Getting Americans to borrow and spend lots of money can produce a nice economic sugar high, as we saw during the Bush years. But the party can't last forever and, eventually, heavy debt servicing acts as a drag on the economy. After all, the more money that debtors are forking over to banks every month in the form of interest payments, the less they have to spend on everything else.
This problem is especially bad if it's younger people who are most indentured to creditors, since young people tend to be the biggest spenders on consumers items (since they don't already have homes and garages full of stuff.)
So it is that more experts are realizing that today's record level of outstanding student debt -- over $1 trillion -- isn't just a problem for the under 40 crowd, it's a problem for the economy as a whole. As I have noted here before, student debt is holding back younger people from buying homes, which dampens the housing market. But this dampening effect goes well beyond that. As the New York Times reported today:
The weak economy and tight credit standards remain the main culprits preventing young people just establishing themselves from making major purchases. But millions now face putting a substantial share of their take-home pay toward past debts rather than present needs. Student loan debt leaves them with less money for things like clothes and restaurant meals. And it is even more likely to suppress purchases of more expensive items that need to be bought with credit. A poor job market is compounding the problem: the educational debt burden of many so-called millennials has sharply increased even as they are being forced to get by on significantly less income than the previous generation — a decline of about 15 percent in real terms since 2000, with much of that drop coming from the recession.
According to calculations by the Pew Research Center, the measure of debt to income for households under the age of 35 has ballooned to about 1.5-to-1 in 2010 from about 1-to-1 in 2001. The composition of that debt has shifted, too: more is tied to student debts, and less to homes. “Having a lot of student loan debt makes it harder to qualify for a mortgage and harder to save for a down payment,” said Jed Kolko, the chief economist at Trulia.
Student loan debt is not only constraining young adults, but also, at least in the near term, holding back the recovery itself, some economists say. The shadows might remain even as the economy picks up, by making young workers more cautious when it comes to decisions about their careers and their finances. Millennials might end up buying less expensive homes or more often choosing to rent than previous generations.
Sounds like a great time to double interest rates on many student loans, as is set to happen July 1 unless Congress stop it.