The Effects of Student Loan Debt

AYAN SHUKLA

10 months ago

Student loan debt is one of the most vitriolic and pressing issues in the United States in the 2020s for the next generation of individuals entering the workforce and financial adulthood. In fact, the most recent statistics show a sobering 1.6 trillion dollar total loan debt, affecting over 43 million Americans (with only 38% current on their payments due to substantiated amounts). Even worse, this particular debt has devastating impacts over the long-term, affecting graduates and students singularly while also posing a fiscal threat to the collective US economy. This article examines the major causes of these debts, their implications (on an individual and a communitarian level), and the steps the US federal government can and should take to resolve this issue alongside its underlying causes.

The Causes – What Started the Crisis

The student loan debt crisis has been mounting for decades. One of the first, principal causes for it is the shift from the 1960s, set off into motion when Ronald Reagan, then governor of California, began to withhold funding from many of the states’ universities, colleges, and other post-secondary institutions. This marked an economic and sociocultural change in the way a tertiary education was perceived and utilized.

Furthermore, as this change began to trickle into the government (local, state, and federal), funding for these institutions began to substantially decline. Consequently, to keep up with professor salaries, campus upkeep, and other institutional costs, universities began to increase prices. In fact, total costs in 1963 were $12,130, adjusted for inflation. By 2022, this figure jumped to a substantial $28,000. This marked a 125% increase in costs, or a multiplier of 2.3 times. It is evident that the sociocultural and economic shift in the perception of post-secondary education became one that sharply increased the costs in college tuition. As a result, a growing number of students (particularly lower and middle class ones) were forced to take out student debt loans.

Another key point in the dramatic, pointed spike in cumulative student loan debt was the introduction of the fiscal policies (coupled with the already rising costs previously mentioned in a cause-effect manner) that streamlined, expedited, and widened the capacity to take out student loans, even to those who could not afford it. We see this through the passage of two key policies in the legislature:

National Defense Education Act (NDEA): The NDEA was signed into law in 1958 by President Dwight D. Eisenhower, and aimed to bolster STEM innovation in the United States during the Cold War. It principally established the student loan process, which, in theory, was a success, but ultimately and directly led to the loan debt crisis as it also charged extremely high interest rates (rates that still apply today) that have left many unable to pay.

Higher Education Act of 1965: This Act significantly increased access to student loans for students, exacerbating the amount of individuals who would take out a loan, despite their potential inability to repay it. While it was a crucial stepping stone towards educational equality between classes, races, and genders through the widening availability of capital for college, it extolled the repayment of these costs. Essentially, this Act posed significant trade-offs, which, when combined with spiked inflation, interest rates, sociocultural and economic shifts, severely exacerbated the student loan debt crisis.

Evidently, the primary causes of the student loan debt crisis are rooted in numerous factors, spanning the areas of economy, society, history, culture, and education. As will be seen in the next section, these causes come together to present a modern-day, complex problem that affects tens of millions of students.

The Effects – The Short-Term, Long-Term, Individual, and Collective Impacts

The effects of the student loan debt crisis are devastating and debilitating, and they have caused detrimental harm to the US economy, on an individual and communitarian level.

Individual:

A key impact that the student loan debt crisis has had on individual borrowers and debt holders is a negatively balanced debt-to-income (DTI) ratio. The DTI ratio measures the amount of debt for the income an individual has, typically utilized in credit score scenarios needed for significant purchases and financial landmarks such as buying or building a home, opening a new bank account or a credit card, or buying a car. As this ratio increases, making these purchases becomes substantially more difficult, because it is an intrinsic portion for banks to consider financial candidates for them.

The student loan debt crisis has dramatically increased the DTI ratio for many graduates, and even those still studying in a post-secondary institution. In fact, this debt, leading to a higher DTI ratio, is the reason 20% of those who are unable to purchase a home right now cannot afford to. Even further, this lack of capacity to make milestone financial purchases for new graduates (typically from the age of 22-35) will have significant long-term consequences. Because these purchases take so much importance and precedence in these individuals’ lives, economists estimate that this will substantially impact future financial independence, leaving them reliant on small loans that don’t require a high credit score (which are also typically smaller and compound in interest more quickly) and welfare programs like Social Security, Medicare, and Medicaid, all of which are extremely tumultuous and are not viable sources of personal funding, especially for critical goods and services like food, rent, and healthcare. This creates a perpetuated cycle of reliance on loans and then the inability to pay them back, resulting in even more loans.

Moreover, student loan debt’s sheer amount (around $40,000 and compounding per person who owes it) overwhelms most individuals’ capability to:

Save: Empirical economic research has found that as debt accumulates, savings proportionately deaccumulates. The same applies with student loan debt, as it is the primary driver of the decline in savings since 2020, the “spike” of the debt crisis. Since that year, savings per capita has gone down 32% , debilitating net worth capacities, investment capabilities, and financial credibility. These are all crucial factors for financial independence and securing stability.

Prepare for retirement and emergencies: Just as with savings, as debt accumulates, funds for retirement and for emergencies deaccumulate. This delays vital milestones in aging and also being financially prepared for emergencies.

Additionally, minorities and marginalized groups are disproportionately affected by (a) the debt itself, and (b) its long-term implications. In fact, women, on average, owe approximately 10% than their male counterparts; African Americans also owe 50% more than Whites. When traced back to its historic origin, the reasons why further proves student loan debt’s encroachment in inequity:

Generational wealth gaps: Historically, minorities and marginalized groups have had less value in the dollar than their composite counterparts, leaving them more financially vulnerable and therefore in need of taking out student loans. However, it is important to understand that the loan itself continues to perpetuate this inequality, as compounding interest and preexisting socioeconomic inequity has driven these individuals to even more debt.
Higher attendance at for-profit institutions: Statistically speaking, marginalized groups, across racial and gender spectrums, have much higher rates of attendance and enrollment at for-profit institutions. This leaves them with increased tuition and living costs, a lesser chance at scholarships and college-driven aid, and an economic disadvantage overall.
Educational factors: Part-time enrollment and lower graduation rates due to deep-seated historic inequity have driven the need for minorities and marginalized groups to take out loans and their inability to pay it back. Student loan debt is one of the most common types of debt for these individuals to fall into because of its precedence in compounding interest and its sheer girth in terms of initial cost.
Inequity in the federal student loan program: Specifically, people of color are disproportionately affected by a broken federal student loan program. For example, Black and Latino people are more likely to graduate with loan debt: 90% for the former and 72% for the latter, compared to a mere 66% for Whites. Furthermore, POC owe around $40,000 on average, compared to under $30,000 for Whites. Consequently, the high rates of debt and the amount of debt have caused around 50% of POC to default on their loans, juxtaposing heavily with only 29% for Whites.

It is clear that the student loan debt crisis disproportionately affects women, POC, and other marginalized groups. This represents, exacerbates, and perpetuates a generational and sociocultural historic disadvantage, one that continues to persist today.

Collective:

The student loan debt crisis also impacts a wider range, affecting the economy as whole. This is also a vital angle to view the crisis from because it trickles down to affect individuals with and without student debt.

Firstly, the crisis has slowed down and will continue to slow down the creation and retention of small local businesses (an approximate 14%), a vein of the economy that is widely regarded as the “backbone” of America. This is because it accounts for 99.9% of businesses, employs over 59 million workers, and has accounted for, on average, 61.1% of overall job growth since 1995. Even further, they promote the standard for sustainability (fiscal and environmental) and the communitarian mindset in the US in practice.

Even when considering its importance and overall benefits, maintaining and promoting small businesses on a larger economic scale is difficult because of the reliance on consistent cash flow. As more and more graduates and future entrepreneurs unsuccessfully grapple with student debt, it diminishes the possibility of maintaining and sustaining new and small businesses because said cash flow comes in much lower, fluctuated rates due to higher amounts of it. Consequently, innovation, standards in economic practice, and communitarianism will be debilitated in the US.

Furthermore, student loan debt has shown to have fewer individuals spend on unnecessary (and even sometimes necessary) goods and services. As the pool of capital in any given person’s balance declines and goes to banks, that person has less purchasing power in terms of how much they can get for how many dollars they have. This proves to be true in the case of student loan debt, as 20% of the decline in spending since 2020 has been observed to be because of it (some other factors, for context, include mortgage debt, private debt, and automotive debt).

One other important perspective to consider is the long-term effect of reduced spending in direct correlation and impact in student loan debt. As consumer spending declines, government tax revenue declines at the federal level. This means that less capital and less of the budget is used towards programs that provide relief and funding for initiatives to lessen the burden and impact of student loan debt, which perpetuates the cycle of the lack of capital for all parties involved.

Moreover, the student loan debt crisis affects the financial progress of the lower and middle class. The two principal ways for this to happen are:

Homeownership: Homeownership assists with wealth accumulation (around 9,500 dollars gained per year of homeownership), helps with planning and paying for higher education for children through leveraging financial gains from their property, prompts and promulgates civic engagement through associations and neighborhood groups, and sustains child development (because children living in a physical house with some sort of community have been directly linked to doing better than their non-physical house counterparts socially, emotionally, mentally, and academically).

Entrepreneurship: Because of the nonrigidness of entrepreneurship and the opportunity it provides (especially in an economic system like in the US), lower and middle class individuals can financially progress through this method. This occurs because of its speedy accumulation of wealth, drive for innovation, and job creation in a communitarian sense.

However, both of these routes are essentially blocked for many lower and middle class individuals because of student loan debt, perpetuating the inability for these people to gain financial independence and unstick themselves from the cycle of socioeconomic barriers, which affects generations. This is because those in the lower and middle class are more likely to pass that socioeconomic status down to their children, and so forth, with student loan debt being the factor of this generation.

The Solution – What It Is and What It Is Not

Considering the vast impact of the student loan debt crisis, it is not only prudent, but necessary to find a solution – one that actually already exists today.

Before we delve into what that is, one important point to consider is why the other proposed and commonplace solution is not viable in the long term, that of universal forgiveness. Universal forgiveness is a commonly deliberated upon fix for the student debt crisis, one considered deeply by the Biden administration and frequently brought up upon economists. However, new research from 2024 and expert discourse in past years has identified that this would actually damage the economy. This is because of two primary reasons:

The cost: The federal government, simply put, cannot afford to universally forgive all student loan debt. It is already in some 37 trillion dollars in national debt, is currently in a government shutdown amidst mass polarization and extreme partisanship, underfunded in crucial areas and programs, and is in a budget deficit of close to 2 trillion dollars. The 1.7 trillion is not feasible for the government at the moment, and economists warn that universal forgiveness would put it in even more fiscal disarray.
The inequality: As found in a University of Chicago study, high-income borrowers (and those who come from high-income families) owe twice as much as low-income borrowers, primarily because of the higher degree the former group of individuals have pursued. This means that universal forgiveness would disproportionately benefit high-income borrowers because they would essentially gain twice as much as their composites, driving wealth inequality across the United States.

Thus, the solution to the debt crisis cannot be universal forgiveness. The best fix the US federal government has is to promulgate income-driven repayment, or IDR. IDR is an economic system in which debt repayment is categorized based on income, meaning that lower-income individuals pay less (proportionate to how much they make) than high-income individuals. This ensures that the same amount of income percentage is being distributed from borrowers across socioeconomic classes, providing relief to those who cannot immediately pay their debt and are low-income. It would be infeasible to have everyone across classes to pay the same amount, as it increases wealth gaps even further and perpetuates the inability of the lower class to pay off their debt due to compound interest (as it takes more time to pay large sums at a time, the amount owed begins to sharply increase).

Furthermore, IDR ensures timely payments, meaning that banks (and the government) get their money on time. This would be a significant step towards fiscal responsibility and a steady flow of borrowed debt.

Yet, it is important to consider that this system is already in effect and in current use. The issue is that it is barely utilized, with only 14% of student debt holders being on this plan. What needs to be taken into account and into action by the federal government is to inform individuals about it, and incentivize servicers and banks to encourage it.

As of right now, most people simply allow the debt to compound through delinquency and defaulting on their loans, causing significant economic harm in the short and long term. Or, they have utilized the bare minimum monthly payment to stay afloat, when in reality IDR payments could make these minimums even lower.

Conclusion

In summary, the student loan debt crisis is one of America’s most pressing issues, one that affects millions. It has disproportionately affected certain minorities, the lower class, and women; debilitated capital owed to the government, slowed homeownership and entrepreneurship (and, in turn, innovation and civic engagement), devastated preparation for retirement and emergencies, along with savings; and had generational effects. The solution is one that already exists but needs to be promoted more to ensure fiscal sustainability in the long term. It is evident that this crisis needs to be solved to ensure a more economically viable, socio-racially sustainable, and generationally responsible future.