Student loan debt for higher education has exploded in recent years. According to the Federal Reserve, total student loan debt at the end of 2016 was $1.31 trillion, which is nearly four times what it was in 2004. Student debt is now second only to mortgage debt ($8.69 trillion) in terms of debt in this country, and exceeds that of credit cards ($764 billion) and home equity loans ($452 billion) combined. Unlike credit card debt, student loan debt is concentrated in a narrower subset of the population, estimated to be 44.1 million people. This means that the debt per borrower for student loans (nearly $30,000) is much higher than that for credit card holders (just slightly above $4,000).

There is growing concern about the impact that such a large debt could have on the economy. The repayment of the debt reduces disposable income and takes purchasing power out of the national economy. The Federal Reserve Bank of Cleveland estimates that the average student loan repayment is $351 per month. Research has shown that graduates with debt are less likely to start businesses. The repayments make it more difficult for entrepreneurs to accumulate capital, and high levels of debt make it more difficult to obtain loans.

Related: What you can do about college debt before graduating

Another impact is on job choice by graduates. Because of the need to repay the loans, they are more likely to choose jobs based on the expected income as opposed to job satisfaction or a desire to contribute to society, such as taking a job in the nonprofit sector. Yet another impact is that having to pay off high amounts of debt reduces contributions to retirement plans. Because of the power of compound interest, not putting away money early in your career has a magnified impact decades later when retirement comes. This makes the already bad problem in the U.S. of low savings for retirement even worse.


One impact that generates a lot of concern is the effect of the debt on the housing market. Because of the need to make loan repayments, graduates with debt tend to postpone big ticket purchases, including cars and houses. The public policy research group Demos found that 52.3 percent of graduates with student loan debt own homes compared to a home ownership rate of 58.8 percent for those without debt. As was the case with starting a business, the loan repayments make it difficult to save for a down payment and then make the required mortgage payments.

If there is some good news on the student debt front, it is that the average debt and repayment figures are distorted due to disproportionately high levels of debt among some students. That is particularly the case for those who are post-graduate students earning advanced degrees in some professions. According to Newamerica.org, the average combined debt (undergraduate and post-graduate) for a student in medicine and health sciences is $161,772, while a law student graduates with $140,616 in debt on average. Loans for advanced degrees account for about 40 percent of all student debt and the median amount of combined debt for graduate students is $57,600. The hope is that those students would have higher incomes with the advanced degrees that would enable them to cover the higher levels of debt. Taking those students out of the mix means that half of all people with student loan debt pay $203 a month or less.

So what can be done to alleviate some of the problems associated with student loan debt? One thing to do is to avoid as much debt as possible by going the community college route, where the first two years of a bachelor’s degree can be done at very low cost. Appropriate public policy here would be to devote sufficient resources to the community college system. Once the debt has been incurred, income-driven repayment plans allow students to take jobs providing service to the community but have low levels of pay. Graduates would pay a fixed percentage of their income for a period of 20 to 25 years, after which the debt is forgiven. Increasingly popular in a tight labor market are situations where employers help their employees pay off their loans as a benefit. HR 3861, the Employer Participation in Student Loan Assistance Act, would encourage that by making such payments tax-free in a 401(k)-like system as opposed to having the payments be taxable income. Passing that measure would give incentives to businesses to start or expand such programs.

The state of the world economy today means that higher education is more important than ever. Any barriers to students obtaining that education, including student loan debt, makes the U.S. economy less competitive and hurts us all. Policies that reduce the burden of the debt benefits not only students involved but the economy as a whole.


Gin is associate professor of economics with the University of San Diego’s School of Business.