Unpaid student loans can put a heavy yoke on personal finances. For millions of Americans, outstanding student debt means years and years of ongoing payments (averaging hundreds of dollars per month).
It can be hard to balance paying back what’s owed on student loans while meeting immediate expenses (like, paying rent) or pursuing long-term financial goals (like, saving up for a mortgage down payment).
But, the impact of student loan debt on the economy goes deeper than dinging individuals’ wallets, affecting entire job sectors.
Student loans now account for almost 40% of outstanding consumer debt in the U.S., outpacing the amounts owed on motor vehicle loans, for example, by more than $355 billion.
For a wide-angle view of student loan debt and the economy, it’s useful to know just how much money is owed by borrowers across the U.S. on educational debt. In 2023, the cumulative total of student loan debt in the U.S. surpassed $1.7 trillion, according to data from the Federal Reserve.
Understanding How Many Americans Have Student Loans
This educational debt load affects tens of millions of Americans. More than 43 million borrowers have federal student loan debt, with the average balance per individual being $37,338. To obtain a bachelor’s degree, the average student borrower takes out more than $31,000 in student loans.
For those with master’s degrees, student loan debt is even higher. The average master’s degree holder’s student loan debt is $83,651, which is 141% higher than the average student debt balance.
Given these massive numbers, it becomes clearer how the U.S. college student loan debt crisis and the economy are enmeshed in a tangled tango.
Reviewing Effects of Student Loan Debt on the Economy
If the total amount of student loan debt held by Americans sounds staggering, it’s because it is. That total — $1.757 trillion — is more than the GDP of countries such as Australia, Spain, and Mexico.
And, it’s more than double that of Saudi Arabia and Switzerland. It even outpaces the global box office totals of the 20-highest grossing films in history — a list that includes blockbusters like, Avengers: Endgame, Avatar, and Titanic — by more than 50 times!
With these numbers in mind, let’s dive deeper into the drag that this massive amount of educational debt continues to have on the U.S. economy.
Does Student Loan Debt Hamper Spending?
For the average individual paying off a student loan, typical payments amount to $200 to $299 each month. For many — especially those embarking on a career and earning an entry-level salary — this ongoing financial obligation can put a deleterious dent in funds they could otherwise spend elsewhere.
Student loan repayments can place a very real squeeze on the money that individuals have available each month for buying, investing, saving, or starting a business.
More money spent paying back student loans, in practice, means less money in pocket or saved. Consumer-driven economies grow when people (aka consumers) spend their hard-earned money. So, millions of people redirecting income towards loan payments can significantly slow or stifle economic growth. If someone is struggling to pay off their student loans, they’ll have less money to spend on purchases that help fuel the economy, businesses, and the workforce. The more young people there are who struggle to pay off loans, the greater this economic dampening effect that occurs.
During periods that require economic resilience, such as in a recession, reduced spending can be especially nefarious.
Consumer spending can help to stimulate a floundering economy, mitigating or reversing sudden downturns in specific sectors.
When that spending doesn’t happen during a downturn, it can take longer for the economy as a whole to bounce back.
For those with student debt, it can also be harder to weather a financial crisis, compounding the pain of higher unemployment and lower spending.
How Do Student Loans Affect the Housing Market?
With less money to spend, it’s no surprise that people with student loans have fewer funds for big ticket items, such as buying a home or saving for retirement.
And, since home ownership is a major driver of wealth accumulation, delaying when one buys a home can impact an individual’s net worth for decades to come.
How Do Student Loans Stifle Entrepreneurship?
Small businesses contribute to the economy in major ways. In fact, they’re responsible for 1.5 million jobs annually and generate 44% of economic activity in the U.S.
Future business owners may not be able to turn toward traditional means of financing, such as small business loans, when saddled with student loan debt. It can be harder to get approved for financing when your debt-to-income ratio is high due to loans.
And, when an individual with student debt does become an entrepreneur, they’re at risk of falling behind on student loan payments if their incoming income decreases.
Paying Off Student Loans Can Benefit Individuals and the Economy
When examining student loan debt and the economy, it may be helpful for borrowers to research additional ways to pay off existing student loans — both for their own financial well-being and the future growth of the U.S. economy on a whole.
Here are some strategies that could help those with outstanding student debt to pay down their educational loans faster.
Paying More than the Minimum Due
Student loans are generally subject to interest. Interest is a percentage charged by the lender on what’s been borrowed. Practically speaking, student loan interest accrues over time. So, borrowers who are unable to pay off their loan balances quickly typically end up spending more in interest over the entire life of the loan.
In most cases, the longer student loan debt goes unpaid, the more the borrower will owe, as unpaid interest gets added to the base dollar amount that had been borrowed from the lender. This is called compounding, and most student loans compound their interest daily. This can get confusing quickly, so here’s a student loan calculator so you can see exactly how much you’re spending on interest over the life of the loan.
Many lenders allow borrowers the option to submit a “minimum payment.” In the short term, paying a lower amount per month can free up some income or cash. But, paying the minimum does little or nothing to tackle the outstanding loan balance — typically, the borrower is just paying the accruing interest.
Paying more than the minimum can help reduce the length of time it will take to pay off an existing student loan — shrinking the principal balance as well as the amount of interest paid (aka total money spent) during the life of the loan.
While increasing monthly payments may not be manageable for every individual, paying a little extra when the opportunity presents itself can still help borrowers to eliminate student debt faster.
If nothing else, borrowers may want to apply a share of occasional windfalls, such as a work bonus or tax refund, towards outstanding student debt.
Applying for Loan Forgiveness
Under some circumstances, the government will even forgive federal student loans, essentially canceling out the remaining debt. Some teachers and public servants are among the groups that may be eligible for federal student loan forgiveness programs.
It’s worth noting that this Public Service Loan Forgiveness (PSLF) program is not available to all workers (including some in the public sector) and applies only to federal, not privately held, student loans.
Refinancing Student Loans
Refinancing a student loan with a private lender may result in lower interest rates and/or the ability to pay off what’s owed in a shorter amount of time for well-qualified borrowers.
Student loan refinancing replaces an outstanding educational debt (e.g., a student loan or loans) with a new loan. As such, the new loan can have different terms and interest rates.
For some student loan holders, refinancing allows them to reduce their monthly payments or the total interest paid over the life of the loan.
It’s worth remembering, though, that refinancing federal student loans with a private lender means that the borrower will forfeit federal benefits, such as access to income-driven repayment plans or public service forgiveness programs.
Paying Off Student Loans Faster
Student loans have the potential to keep taking a big bite out of the economy. But, unpaid educational debts undoubtedly hurt the borrower even more, creating accruing interest and loan balances that can take years and years to pay off.
Refinancing educational debt with SoFi could potentially save borrowers money. SoFi’s loan refinancing comes with no application fee, a quick and easy online application, and competitive rates.
SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.
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