Negative Effects Of Student Debt: Recent economic news in the United States has largely been dominated by considerations relating to the economic recovery, the evolution of monetary policy, or the risks of a political disagreement on the budget. All of these topics have overshadowed the worrying development of student loans. While this development is not comparable to that which led to the outbreak of the global crisis with mortgage loans, the fact remains that the threats to the economy are real.
The evolution of student loans in the United States...
The total amount of US student loans has risen sharply. Indeed, since 2008, the outstanding amount (current stock of debt) of student loans has increased by +50% and now stands at almost 1,000 billion dollars, or approximately 750 billion euros. Thus, the average debt per university student in the United States is 25,000 dollars. In this context, the total amount of student loans is certainly lower than real estate loans, but they are now higher than other types of loans such as car loans or consumer loans.
The reasons for this surge in student loans are twofold:
- First of all, this evolution reflects an increase in the cost of studies with an increase in university entrance fees ranging from +30% in private establishments to +40% in public establishments.
- The rise in student indebtedness also reflects the parallel drop-in student grants awarded by -20%.
The rise in interest rates on these loans has increased recently. Indeed, whereas previously the credit rate guaranteed by the federal state for students fulfilling certain means conditions was 3.4%, this rate has doubled since July 1, 2013, to now stand at 6, 8%. The increase in the credit rate for these students results in an average additional cost of $4,600 per student.
Payment default is at worrying levels. Indeed, the number of credits contracted for the financing of studies is gradually increasing year after year to reach 11% in 2012. In other words, one in ten student loans cannot currently be repaid correctly.
Raises several issues and concerns
American graduates must return to the family unit. As in many developed countries, the younger generations coming from the university system find it difficult to integrate into the labor market. In the United States, this phenomenon is amplified by an unfavorable economic situation with a lackluster economic recovery that is struggling to be confirmed and which is for the moment largely dependent on an exceptional monetary policy.
Unlike other developed countries where student loan is still marginal, this method of financing studies is widely used in the United States. The originality of the American situation, therefore, lies in the combination of a difficult economic context with a very high debt burden. In this context, young graduates are increasingly likely to have to return to live with their parents because they cannot afford to pay rent.
The younger generations are restrained by the weight of their debt
The weight of the debt limits the economic independence of the younger generations. Indeed, with the financial burden related to the repayment of their loans, young graduates must postpone their various projects, whether economic (buying a car, housing, etc.) or personal (marriage, starting a family, etc.).
The personal possibilities of social evolution are mechanically restrained, as well as the potential for consumption. Indeed, while the youth of a country and its dynamism participate in the economic growth of a country, the latter is affected. Practically, instead of spending on the purchase of capital goods or a house, young graduates devote most of their income to repaying their credits. Thus, an average debt of 25'
The whole society impacted
The situation has a broader impact on society as a whole. In fact, beyond student indebtedness, it is sometimes the families who bear the weight of the indebtedness linked to the financing of their children's studies. In this context, nearly one in five households in the United States faces this problem.
In addition, note that nearly 40 million individuals continue to have to repay a student loan after the age of 30. For example, the American President, Barack Obama, and his wife, Michelle Obama, only finished repaying their student loans in 2012.
Finally, note that the doubling of interest rates on student loans will mechanically continue to complicate the access of the poorest populations to higher education.
Fewer studies, fewer qualifications: the risk of a deterioration of human capital
In the long term, the impacts can be very negative. Indeed, it should be noted that the increase in the debt burden can discourage people from investing in their studies, and encourage some to put an end to theirs, all the more so in an economic context where the prospects for employment are weak.
Thus, it is approximately 30% of 20 to 24-year-olds who are currently unemployed, that is to say, who do not have a job and who are not engaged in an educational process. In this context, and beyond the immediate economic implications, the medium and long-term risk in terms of the deterioration of human capital is very real.
In other words, this phenomenon could lead to a deterioration in the average level of qualification of the American population, with potentially significant implications for its future economic growth.
The specter of a new financial bubble
Some fear the formation of a bubble like the one that preceded the global crisis. Indeed, the dynamic of student loans resembles in certain respects that of mortgage loans (real estate) which had seen the formation of a financial bubble. It ended up exploding in 2007, thus triggering the current global crisis. The acceleration in the volume of student credits and the rise in defaults on these credits may lend credence to this idea.
However, the two situations are not completely comparable. Three elements temper these fears:
1) First of all, if the amount of student loans is high (about 1,000 billion dollars), it remains lower than the number of mortgage loans, and above all, it remains ten times lower than the level of mortgage loans before the crisis.
2) Then, while real estate debt is held by banks, student loans are mainly held by the State. Indeed, 80% of student loans are guaranteed by the State. In this context, even in the event of default, this would not be likely to bankrupt a banking institution as was the case in 2008, with the chain repercussions that followed.
3) Finally, in the event of non-reimbursement of loans, the "price" of studies and the value of diplomas will not fall, unlike the same situation in the real estate sector.
In other words, in the case of a wave of defaults on student credits, this is not what would constitute a reason for diplomas to lose their value in the labor market.
Thus, students will always have the ability to find a job, which can then make it possible to repay the loan contract. The situation is different in the case of the real estate market.
Indeed, a generalized wave of default mechanically leads to a fall in the value of assets, and therefore a parallel reduction in the assets and the repayment capacity of the people who hold these assets.
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