Student Loan Debt – The Next Economic Crisis for America?

As 2016 ends, American student loan debt has reached $1.3 trillion. The average amount of debt for a 2016 undergraduate grad is now $37,172 – a 6% rise over 2015.

For graduate students, it’s worse. Most who graduate with Master’s degrees owe between $50 - $60,000; for law and medicine the range is between $150,000 - $165,000.

In terms of numbers of people, 44.2 million people in America have some type of student loan debt, and the current delinquency rate is 11.1%.

And, while politicians all speak to the need to “do something” about both helping out current debtors and making college more affordable, nothing seems to ever get done. The trail of debt continues. And it continues to get larger, as states reduce their investments in higher ed, causing even public institutions to raise costs. And financial aid hasn’t kept up either. During the 1980’s, Pell Grants, which did not have to be paid back, took care of 1/2 of tuition costs. Today, they take care of only 1/3 of such costs.

What government and financial leaders need to realize is that this continued path of mounting debt is actually turning into a social and economic crisis that ultimately can threaten the entire U.S. economy. Here’s how that works.

Economic Implications

The economic crisis that is upon us is the result of a couple of factors:

Wage Stagnation

There is a lot of news about the plight of minimum wage workers. And to be sure, they have been losing ground over the past three decades. But the same thing is true for salaries of middle-income salaried employees. Their incomes have not risen to meet inflation over the past 30 years either. And, according to the Economic Policy Institute, this has been the result of “intentional policy decisions” on the part of America’s political and economic leaders. Here are just a few statistics and data from the latest Institute findings:

• Those with college degrees have seen no growth in income over the past decade.
• Incomes for STEM graduates have grown so slowly that they have not kept up with inflation
• Policy decisions have allowed the wealthy to continue to grow their incomes, creating the increasing gap between the tiny percentage at the top and the 90% below that.
• There has been a shift away from full-time hiring, with many corporations preferring cheaper contractual arrangements, made even more possible because of technology.

The Inability of Indebted College Grads to Participate in the Full Economy

Economies grow when consumers are able to afford and have a desire to make larger more permanent purchases – specifically cars and homes. These two industries, in fact, account for a huge part of the U.S. economy. Even when raw materials are purchased from overseas markets, the home construction industry employs huge numbers of people domestically. The purchase of a home impacts many other consumer industries as well, as homeowners furnish, upgrade, repair and improve their dwellings. And while many drive foreign vehicles, they are assembled, sold and repaired within this country.

Further implications are yet to be felt. Millennials in debt will not be investing. The longer-term implications of this may serve to widen the gap between the top 10% and the remainder of the population. And what type of retirement can this generation expect?

In general, the inability of millennials and generations to come to participate economically will impact all sectors of the consumer economy.

Social Implications

This is clearly a question of “which came first…the chicken or the egg.” Millennials and those coming behind have a very different view of their future worlds than their parents or grandparents have had. Traditional social values of adulthood have included the following:

• A steady full-time job, often with the same company for a lifetime
• Marriage and a family of 2.4 kids, two cars in the garage, and a home on a small piece of land on this planet
• Savings for kids’ college and retirement
• A comfortable retirement so as not to have to be dependent upon the kids
• A middle-class “work ethic” that involved getting up every morning, getting dressed, and going to a physical place of employment, often for more than 8 hours a day.

This traditional life cycle is largely being dismissed by millennials and following generations. Whether this is the result of their upbringing or their adaptation to an entirely disrupted world really doesn’t matter. Student loan debt, however, does play a big role in the life decisions they are making.

• They are delaying marriage, opting for freer lifestyles with partners – partnerships that can end without legal entanglements
• They are delaying having children. The birth rate today is at an all-time low.
• They freely accept and indeed, welcome, the opportunities to be fully mobile and to change jobs and careers as often as they wish without any repercussions. They are willing to go where the money is, as long as they can have the work-life balance they desire.
• Their student loan debt is an accepted fact, and it creates everything from living at home with parents to defaulting or deferring as much as possible.
• They have “given up” on traditional political and social institutions, believing that they cannot or will not solve societal issues.

Facing the Future

Student loan debt has the potential to change the entire social and economic “face” of America. Our political leaders have not come to grips with this fact. While they spend time on global politics, controversies about entitlement programs, social safety nets, defense spending, and such, they are ignoring the real and rapidly approaching threat to our economic well-being – the mounting crisis of student loan debt.