Is Our Student Loan Debt Killing the Economy?

I’m sure you’ve heard a lot about student loan debt lately. “Student loan debt is killing the economy” is the common phrase I’ve heard lately. Then they quote that the average college graduate has over $25,000 of student loan related debt according to some survey and that this debt puts off the normal spending cycle of someone with their first post college job. Today, I’m going to share how student loan debt has affected us and our spending.

How We Became Two Polar Opposites – No Debt vs $80,000 of Debt

When I graduated from college I hadn’t taken out a penny in loans. Part of this was due to me saving money when I worked, part was from applying for and winning a few scholarships and half of it was my parents helping me pay my way through college. I was lucky and graduated with zero debt, or $25,000 below the average.

My fiancee, on the other hand graduated with $80,000 of student loan debt which is over 3 times the national average. She went to college during the credit crunch and didn’t have the same resources available to her that I had.

Her major (nursing) was much more demanding on her time, so she couldn’t work outside of school as much as I did. She was also the typical American college student (white, female, and decent but not top 1% grades) which leads to very few scholarship opportunities and no financial aid other than unsubsidized loans.

She didn’t borrow $80,000 to get through college, she borrowed much less. However, when you can only secure very little in federal fixed rate loans, the rest of the money has to come from some other source of loans. Unfortunately, this meant turning to variable rate private student loans during one of the worst borrowing environments in recent history.

Her variable rate private student loans started accruing interest immediately, as all unsubsidized loans do. The interest rate was insane and at times it was more than 12% . Luckily, it has come down to 8% at the current time, but adding 12% to her balance every year while she was in college made her debt blow up bigger than a hot air balloon.

How Our Post Graduation Spending Was Different Because of Debt 

After I graduated from college, I didn’t have many worries financially. I had to find a place to lay my head, but other than that I didn’t have any major expenses. I owned a decade old used car that was paid off and I had a job lined up.

I ended up maxing out my Roth IRA during my first full year of work and started saving for big purchases, such as my new car I bought a year after graduating. I saved for a house down payment and spent some money on small luxuries that I couldn’t afford in college.

I wasn’t like my peers, though. I tried to keep a tight budget and save for the future. I knew this would be the easiest time in my life to save, since I hadn’t experienced any major lifestyle inflation yet and I didn’t have a ton of responsibilities. The money I saved in the first couple years after I graduated allowed me to take advantage of some great opportunities that I may have had to pass up on otherwise.

My fiancee, on the other hand  graduated from college with a ton of worries. Her student loan debt was more than double her expected annual gross income and she didn’t even have a job lined up yet! Talk about nerve wracking!

After three months of searching, she settled into her first job and immediately began to pay down her student loans. She only contributed up to the match in her retirement account and set a strict budget for herself. All extra money went to pay down the student loan debt.

Luckily, she had a reliable car that was paid off, so there was no need to spend money there. She lived with me, so she only had to worry about her part of the monthly rent or mortgage and didn’t have to worry about saving up for a down payment.  However, if she had to live on her own her budget would have been even tighter. She has done a great job of paying her loans off so far, but we still have a long way to go.

How Student Loan Debt Will Affect Our Future Spending

Since my fiancee still has over $50,000 of her original $80,000 of student loan debt, we still have a long way to go. We’re getting married in just a couple of months and we plan to combine our finances. That means I’ll be working just as hard as she is to get rid of that student loan debt.

With our focus on the student loan debt, that money won’t be going toward other goals. My fiancee would love to decorate our new house but there isn’t money for it in our budget. We wouldn’t mind going on a nice cruise on a fancier cruise line or cruise ship, but again, the student loans come first. Basically, rather than spending money or investing more money to secure future spending, we will be paying down debt.

So does student loan debt destroy the economy? I’d definitely say it changes it in a major way. Students spend the money up front and then they pay the original money, plus a ton of interest, back to banks. Assuming the banks loan the money out again, the money should be spent somewhere. But does that happen?

I’m interested to hear your opinion! Do you think student loan debt kills the economy? It definitely puts an interesting twist on the normal spending timeline!

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About Lance Cothern

Lance Cothern, a Certified Public Accountant (CPA) licensed in the Commonwealth of Virginia, is the founder of Money Manifesto. You can read more about him here or connect with him on Facebook, Twitter, Google+ or Pinterest.


  1. It is definitely not helping our economy. When college students graduate with this much debt and have a difficult time finding work, it makes it difficult for a healthy consumer to enter the market.

  2. I would say that not just student debt, but all debt is having a big effect on the wealth of our country. We all got greedy when the credit was flowing and thought that the good times would never end. Unfortunately, at a certain point, the lenders always want to be paid back.

  3. Yes – student loan debt is having an impact on the economy. The similarities between educational lending and sub-prime lending (in residential real estate) are extremely similar. Even though I am an advocate of education, I think too many people go to college – much like too many people were purchasing homes. People are taking on loans that they knowingly cannot afford – only to do a job that they could have fulfilled without a degree.

    The only part of this article I do not like is towards the end when you say “back to banks.” There is very little connection between banking and student loans. Banks offer student loans, but the Department of Education originates about 9/10 of all new student loans while private student loans make up the other 1/10. Of all existing loans, I believe $600 billion are federal versus $100 billion of private.

    The last thing that I will add is regarding student loan interest rates. In the example of your fiance, it was 12%. I realize that this sounds insane, especially when you hear stories of “banks getting no-interest loans” from the government and homebuyers refinancing at 3%. But, interest rates are (should be) determined by risk. Think about if you are the lender in this scenario. You are giving $80,000 to a young person that has (probably) never borrowed money before. They have no history of borrowing and therefore no history of paying someone back. Even worse, they will no begin repaying you until 4.5 years later. At that point, they probably will not graduate with a job that pays them enough, so the possibility of default is HUGE! While 12% may seem insane, I think it’s justified. But, since most student loans are federal, once students default – it will come at the expense of taxpayers.

    • I’m just glad that the 12% went down to 8%. It is crazy to me that she can’t refinance these loans at a lower rate today though.

    • While I understand the initial high interest, if an individual has good repayment, why can’t interest rates be reduced? I have extremely good credit and have a few years of on-time payments behind me but I’m stuck with the 6.55% interest on my federal grad school loans that I can’t refinance for the rest of their repayment.

      Also, while someone can technically stop paying their student loans, they’re very hard to declare bankruptcy on. I get that default happens, but those who succeed in never paying their loans would probably default on any debt as they enjoy the no bank account, cash only lifestyle.

      I don’t think student loans should be forgiven or anything like that, but I definitely am for loan refinancing for high interest federal loans and possibly giving incentives to private bank loan holders to offer the same.

      Although this wasn’t mentioned in the article, I like to add that there are a lot of accredited private colleges (that are essentially diploma mills) that are as much to blame for the over 1 trillion in student loans out there as much as the students. If these colleges weren’t drooling over higher attendance and more $$$ from the students (and essentially becoming a “non-profit making a profit”) these private banks wouldn’t be lending out as much loan money because there’d be no market for it. The federal government needs to reevaluate what schools qualify for tax-funded grant money and loans for students– especially if those colleges are raising their tuition 3 times the inflation rate.

  4. Definitely not helping. The cost of going to college is just too much. We’re all about credit and credit and credit. It’s not helping anyone anyway.

  5. It’s definitely not helping. I shudder to think of what college will cost when our little ones come of age. I tend to think that the current trajectory is not a good one.

  6. I think the potential is there to take money out of the economy. I think you have to strike a balance of paying it down and looking toward the future. If you concentrate all disposable cash on paying down the loans, you are not investing or living. 5-10 years later, the loans are paid offf, but you lose valuable time.

    • We still save for retirement and put some money aside for a vacation every year. We’re not cutting the cable cord or living on beans and rice either 🙂 We’ll be fine!

  7. Not only do I think student loan debt is hurting our economy, I’m certain it is going to cause a bubble of some sort just like mortgages did. When you’ve got that many young people leaving college with so much debt before they ever even start their first job, something is wrong. Eventually as prices go up, fewer and fewer people will be able to take on this kind of debt, and that will create a lot of people in society who have limited opportunities.

    As a young couple starting out, I can advise that one of the best things you can look into is a 529 college savings plan for your kids. Money is one of the things I don’t want holding my kids back if they are ambitious enough to get accepted into college.

  8. That’s a tough one Lance but I believe in a way it can hinder the economy as people have no money to spend. They are busy paying off huge loans and saving what they can for a rainy day.On the other hand there are people who keep the economy running even though they have no money by using credit. If I were in the same position I’d be paying off the loan as soon as possible but also balance my savings with retirement as well as emergency funds. I guess I don’t like to put all my eggs in one basket but I also don’t like debt, who does. Good luck with it all mate.

    • I save a lot for retirement and my fiancee just saves enough to get the match in her 401(k). Once we’re married, I’ll still contribute to retirement which will have an overall decent retirement saving rate between the two of us, plus attack her loans.

  9. Student loan debt definitely sidelined me as an economic driver in this country. While I’ve been paying mine off I’ve been delaying buying basically everything, from a house to a second car to hair cuts!

  10. The comparison between you as a college grad with no debt vs. your partner as a college grad with debt is the wrong comparison. Compare a college grad with debt vs. a non-college grad, and statistics overwhelmingly show that the college grad with debt comes out way ahead in the lifetime of earnings. There are counterexamples — so if you can program like Mark Zuckerberg, no need for college — but for most people, student loan debt has a huge ROI in terms of future earnings potentially.

  11. I would say that Debt is killing the economy, but Student loan debt is becoming a big part of it. More and more students are getting loans they can’t afford and that is stealing money from the economy. I am interested to see what happens in the future, especially when I need to send my son off to college.

  12. Kyle @ Debt Free Diaries says:

    As someone who is the same age as a lot of recent grads, I’ve noticed a ton of people are paying $800-1200/month just on loans! Based on some other economic factors (older people not retiring, less open jobs on the market) anyone who graduates but doesn’t find a decent paying job is going to have trouble just making those payments. Add in all the other things students are paying for and that’s a lot of discretionary spending out the door.

    I don’t have a lot of student debt personally, but the extra hundred bucks each month going toward the payments ending the month in my pocket instead could take a huge weight off my shoulders.

    • Kyle, there are a ton of people with a lot of loans out there. I know a lawyer who has a ton of debt but just an average salary… he’ll be paying them forever.

  13. I definitely think that student debt can be a huge burden for many people trying to start their life out of school. But I think it’s an interesting question to compare it to the lifestyle of many recent graduates. You sound like you were very responsible, but there are many others who, with no student loan debt to learn from, may turn to other forms of credit to finance ridiculous lifestyles. They may eventually learn to be more responsible, but is that route better than learning through student debt? This is totally hypothetical with no numbers to make a real comparison, but it’s an interesting question. In any case, getting into debt at an early age certainly has negative impacts for the individual.

    • Very interesting question. I do think I was pretty responsible because I didn’t get into any major debt, but there are many others like me out there, I’d like to think.

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