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Millennials' Student Debt Will Have Ripple Effects Throughout the Economy

On February 28, the Federal Reserve Bank of New York held a press briefing to discuss its Quarterly Report on Household Debt and Credit. Unfortunately there was very little good news to be shared. First, the total household debt outstanding rose in the fourth quarter of 2012 by $31 billion, a number that had previously been falling steadily since 2008. A likely driving force behind the recent increase? Auto and student loans, the debt from which now comes to a whopping 2.75 trillion.

What gives? Well, the rising cost of a college education for one thing. In a 2012 College Board study, it was reported that between 1982-83 school year, and the 2012-13 school year, the cost of private four-year institutions rose by 167% and the cost of public four-year institutions rose by an unbelievable 257%. The numbers were adjusted for inflation and are all in 2012 dollars. These drastic increases mean that a greater number of families must take out significant federal and privately sourced loans to pay for college.

If adjusted for CPI and inflation the average income in the U.S. in 1983 was 46,215. Thirty years later it has risen by 7.68% to 50,064. That is the average salary increase. Over the same time period, the value in constant dollars (1996) of the minimum wage has actually decreased by $0.31 from $5.28 (1983) to $4.97 (2012). Obama’s new minimum wage of $9 is long, long overdue. Outside of the basic economics — rising costs paired with lower relative incomes and the potential devaluation of homes or unemployment caused by the recessions — there is growing competition, and the need for students to attain at least a BA if not a higher degree in order to get an edge over other candidates. The pressure is on.

The growing number of students in debt has been called a “generational migraine.” But is it really just that? It is just some annoyance that will affect only this generation of graduates, an illness contained? Given the fact that there are people of a variety of age groups taking out loans to go back to school – nearly 15% of students debt holders are in the 50+ age range, and half of all debt holders are over age 30 – this does not seem to be a solely millennial problem.

The drastic increase in students will likely have a lagging effect on the economy given that for the millions of graduates who have taken out private loans, their monthly payments could be upwards of $1,000 per month.

Due to the drastic difference between average monthly payments for those who take out federal versus private loans, the emphasis seems to be double sided. One argument is that students should take out as much in government loans as possible before turning to private lenders, but this is clearly a market that isn’t going anywhere while the costs of college remain so high. Thus, the CFBP is encouraging financial institutions to create alternative financial products for students whose loan payments may take up over half their monthly salaries, preventing them from moving out of their parents homes, and saving to make large purchases such as cars or mortgage down payments. Additionally, as of 1976, filing for bankruptcy does not get rid of student loan debt so once you take out loans, there is no way out.

Herein lies the basis for the rising student debt as a multi-generational problem. Recent college grads who owe significant amounts of money and are crippled by college debt may set themselves up for delays in saving, purchasing a home, a car, and may even hinder their ability to look for jobs once they’ve graduated due to the costs of traveling or moving to take advantage of areas with greater economic opportunity.  

It may go so far as to hinder their ability to pay for their kids' college education should the costs rise another 167% by the time they apply. An extremely unhealthy cycle of student loan debt can be avoided by programs that allow for loan forgiveness — in much larger sums than is currently available — especially in industries like education where salaries are notoriously low. Other options include graduated repayment plans for private loans, or perhaps even greater institutional participation in creating scholarships and grants for students. 

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