A July report of the Federal Reserve Bank of Philadelphia finds that student loans have increased tenfold since 1999. Even worse is the acceleration of this debt over the last eight years. Since 2007, loans doubled from $537 billion to more than $1 trillion today.
The ballooning of student loans is fueled by the idea that everyone should go to college. The problem is that most students have to go to the bank before going to college. Many students secure loans even though they are not sure what they want to study. Others just go because everyone else is going. Universities have responded to growing credit demand by making loans easy to secure.
The Philadelphia Fed’s report now says this policy is misguided. The surge of students on loans is not helping the economy, but ruining it.
1. Starting Life With a Handicap
The first reason why this policy does not work is because students on loans leave college with an average of $28,000 in debt. This weighs them down exactly during the time when they need to build resources to establish a family and career.
The problem becomes worse because the debt load comes when the graduate will be earning less because of a lack of experience. The graduate thus enters life as an adult with a severe handicap that dampens demand and initiative so necessary to a healthy economy.
2. Jobs Without a Future
The second reason why student loans are ruining the economy? They discourage graduates from taking risks and initiatives that help economies. Usually young people are full of energy and ideas which can be a great stimulus for an economy.
Now risk adverse graduates laden with debt are flocking to existing companies to find “safe” jobs to pay off their burdens. They often accept jobs that have no relation to the degree they paid so much to obtain.
3. The Illusion of a Degree
Another reason is that the practice is not living up to the promises of success. Student loans often ruin the possibility of benefiting from a degree. It is now becoming increasingly clear that a university degree is not an instant ticket to success that promises higher lifetime earnings and better well being.
In fact, the Philadelphia Fed’s report finds that many students would be better off without a degree especially among those 17% that are delinquent in their debt payments.
4. Fewer Young Entrepreneurs
Student loans are also responsible for a decreasing number of young entrepreneurs in start-up businesses. The graduate with loans has neither the money nor credit with which to start a business. As a result, young people are not becoming entrepreneurs and the number of small businesses, which make up half of the nation’s economy, is declining.
The Kauffman Foundation, for example, has found that the number of new entrepreneurs between the ages of 20 to 34 fell to 23% of all new start-ups in 2013. The number is down from 35% in 1996. Such a decline could have grave consequences in the future.
5. Time Bomb
Finally, student loans are increasingly going unpaid. Default on loans is a trillion dollar time bomb just waiting to explode with horrific consequences for our economy.
Some want to present taxpayer subsidized student loans as a way of building the nation’s future. However, it is fast becoming clear that it not only hurts the students who often carry their debt for decades but it also burdens the taxpayer who is left to pay the bill. All this pulls down the economy and discourages growth. Should the bubble burst, it could trigger an economic crisis.
Student loans are supposed to guarantee success and bolster today’s hobbling economic “recovery.” Instead, these loans are contributing to the problem they were supposed to solve.
Moreover, it is creating a culture of entitlement and irresponsibility. One has to ask: What ever happened to the days when students only went to college when they knew what they were going to become and had the money to pay for it?
As seen on TheBlaze.