With a total of $1.71 trillion in student loan debt, it’s no surprise that student loan debt affects the economy in the United States. Before the coronavirus outbreak, about 45 million Americans had student loans, and more than one in ten of those borrowers were either late or in default.
You may be wondering exactly how much student debt impacts the economy. According to analysts, economic development might be stifled due to all this debt since debtors are barred from fully engaging in American capitalism. According to this logic, you’re less likely to start a company, purchase a house, or participate in the stock market if you have a lot of student loan debt.
Will it be easier to discharge student loans in bankruptcy?
Student loan borrowers looking for a smoother path to bankruptcy discharge have been getting mixed indications from the Biden administration about what, if any, reforms are on the way.
The Current Legal Situation Regarding Student Loan Forgiveness Through Bankruptcy
There is a common fallacy that bankruptcy cannot be used to discharge student loan debt because the law prohibits it. That isn’t the case at all. However, BankruptcyHQ code and a long line of precedent in the courts might make it challenging.
Most student loan debtors would have to establish that repaying their loans would cause them “undue hardship” if they filed for bankruptcy. This distinguishes student loan debt from other types of consumer debt, such as credit cards and medical bills, which are considerably easier to discharge without a higher standard.
Because the term “undue hardship” isn’t defined in the bankruptcy legislation, it’s up to judges to devise rules and procedures to assess who qualifies.
In terms of the burden of evidence, those rules and exams often set a high bar for student loan borrowers. Borrowers in several countries must demonstrate that their condition is “certainly hopeless.”
Borrowers must first go through a “adversary process,” which is essentially a lawsuit filed in bankruptcy court against the borrower’s student loan lenders, before even attempting to claim undue hardship. The borrower tries to show that they meet the undue hardship legal requirement, while the student loan lender tries to show that they don’t, and finally a judge makes a decision. The federal government is the lender for most federal student loans, and it will fight the borrower in an undue hardship proceeding.
According to academics, below are some examples of how student loan debt has affected the economy:
Businesses are less likely to start up.
Students with more student loan debt are less likely to start new firms, according to research from Philadelphia’s Federal Reserve Bank. According to Karthik Krishnan, an assistant professor of finance at Northeastern, students who owe $30,000 in student loans are 11 percent less likely to start a company than those without debt.
The development of small enterprises is hindered by student debt. The introduction of new enterprises impacts long-term employment.
There may be fewer employees in the long term if fewer enterprises are starting up.
Business development expert Joe Bailey of My Trading Skills also believes that school debts deter aspiring businesses.
‘Post-college debt has a terrible influence on people’s ability to start their businesses,’ according to Bailey. As a result of decreased entrepreneurial activity, employment levels and economic production are reduced, which lowers the national revenue. “
In the end, student loans are a drag on the economy’s spending and business engines. As a result, poor economic development and productivity may have a wide-ranging influence on the economy.
Lowers homeownership rates
Borrowers who may otherwise be saving or buying a house are held back by student debt. According to a 2018 Student Loan Hero poll, 43 percent of student loan borrowers have postponed homeownership because of their debt. Once they leave school, they’re typically obliged to return to their parents’ house.
Financial journalist Igor Miti says student loan debt hurts the economy since it hinders millennials from buying homes. Because of student loan repayments, saving for a down payment might be almost impossible. Not to mention that it increases the likelihood of default. Credit ratings and the ability to get mortgages and other sorts of loans are impacted due to this.”
Student loan debt has stopped an estimated 400,000 young Americans from acquiring a home, according to a Federal Reserve analysis released in 2019. The price of a house might remain the same if there are fewer purchasers.
The banking sector is also feeling the effects of rising home-buying rates. Lenders and investment businesses stand to lose money if fewer individuals purchase houses, which means fewer people will take out mortgages, reducing their earnings.
In a recession, it makes it more difficult to weather.
If the economy is hit severely by more significant causes, such as the Great Recession of 2008 or the COVID-19 epidemic, student loan debtors may find it more challenging to make ends meet.
As he put it, “student debts make it difficult to navigate through an economic slump or recession.” People who have more outstanding debt often have fewer savings and reserves to offset shortfalls during a downturn in the economy.
Saving money for an unforeseen bill or job loss may seem hard while trying to pay off debt, but having an emergency fund on hand might come in handy.
Consumption is reduced as a result.
Student loan debtors are often unable to afford to purchase products they would otherwise be willing and able to buy.
Student Loan Hero found that 1 in 10 borrowers could not afford a vehicle due to their debt, as previously reported.
According to Riley Adams, a financial expert, the decline in consumer spending will have a long-term impact on the economy.
There is still a lot of uncertainty about the long-term impact of student debt, says Adams. Debtors (intended) use their current financial freedom and ability to pay for a purchase in the future, exactly as other forms of debt do. Due to these debt repayments, the typical economic activity that an economy would enjoy when a big generational group matures would be reduced.”
Purchasing products and services in the United States contributes to economic growth and stability. In our consumer-driven economy, reduced spending equals fewer revenues and profits, which, in turn, slows financial growth.
Traditional life milestones are put on hold as a result of this.
Borrowers of student loans have to wait longer than prior generations to reach important life milestones. Many borrowers may not be able to afford the same experiences as their debt-free parents because of their expensive student loan payments.
In the words of Institute of Student Loan Advisors president and founder Betsy Mayotte, “student loan debt may be a barrier to other financial milestones.” “Many studies demonstrate that consumer debt is delaying first-time house purchases, marriage, children, and retirement, just to mention a few.”
Research reveals that student loan debt delays marriage, even if societal norms may affect some of these numbers. High student loan loads may have an even more significant impact, preventing many debt-burdened borrowers from pursuing their dreams of marriage and other life objectives.
It affects the ability to save for retirement.
Student loan debt in the United States may potentially leave a generation vulnerable or less protected when they reach retirement age.
According to 2018 research by Boston College’s Center for Retirement Research, individuals with outstanding student loan amounts had just about half as much invested as counterparts without debt at 30.
According to Adams, folks who have student debts may not be able to save much for retirement until they have paid off their loans. A lack of compounding returns for millennials implies they won’t be able to enjoy the present entitlement program benefit payment levels when they reach retirement age. “
Those who lack retirement funds might work longer or depend more heavily on government programs like Social Security, which may not adequately meet their requirements.
It removes students’ economic clout.
Dennis Shirshikov, a financial expert and writer, argues that student loans have weakened students’ positions of power rather than strengthened them.
Shirshikov said that student loan debt had moved economic power away from students. Increased prices have benefitted many, including colleges, lenders, and investors. They have more money to put into ventures, take risks, and work on various things.
People still think of it as “the young person’s concern,” but Mayotte says that isn’t the case.
Half of all borrowers are over 30 years old, and a quarter is over 45, according to Mayotte. The fastest-growing group of borrowers is the over-65s, he said. In other words, “this indicates that the repercussions on the economy are considerably wider and longer-lasting than they were even 15 years ago.”
Enhances the earning power of persons holding bachelor’s degrees upgraded.
According to numerous analysts, students’ student debts have a negative influence on the economy. However, this does not imply that student loans do not have a favorable economic effect.
Higher education, made possible by student loans, is still an important stepping stone to a better job and a better life for many people. Those with college degrees often earn more money and lower unemployment rates than those without degrees.
Student loans, according to NASFAA CEO and president Justin Draeger, may have an overall beneficial effect if the borrower completes their degree. NASFAA is a national association of student financial aid administrators.
“Yes,” answered Draeger when asked whether loans may positively influence the economy since they are used to pay for school costs. A recent study found that people with a bachelor’s degree or above had a higher chance of making more money in their careers than those with just a high school diploma.
Indeed, according to May 2021 data from the US Bureau of Labor Statistics, employees with just a high school education earn $746 less per week on average than those with bachelor’s or master’s degrees ($1,248) and ($1,497), respectively.
In addition, what impact will student loan debt have on the economy’s future?
Student loan debt has had far-reaching effects on the economy, some of which we are just now beginning to understand. As we know more about student debt’s impact on the economy of the future,
The problem is the high expense of schooling, not the much-debated idea of universal student debt forgiveness. This would raise buying power and help the economy as a whole.
Because of the high expense of college, students have racked up large amounts of debt, according to Mayotte. A freed-up income from freed-up student loans might help the economy for a short time, but it’s simply a short-term solution since students will still need to borrow heavily to attend college.
In Mayotte’s opinion, students’ economic power must be restored if higher education is to be free of debt.
Free or debt-free education plans are more important to me because they deal with the problem itself rather than simply the symptoms,” she added. We should do both if we can, but cutting down on the number of debts people have to take on would have a longer-term positive impact on our economy.