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posted on 03 September 2015

Student Loan Debt and Effects on the Economy

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Current student loan debts total around $1.3 trillion spread across 40 million people. In 2014 alone approximately $100 billion was taken out for student loans . According to Debt.org, recent studies showed that in 2014 70% of college graduates leave school with an average of $33,000 in student loan debt. If tuition rates rise as they have for so many recent years, so will the amount of people that not only need student loans, but also become delinquent on payments or default on those loans.

The St. Louis Federal Reserve calculated the rate of delinquent payments on student debt at around 17% in 2014:Q4. This continuing a fairly consistent rise from 11% in 2004:Q4. Interestingly enough, if you only consider those with debt that are still in repayment, which is about 55% of those with debt, then suddenly the delinquency rate on these loans jumps to 27.3%. Out of those who are making payments on their debt at all, more and more are making payments late. This shows us an increased financial strain on those that are under the burden of student debt as they have more trouble making monthly payments.

We are also seeing more defaults (no payments made in over a year) in student debt this past year. Those that haven't paid any of their debt in over a year has jumped to 7 million. This is up 6%, or 400,000, from last year. This is especially alarming to be continuing as the unemployment rate drops - we should be seeing the delinquent rate drop as well and instead it keeps increasing. Delinquent rates on credit card and mortgage loans have decreased with the recent drop in unemployment. However, this has not been reflected in the student loan sector. The government plans to forgive a portion of this debt as more people sign up for the income dependent plan that bases monthly payments on 10% to 15% of income. After 10-20 years of on-time payments the entire debt is forgiven. The number of people who have joined this plan has increased by 56% in the past year. Those who go to graduate school or schools with high tuition could benefit the most from this program as their debt tends to be the highest.

While obviouslythere is concern regarding the purchasing power of those with debt, such as ability to borrow for cars and mortgages - and a worry of another debt bubble - there could be added adverse effects on the economy. The Philadelphia Federal Reserve studied the effects of student loan debt on small businesses and startups. Student debt poses 2 major issues to those looking to start a business, one being the debt itself and the other being the ability to borrow more. Not only are recent graduates struggling with an average of $33,000 of debt but also are unable to borrow more to start those businesses. The Fed has found that companies with 5 or less employees have dropped by17% between 2000 and 2010 where relative student debt grew by 2.7%. The report from the Fed also reports that 6 out of 10 jobs come from small businesses, which poses a problem seeing as small businesses are becoming more rare. As student loan debt grows we could see many young people struggling financially, which could produce serious setbacks for the economy in several sectors.

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