Monday, May 12, 2014

Is College Debt bad for the Economy?

Well according to the New York Federal Reserve Bank student loan debt amounted to a mere $966 Billion by the end of the fourth quarter of 2012 (1). This would represent about 6.22% of the real GDP for the 4th Quarter of 2012 in comparison to the 67.23% of personal consumption and 18.91% of government consumption and investment (2).

Further the St. Louis Federal Reserve Bank did comment that student loans do appear to be impacting the economy in the short term, but refused to comment on the long term stating However, this topic is complex and more research is needed before suggesting policy prescriptions. (3)

Logically it would seem that having student debt would lower the amount of available income during the time of the loan thus decreasing abilities to both purchase items and save. But this all depends upon the ratio of the income to debt being paid. The worse this ratio is the worse the problem will be for the economy.

If anything student loan debt simply slows down the economy by sucking away potential consumption spending or savings.

The same could be said of housing to a lesser extent but only for existing housing vs. new housing. Economically the constant reselling of existing housing and the associated loans do nothing more than eat up potential income for a time and thus personal consumption and savings.

Both housing and student loans could be seen as excellent tools for dealing with inflation since if there is greater interest charged this could dampen any potential inflation caused by larger amounts of currency present. All one needs to do is simply make occasional adjustments to these key rates and viola you can make macro-adjustments as needed to the currency supply.

So in the end student loans are not really that bad for the economy since they now provide the Federal Government an excellent policy tool to deal with the economy (especially since the Bank of Ed opened its doors back in 2010), morally though I think one can make a strong argument that this is not a good idea linking higher education to such a debt mechanism.

Unlike a house, higher education debt is permanent in nature (you can only get out of it through death) and does not have a product that can be resold to at least recover from some of the debt (housing loans get you a house—higher education gets you a piece of paper with your name on it saying you completed a bunch of courses).

If given a choice between housing debt and college debt, I would take the housing debt because it offers better terms in general despite the potential economic bubble problems of the late 1990s.


(1) Federal Reserve Bank of New York (2013). Student Debt by Age Group. Retrieved on 5/12/14 from .

(2) Federal Reserve Bank of St. Louis (2014). Economic Research. Data. Retrieved on 5/12/14 from .

(3) Elliott, William and Nam, Ilsung (2013). Is Student Debt Jeopardizing the Short-Term Financial Health of U.S. Households? Federal Reserve Bank of St. Louis Review. Sept/October 2013, Vol. 95, No. 5, pp 405-424. Retrieved on 5/12/14 from .

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