Addressing the Student Loan Debt Crisis: An Analysis of its Impact on the Economy

July 20, 2023
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When delving into the student loan debt crisis, one discovers that the total student loan debt in the United States amounts to a staggering $1.52 trillion. The average student borrower carries a debt of $31,172, and the duration to repay these loans can extend from approximately 10 to 30 years. A clear trend emerges from the data, showing that college costs have surged by 145% since 1971, while the median household income has only seen a modest 28% increase (Issa). This phenomenon underscores the growing difficulty faced by families trying to finance higher education, leading to an exacerbation of the student loan debt crisis (Issa).

The effects of student loan debt

Remarkably, the total student loan debt amounts to a substantial 8% of the national income. This begs the question of how student debt precisely affects the broader economy. One of the adverse consequences is the postponement of marriage and family-building. A study conducted in 2014 revealed a significant link between a woman's student loan repayment schedule and her timing for marriage. Researchers found that for every $1,000 increase in student loan debt, the likelihood of marriage among female bachelor's degree recipients decreased by 2% each month during the first four years after graduation. The financial burden of student debt hampers individuals from affording weddings and other expenses, thereby delaying their plans for marriage.

Moreover, student loan debt poses a significant obstacle to the growth of small businesses. According to a study conducted by the Federal Reserve Bank of Philadelphia in 2015, there exists a correlation between student loan debt and the formation of small businesses (Ingraham). High levels of student debt deter aspiring entrepreneurs from accessing the capital necessary to launch and sustain their ventures. Since small businesses contribute significantly to employment, with 60% of jobs stemming from this sector (Ingraham), their reduced establishment due to debt-related constraints leads to increased unemployment rates and impedes overall economic growth.

The housing market is also affected by student loan debt. As evidenced in a Federal Reserve report, over 400,000 families are unable to purchase homes due to their existing debts (Ingraham). The burden of loan repayments makes it challenging for individuals to accumulate sufficient funds for down payments, consequently hindering homeownership.

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Furthermore, student loan debt hinders retirement savings. With monthly payments increasing, many individuals struggle to set aside money for their retirement funds. Additionally, the burden of loan payments affects the amount they can contribute to retirement accounts, such as 401(k)s.

Ways to alleviate the student debt crisis

Several policy proposals could alleviate the student debt crisis. One potential approach is the complete forgiveness of all federal student loan debt. While this policy comes with a significant cost, approximately $1.5 trillion, it would eliminate debt for all 43 million individuals suffering from student loans (Miller, Campbell, Cohen, Hancock).

Another option is to forgive a specific dollar amount for each student based on their annual income. The chosen dollar amounts should aim to provide equitable relief to borrowers, with higher amounts allocated to those with lower incomes. Depending on the chosen dollar levels, this policy could alleviate a substantial portion of borrowers' debts (Miller, Campbell, Cohen, Hancock).

Furthermore, policymakers could consider a targeted approach, such as forgiving the debt held by former Pell grant recipients. Pell grant recipients are students from low-income backgrounds who receive financial aid that does not require repayment. Forgiving the debt of these recipients acknowledges that borrowing was never intended for them due to their financial circumstances (American progress).

Lastly, reforming the Income-Driven Repayment (IDR) plan could be a viable solution. By eliminating interest growth, the plan would reduce the time needed to repay student debt. Implementing these changes would significantly benefit over 7.7 million people on IDR plans (Miller, Campbell, Cohen, Hancock).

Addressing the student loan debt crisis with these policies would not only help individuals in paying off their debts but also stimulate economic growth. Increased access to higher education would lead to a rise in aggregate demand for college education, consequently boosting the educational labor force (see graph below). As a result, aggregate supply would also increase, leading to higher real GDP and lower unemployment rates (see graph below). By effectively tackling the student debt problem, we can foster economic growth and provide financial relief to millions of individuals struggling with the burden of student loans.

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