents to the jobs that are

offering a more lucrative salary than a public company focused on the well being of everyone.

Such choices have profound implications for filling positions in education, public administration,

and social welfare” (Cornelius, Frank 37). This is a problem because the young adults are not

focusing their talents in the necessary places always and may not help out for a better tomorrow

due to problems today.

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The effect of student debt is not only affecting a select few students either. In 2017 four

in ten adults under the age of 30 have student debt outstanding. This problem is specifically

affecting the current college graduates now more than ever. In fact, students are owing more

money and more students affected than ever before. Today, the average student, leaving college

with a bachelor’s degree, has a debt of $25,000 and this is up from $13,000 in 2004 adjusted for

inflation. The total US debt is now around $1.3 trillion and has recently surpassed the total debt

outstanding for auto loans. This total debt is more than two and a half times that of total student

loan debt 10 years ago.

In the current times, going to college doesn’t just affect the student attending the

institution, but the family altogether. A family will save up their entire lives making sacrifices in

a desperate attempt to help their children in a time where it seems that you must have a degree to

make a name for yourself. The total amount of student loans doesn’t portray an accurate picture

of the debt either. There is hidden debt as an effect “Beyond the $1.19 trillion in student loan

debt reported by the Federal Reserve Bank of New York last week lies an additional problem: an

unmeasured mountain of related credit card and home-equity debt, plus money diverted from

retirement accounts” (Curan). There are many cases of students graduating with unsurmountable

amounts of debt that are putting huge strains on themselves and their relationships. Many times,

the co-signers of the student loans are the parents and they are having to reach into other funds to

save their family from bankruptcy. When a couple gets married the debt is passed on to the

couple as well and their debt becomes even larger as they are responsible for each other. There is

also a correlation between the stress of student loans and fertility of female recent graduates.

This stress is causing families to delay growth and ultimately affecting the housing market and

GDP altogether.
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The effect on the student can be demoralizing and ruin the financial stability for the rest

of their lives. “A 2013 national study of those who graduated in 2005 with student loans reported

that 41 percent of 2005 graduates were at that time either delinquent or in default on their student

loans” (Rose 73). Defaulting on student loan debt means that it has been 270 days since the last

payment on the debt. Defaulting on the debt can ruin the student’s credit score and will result in

more expensive loans and difficulty in future financing activities. Student loan debt cannot be

voided through bankruptcy either and since most student loans are federal the government will

stop at nothing to get their money back. “Collection activities pertaining to delinquent student

loans include the right of collection agencies to garnish wages, tax refunds, and even Social

Security benefit payments for nonpayment of federal student loans” (Rose 73). These reasons and

many more are clear incentive to pay off student debt and is understandable why young adults do

not want to stack student debt with mortgage debt.

In conclusion, student loan debt can be detrimental to both the overall economy and the

individual holding the debt itself. College is an investment for the future and when properly

financed can lead to a great source of future cash flows for the student and the macroeconomic

picture. There is a direct relationship between student loan debt and homeownership rates. This

relationship is slowing the economy and specifically impacting young adults and their financial

abilities continuing through their lives. The impact of student loans can harm the finances for the

entire family and lead to additional stresses beyond that of daily lives. Student loans can help

individuals prepare for the rest of their lives but must be taken seriously to avoid the negative

possibilities they can carry.

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Works cited

Berger, Lawrence, Houle, Jason N. “Is Student Loan Debt Discouraging Homeownership among

Young Adults?” Social Service Review, vol. 89, no. 4, 2015, pp. 1-33.

Black, Sandra, and Amy Filipek. “Student Loans and College Quality: Effects on Borrowers and

the Economy.” Student Loans and College Quality: Effects on Borrowers and the

Economy | VOX, CEPR's Policy Portal, 4 Aug. 2016, voxeu.org/article/student-loans-

and-college-quality-effects-borrowers-and-economy.

Cilluffo, Anthony. “5 Facts about Student Loans.” Pew Research Center, 24 Aug. 2017,

www.pewresearch.org/fact-tank/2017/08/24/5-facts-about-student-loans/

Cornelius, Luke M., Frank, Sharon A. “Student Loan Debt Levels and Their Implications for

Borrowers, Society, and the Economy” Educational Considerations, vol. 42, no. 2, 2015,

pp. 35-38.

Curan, Catherine. “Student Loans Affect the Whole Family - Not Just Students.” New York Post,

New York Post, 17 May 2015, nypost.com/2015/05/17/student-loans-affect-the-whole-

family- not-just-students/.

Gorman, Ryan. “How Student-Loan Debt Is Dragging down the Economy.” Business Insider,

Business Insider, 1 May 2015, www.businessinsider.com/3-charts-explain-the-effect-of-

student-loans-on-the-economy-2015-5.

Letkiewicz, Jodi C., Heckman, Stewart J. “Homeownership among Young Americans: A Look at

Student Loan Debt and Behavioral Factors” The Journal of Consumer Affairs, vol. 52,

no. 1, 2018, pp. 88-114

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Rose, Clarence C. “Overcoming the Obstacles Student Debt Presents to the Ability to Buy a

Home” Journal of Financial Service Professionals, vol. 70, no. 5, 2016, pp. 72-80.
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Reflective Statement

Dear Professor Haak,

This research paper ended up being more of a challenge to me than I initially thought it

would be. I think it is obvious that I put in a great deal of time in my research for my topic but

am not as happy as I could be in the way that my paper flows. I did a lot of research and this

topic is just very controversial since there are a lot of outside factors that are always influencing

the macroeconomy. I tried to only put the most relevant information but found myself writing

about how the debt is affecting students individually. For this reason, it made specific research

hard to find because more of the scholarly articles went way more in depth than I could handle. I

only trusted a select few articles that were not scholarly journals because of the difficulty of the

topic and I wanted the true facts. It helps that I have a true passion for this subject because there

were many long articles I had to dig into to find information relevant to my specific topic.

One tactic that I tried to use is the quotation sandwich. I felt as if my use of quotes was

not great in my comparative analysis and they were unsupported and alone. For this paper I

really tried my hardest to get quotes incorporated in the flow of my paragraph, so they could be

seamless instead of stand-alone.

I tried to use the most effective paraphrasing techniques that we have learned but am

worried that it may come off too much like the source. I used the best uses of quotes and

techniques to give credit where due to try and avoid plagiarism. This is the first research paper

that I have written since the eighth grade and was hard to write because I wanted to give the most

accurate facts without taking other’s ideas.

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Another element that I took from class is after I completely wrote my paper I felt like the

flow was just not where I wanted it to be. To help this I read the paper over many times and put

different paragraphs in different areas to see if I could fit it all together like a puzzle and make

the most sense as it is read.

One of the most important things I considered when formatting my paper was how my

thesis is going to intrigue my audience. For that reason, I tried to make the paper so that I could

tell why it is very important to go to college despite debt, then some adverse effects of debt,

reasons why, the ways to overcome debt.

I hope you find my paper informative and can find some of the in-class practices that I

used within my paper.

Sincerely,

Mitchell Liston