June 17th, 2014
The Economic Setbacks of Student Loan Debt
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For many college graduates, commencement is not only a time to reflect on all of their hard work over the past four years, but also a reminder that reality is waiting on the other side of the stage. In addition to the threat of a weak job market where 44 percent of recent graduates work in positions that don’t require a college degree, this reality includes the burden of student loans.
What’s going on?
Currently, the average college student graduates with well over $27,000 in student loans. This average represents an increase of 70 percent between 2004 and 2012. Student loan debt is the second highest type of nationwide debt According to the most recent Credit Karma data, consumers on average have over $29,000 in student loan debt – and that includes consumers well over the age of the typical recent graduate.*
As if that wasn’t bad enough, a recent study reveals that these numbers could possibly be impeding the American economy. Historically, more educated, often higher-earning consumers were more likely to purchase homes by the age of 30. But in the past few years, the number of 30-year-olds with mortgages has plummeted from 30 percent to 22 percent. In 2012, 30-year-olds without student loan debt were more likely to have a mortgage than people in the same age bracket who did have student loan debt. The same trend held true for vehicle purchases. In theory, this shouldn’t be the case since college graduates supposedly have a chance at higher wages and better jobs.
Are there long-term effects?
However, they also have sizable sums of debt holding them back at a very young age, which makes them more inclined to rent with roommates or join the other 36 percent of millennials who live at home with their parents. The more time spent paying back these loans could mean a longer recovery rate for the economy. As long as people are being weighed down with student loans—which can take up to a decade to pay back—they’ll find it more difficult to boost the economy by buying cars or setting up their own households.
Student loan debt can seem less ominous if people know how to responsibly pay off debt. For those who are carrying student loan debt, it is generally a good idea to pay at least the monthly minimum. People who have a habit of forgetting about bills might profit from setting up automatic payments. That way, the payment is made each month and the bill doesn’t fall into delinquency, which can remain on your credit report for up to seven years.
Is there a solution?
Luckily, there might be some change on the horizon. Just this past week, President Obama signed into action an executive order that extends the Health Care and Education Reconciliation act to even more borrowers. This law will cap student loan repayments at 10 percent of a borrower’s monthly income. Although Senator Elizabeth Warren’s proposed legislation to lower interest rates for student loans failed to pass through Senate last Wednesday, the conversation around student loans continues. Warren plans to reintroduce the bill and hopefully, these steps will lay the foundation for positive change. Unless the current system is dismantled and reformed, student debt will continue to balloon and so will the number of years it takes to rejuvenate the economy.
*Calculations are based on data from 2,407,729 Credit Karma members who checked their credit in May 2014.
Nazhat Salim is a Member Support Specialist at Credit Karma. She spends her free time reading, devouring desserts and talking to her slightly deaf cat, Pusho. When she’s not doing those things, she is dreaming about doing them.
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