The Ripple Effects Of Rising Student Debt

Career College Central summary:

  • What are the roads not taken because students must take out loans for college? A collection of studies shows that the burden of student debt may well cause people to make different decisions than they would otherwise — affecting not just individual lives but also the entire economy. For one thing, it appears that people with student loans are less likely to start businesses of their own. A new study has found that areas with higher relative growth in student debt show lower growth in the formation of small businesses (in this case, firms with one to four employees).
  • The correlation makes sense. People normally have only a certain amount of “debt capacity,” said Brent W. Ambrose, a professor of risk management at Pennsylvania State University and a co-author of a preliminary paper on the research along with Larry Cordell and Shuwei Ma of the Federal Reserve Bank of Philadelphia.
  • When students use up their debt capacity on student loans, they can’t commit it elsewhere. “Given the importance of an entrepreneur’s personal debt capacity in financing a start-up business, student loan debt, which cannot be discharged via bankruptcy, can have lasting effects later in life and may impact the ability of future small-business owners to raise capital,” the study says. Considering that 60 percent of jobs are created by small business, “if you shut down the ability to create new businesses, you’re going to harm the economy,” Professor Ambrose said.
  • Student loan debt also appears to be affecting homeownership trends. According to research by the Federal Reserve Bank of New York, fewer 30-year-olds in general have bought homes since the recession, but the decline has been steeper for people with a history of student loan debt and has continued even as the housing market has recovered.
  • Total student loans outstanding have risen to $1.1 trillion, compared with $300 billion just a decade ago, according to the Fed’s study. The average total debt for student borrowers was around $30,000 in 2013. No wonder borrowers have been reluctant to start businesses or to buy homes.

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THE NEW YORK TIMES
 

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