MainStreet Macro: Should MainStreet Care about Student Debt?

This month, students around the country will graduate from college, vocational schools, and high school after a year of learning like no other.   

Well it’s almost like no other.  One constant of higher education before and after the pandemic has been its high price tag. 

U.S. students owe a whopping $1.7 trillion in combined debt. Outstanding student loans have skyrocketed 90% over the past decade. 

As part of the federal government’s pandemic emergency relief effort, student loan payments and debt collection were suspended, and interest on federally backed loans was eliminated. The payment and collection hiatus might be extended but is guaranteed only through September. 

Student loan forgiveness is a topic of heated political debate but was notably missing from President Joe Biden’s $6 trillion budget proposal. 

Should Main Street care about student debt?  The answer is yes.  Here’s why. 

1. Student debt is a double–whammy to young workers. 

Student loan debt commonly is associated with four-year college degrees or graduate school, where future employment opportunities might be worth the money invested. In reality, roughly two-thirds of people who attend for-profit universities take on student loans to pay tuition and roughly half of them borrow more than $40,000 even though these institutions have a poor record of matching their students with jobs.  

One in three adults younger than 30 and 22% of adults between 30 to 44 carry student loan debt, according to Pew Research.  

This group also was hit hardest by the pandemic, according to ADP Research.  More than 70% of workers aged 18 to 34 reported a job loss, pay cuts, furlough, or reduced hours due to the pandemic.  

The concurrence of student debt with job loss and pay cuts could make it difficult for young workers to gain their footing post-pandemic. 

2. Before the pandemic, student loans had higher delinquencies than other forms of debt.   

Before federal relief efforts were put in place, student loan debt had replaced mortgage debt as having the highest rate of severe delinquencies. Student loans accounted for 35% of severely derogatory loan balances, more than three times the delinquency rate of mortgages, at 11%.   

The federal moratorium has curtailed that delinquency. After the payment and collection hiatus lifts and interest rates increase, it’s likely that delinquent student loans will continue to take a nasty bite out of household credit, especially for young workers.  

3. Student loan debt doesn’t affect the economy much in the short-term, but could limit growth over time. 

Surging student debt loads have had very little effect on consumer spending.  According to the most generous estimates by the Federal Reserve, student debt has shaved at most 0.05% off GDP in any one year.  

But the paltry economic costs in the short run belies the impact of student debt on future investment and growth.  Surging student loans negatively affect people and households by raising debt burdens, lowering credit scores, and limiting opportunities for home ownership and other financial investment. 

In fact, there’s a number of ways student debt can delay the attainment of common life events for young adults. Research shows that student loan debt reduces the odds of getting married, starting a business, and saving for retirement. It can even lead to higher levels of debt.  

My Take 

Debt forgiveness and free tuition are controversial policy proposals because they shift the cost of higher education from students to taxpayers.  But there’s more at stake for the economy than just a hefty price tag.  

The skills gap–that space between what employers demand and what workers are trained to supply–in is widening in the U.S.  Adoption of automation, digitization, artificial intelligence, and clean energy have accelerated during the pandemic. This might explain why even though upwards of 7.5 million people are still out of work due to the pandemic, a growing number of businesses are complaining of labor shortages.  

Preparing America’s workers for the jobs of tomorrow is a national imperative that shouldn’t rest primarily on the shoulders of young workers. Apprenticeships, vocational education, and corporate and public partnerships can close the skills gap and lessen the financial burden of professional development on individuals.  

June traditionally is a month of celebrating our graduates, but finding sustainable strategies to help this new generation of workers manage their debt and gain skills for the jobs of the future is the gift that will keep on giving.