How does student debt affect the U.S. economy?

We know student debt affects millions of individuals negatively. But how does student debt impact the overall U.S. economy? Read on for 3 big ways student loan debt creates problems for the U.S. economy, as reported by the Washington Post.

Problem # 1 Small business decline

According to a study by the Federal Reserve Bank of Philadelphia, there is a “significant and economically meaningful negative correlation” between decreased small business formation rates and increased student debt rates.

Additionally, the Washington Post reports “The increase of one standard deviation in student debt translated into a decrease of 70 new small businesses per county – a decline of approximately 14.4%.”

This is especially problematic, as small businesses are an essential element of the U.S. economy. Small businesses employ citizens, pay local and federal taxes, and provide valuable goods and services to local economies. Or, as J. Mariah Brown wrote for Chron, in How Important Are Small Businesses to Local Economies?:

“When consumers patronize local small businesses, they are essentially giving money back to their local community. A thriving local business will generate high levels of revenue, which means that the business will pay higher taxes, including local property taxes. This money is then used for local police and fire departments as well as schools. A thriving small business also can improve property values throughout a community, improving every homeowner’s bottom line while generating more property taxes for local governments.

The small business impact on local economic growth also takes the form of sales tax collection. Local businesses charge sales tax based on their location and can be the backbone of special taxation districts focused on unique projects, such as lighting and sidewalk projects to improve historic shopping districts and attract additional customers.”

Bottom line? We need small businesses, but student loan debt makes it hard for entrepreneurs to start one.

Problem # 2 Homeownership is hurting

Student loan debt is also hurting U.S. homeowners, and thus the economy. According to a recent Federal Reserve report, student loan debt prevented almost 400,000 young families from purchasing homes between 2004-2015. This lead to an overall 1/4 drop in homeownership between 2004-2015 for young families.

With rising student debt, potential homebuyers are finding extremely hard to save money for a down payment. Additionally, student loan debt increases an individual’s chances of defaulting on a loan. This can make it harder for potential buyers to secure a loan – and eventually purchase a home.

Bottom line? Student loan debt is negatively impacting the future of young families and homeownership rates around the country.

Problem # 3 Retirement savings

One of the scarier problems tied to student loan debt? Many grads with debts are unable to save for retirement, because of their student loan payments.

“In 2013, the average retirement age was just under 65, while the average life expectancy was more than 85. That means people need to have enough saved to last 20 years. Unfortunately, less than half will not have enough to maintain their standard of living, according to the Boston College Center for Retirement Research,” writes The Balance.

However, putting off retirement savings creates devastating problems for individuals and the economy. To name a few issues: working till one’s literal death, downsizing, reliance on donations and charities, an inability to pay medical bills, and severe mental, emotional, and physical stress.

“As people reach their mid-60s, they either have to dramatically curtail their spending or keep working to survive. “This will be the first time that we have a lot of people who find themselves downwardly mobile as they grow older. They’re going to go from being near poor to poor,” said Diane Oakley, the executive director of the National Institute on Retirement Security, in an interview with The Atlantic.

Bottom line? Retirement savings is key for the stability of individuals and the U.S.’s society. But, student loan debt makes it nearly impossible for some to save.


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