BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

How Today's Student Loan Debt Is Failing Future Generations

This article is more than 9 years old.

A college education is seen as one of the best paths to success, but the debt associated with it may be a significant roadblock to achievement.  For some, the “ticket to the middle class” doesn't end with a diploma, but when student loan balances are paid. Millennials are learning this lesson the hard way—those entering the job market today face some of the toughest conditions in recent memory.

Tuition and fees have risen 538% since 1985, outpacing the CPI by over 400%. According to the Federal Reserve Bank of New York, the number of student loan borrowers increased 70% from 2004 to 2012. Now more than 70% of students graduate with loans and outstanding student loan debt totals $1.2 trillion—more than auto and credit card debt. Though it’s difficult to pinpoint the link, some researchers are already finding hints of a drag on the overall economy.

“An increasingly heavy financial weight on twentysomethings means they are starting families later, buying homes later and it’s taking longer for them to save,” says Mark Zandi, chief economist for Moody’s Analytics. Debt will result in millennials “delaying all of the things their parents and grandparents did,” according to Zandi.

Last year the Federal Reserve Bank of New York reported that, for the first time in at least a decade, thirty-year-olds with no history of student loans were more likely to invest in houses than thirty-year-olds with a history of student loans. The trend continued in 2013. Moreover, in a 2013 survey by American Student Assistance (ASA), a nonprofit that aims to help people finance college, 63% of respondents claimed student loan debt affected the ability to make large purchases like a car and 47% of respondents said such debt had a considerable impact—or was the deciding factor—when deciding whether to start a small business. The average age at which people are getting married has been rising over time, reaching 29 for men and 27 for women in 2013. One possible explanation is that student loans are causing some couples to put off marriage—this was the case for 30% of respondents to the ASA survey.

“More student loan debt means some kids are starting households later and moving from renting to ownership later than their parents did,” says Zandi, "which ripples throughout the economy—so when you don’t form a household, you delay when would purchase a car, furniture, appliances and utilities."

(Photo credit: DonkeyHotey)

Overreliance on student loans may not just impede current economic growth, though. The ripple effect may translate to future generations as well. If student loan debt continues to increase, “intuition suggests that [future generations] would have less to save” for their children’s education, notes Zandi. There are some indications that parents are already contributing less: According to a 2013 Sallie Mae and Ipsos report, parents funded 27% of their kids’ college expenses from income and savings in 2013, down from 36% in 2010.

The conventional wisdom is that, though student loans may be a drag on many sectors of the economy, higher education is ultimately beneficial due to increases in productivity and earning power. Mark Kantrowitz, senior vice president and publisher of Edvisors.com, is quick to point out that “lots of studies show that, on average, the value [of a college education] exceeds its costs by a significant margin.” According to Kantrowitz, problems occur when students borrow excessively—when one’s debt becomes greater than one’s starting salary. This group is more likely to default on their loans or go into repayment programs that extend the life of the loan to bring down monthly payments. This may mean not saving for future college costs.

The effects of over-borrowing may not be confined just to the guilty parties—and their families—however. Approximately $1 trillion of the $1.2 trillion in outstanding student loan debt is owed to the federal government and Zandi believes that ultimately taxpayers will be the ones to foot the bill.

“I wouldn’t be surprised if, in the next recession, we see a lot of credit issues that become a significant taxpayer problem,” says Zandi, “and I wouldn’t be surprised if a lot of debt is either forgiven or there is a mechanism for debt forgiveness.”

“Fundamentally, I don’t think the program works very well. Increasingly, the more student loans provided the greater the increase in tuition. [Meanwhile,] the university is not any more affordable. This will become even clearer as we move forward.”

Follow me on TwitterSend me a secure tip