Oversize Student Loan Debt Acts as Drag on the Economy

Wednesday, May 21, 2014 at 2:55 PM by

High levels of student debt have a negative effect on the economy

Many college students graduating this month have heavy loads of student loan debt, a burden that may be weighing down the entire economy. Students who must commit a large part of their incomes to student loan repayments are holding off on making big purchases, reducing the overall level  of economic activity.

More than three-quarter of a million Wisconsin residents have federal student loan debt, according to the U.S. Federal Reserve System. The average debt level for Wisconsin residents is about $22,000.

Student loan payments represent a great deal of money that new graduates are devoting towards paying down debt, rather than making consumer purchases that can boost the economy. More than one in three Wisconsin residents with 4-year or advanced degrees has student debt, according to a web survey of 2,600 individuals, undertaken by One Wisconsin Now. The loan repayments can take a big bite out of graduates’ incomes: the average monthly student loan bill was $350 for Wisconsin residents with a 4-year degree, and $448 for those with advanced degrees, according to OWN.

It is common sense that people making big loan repayments will have less money to spend on other things.  The One Wisconsin Now survey shows that people who were working on repaying student loans are more likely to buy a used vehicle rather than a new one, and estimated that student loan debt reduces annual aggregate spending on new vehicles by $200 million in Wisconsin. People repaying student loan debt are also more likely to delay buying a house.

Some state lawmakers have recognized that we would all benefit from keeping student loan debt at manageable levels. In the last legislative session, the “Higher Ed, Lower Debt” bill was introduced, which would create a state-backed student loan authority to buy loans and refinance them at lower rates. The bill would also allow up to $6,500 of the yearly amount paid in student loan debt to be deducted from income for state income tax purposes.

The bill didn’t pass, but at least it’s a signal that some lawmakers acknowledge the problem of growing levels of student indebtedness. Heavy levels of student debt are bad for new graduates – and for the rest of us, too.

Tamarine Cornelius

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