Student Debt Surged 500% in 15 Years
Investors beware: student debt could be a ticking time bomb for the U.S. economy.
But before going into details, it’s important to understand what’s happening; namely, student debt is ballooning.
In the first quarter of 2003, student loans amounted to just $240.0 billion. In the fourth quarter of 2018, that amount stood at $1.46 trillion. That means student debt has increased well over 500% in a matter of 15 years. (Source: “Household Debt And Credit Report (Q4 2018),” Federal Reserve Bank of New York, last accessed March 13, 2019.)
As debt has increased, we have seen a large number of loans becoming delinquent.
As of the fourth quarter of 2018, 11.42% of all student debt was 90+ days past due; that’s over $160.0 billion. Going forward, it’s very possible for this amount to get much bigger.
And just how many Americans have student loans outstanding? 44 million. That is roughly 13.5% of the U.S. population. (Source: “Here’s how much the average student loan borrower owes when they graduate,” CNBC, February 15, 2018.)
2 Big Reasons Why Massive Student Debt Is a Problem
Why worry about this?
You have to look at the big picture. There are essentially two major problems as student debt gets bigger and delinquencies increase.
The first is that students borrowing more money is a problem for future growth.
Remember that the U.S. economy is highly reliant on consumer spending. As students graduate, many are burdened with a lot of debt right out of the gate. Will they go out and spend money on things they want or things they need? The former is highly unlikely. So higher student debt could take a toll on consumption, which will ultimately be bad for the U.S. economy.
Also, higher student debt could be bad for business in the U.S. economy too.
According to one study, higher student debt also impacts small businesses. This study found that for every one standard deviation increase in student debt, the number of businesses with one to four employees declined by 14% between 2000–2010. (Source: “The Impact of Student Loan Debt on Small Business Formation,” SSRN, March 31, 2014.)
About 60% of all new jobs in the private sector are created by small businesses, so more student debt could hurt job creation.
The second major issue is that a massive amount of outstanding student loans are backed by the U.S. government.
Mind you, the government has already amassed a massive debt load. In case you didn’t know, as of this writing, U.S. national debt stands at over $22.0 trillion.
If we see more delinquencies on student debt, Uncle Sam will essentially be on the hook for it. That will raise the U.S. national debt higher, which could mean the government possibly having to pull back on spending elsewhere.
Soaring student debt is not taken seriously, but it shouldn’t be ignored. It could become a major problem if not controlled, with a lot of economic woes if it gets really out of hand.