Economic Progress

Student loans are crippling young Americans and the economy. The next US president must act

Stanford University students listen while classmates make a presentation to a group of visiting venture capitalists during their Technology Entrepreneurship class in Stanford, California March 11, 2014.

Image: REUTERS/Stephen Lam

Jake Bright
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Though bread and butter issues may have exited this US election, expect the economy to retake centre stage in a Clinton or Trump administration. Whoever wins next week, America’s record student loan debt could hold the key to boosting GDP post-inauguration day.

While the electorate is certainly polarized, the most common expectation of the new president will be to deliver tangible economic benefits directly to wallets and households. Since early 2016, employment and wages have polled highly as voter priorities. Pew Research tracked the economy as “the most important” election issue, and the one concern that unites both Trump and Clinton supporters.

Unfortunately, the 45th commander-in-chief will be boxed in when it comes to levers to spur demand and economic growth. On the monetary side, the benchmark interest rate has been at record lows going on a decade, so the White House can’t bank on much help from the Fed. As for fiscal stimulus, a highly partisan Congress may be unlikely to approve big legislation, such as an infrastructure bill, no matter how persuasive the next president. Even if passed, it could take some time for funds from such a measure to flow into business contracts and wages.

So how could the next administration tap a trillion dollar pool of potential stimulus? By unlocking the latent demand in the monthly student loan payments of tens of millions of Americans. It didn’t’ escape the 2016 election rhetoric that US student debt has risen to record levels. In a nutshell, 43 million Americans owe just under $1.3 trillion in student loan debt, The majority, 64%, are in the 20-39 age group with average monthly payments of $351, according to data provided by the New York Federal Reserve Bank. Seventy-percent of US student loan debt it is owed to the federal government and roughly 30 percent to private lending institutions.

To put this all in perspective, America’s student loan debt now equals roughly half the GDP of California, the country’s largest economy, and is nearly double the 2015 GDP of Switzerland. This burden now surpasses auto-loans and is the second largest pool of US consumer debt after mortgages.

Student loans have become an economic albatross around the necks of millions of American professionals in their 20s and 30s – normally the most active years to get married, begin families, start investment portfolios, and buy houses.

Total student loan debt in the US, by age group

From a GDP standpoint, we should consider the billions Americans pay annually in student loans as billions that could go to US businesses, investments, federal and state tax revenue, and the broader economy. Each dollar in student loan debt a household pays equates to an education tax pulled directly from discretionary income. If freed up, that money could be redirected to boost US consumption, profits, wages and incomes. Lessening America’s student debt load could also positively impact global business, since the US is consistently the largest importer of foreign goods and services in the world.

Circling back to the 2016 US election, one of most direct paths for the new president to lift the economy from modest to more robust growth is to pursue policies that reduce America’s student loan burden. Doing so could be positioned as a tax-cut stimulus package for young professionals. Sure, there’d be plenty of politics and practicality to overcome in passing and paying for such measures. But if the White House and Congress – for the good of the overall economy – could find common ground to aid Wall Street and the auto-industry during the great recession, the next US president can build consensus for student loan relief in 2017. For Americans voting on Tuesday, you can review a New York Times analysis of where Hillary Clinton and Donald Trump stand on student loans here.

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