How Record $1.57 Trillion in Student Debt Threatens the Economy

Inside Subprime: March 26, 2019

By Aubrey Sitler

The Federal Reserve reported that student debt across the country had reached a record $1.57 trillion at the end of 2018. That amount has more than doubled since the recession ended in June 2009, when outstanding student debt was a mere $675 billion.

This amount of debt that has accumulated at an increasingly rapid pace nationwide could pose a problem for more than just the borrowers who owe it back: it could also threaten the U.S. economy on a larger level.

“Over 90% of student loans are guaranteed by the U.S. Department of Education, meaning that if a recession causes a rise in youth unemployment and triggers mass defaults, this contingent liability could prove burdensome for the U.S. government budget,” explained Paul Della Guardia, economist at the Institute of International Finance in emailed correspondence with Bloomberg.

This means that the U.S. Government has taken on an immense risk in lending out such a huge amount of money to people for student loans at an unprecedented rate. If something happens to make people unable to pay that debt back on large scales, the government would be in trouble.

Based on data from the U.S. Department of Education, over 2.7 million student loan borrowers currently owe more than $100,000 each. Of these, approximately 700,000 people owe $200,000 or more. The depth of this debt burden is alarming on individual and system-wide levels. For many, these amounts seem insurmountable—and they may be, depending on their income levels.

According to a Bloomberg analysis, one particular group of borrowers poses a significantly higher risk than others. Compared with everyone who has taken out student loans since the end of the recession, those who took out student loans in 2012 have the highest cumulative loss percentage. This means that, even when compared with students who have had similar amounts of time to pay back their loans, these students have struggled the most with paying back their loans. There are a number of reasons for this, but notably, most of these 2012 borrowers are now between 24-33 years old. Many of them started working when the economy was floundering. The unemployment rate was almost double what it is today, and many people—especially those entering the labor market for the first time—struggled or even failed to find work in their desired fields or wages that met their financial needs. According to the Bureau of Labor Statistics, it also took three times longer on average to find a position in 2012 than it does today.

Each of these issues has impacted this group of borrowers not only when they first started out in the job market, but also as they have continued working. If they couldn’t get jobs for several months and then ended up underemployed, that set up their career trajectories at a much later and lower level than they probably anticipated when taking out loans to attend school.

The age of borrowers with outstanding student loan balances has also shifted over time. As of the 3rd quarter of 2018, borrowers aged 25 to 34 owed about $489 billion, while those aged 35 to 49 owed a whopping $530 billion. In this same time period, borrowers aged 50 and over owed $276.1 billion in federal student loans, marking a $28.8 billion or 11.6% increase since the same quarter one year earlier.

The full impact of these shifts toward higher overall student loan debt nationwide and debt carried across longer periods of citizens’ lives remains to be seen.

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