Student Loan Debt is Not a Drag on the U.S. Economy and Will Not Lead to Crisis

The left has been predicting student loan and financial crisis for years, to no avail. The same liberals who promote ‘useless’ degrees such as ‘gender studies,’ ‘child development,’ and ‘business administration’ are the same people predicting student loan crisis and seeking student loan reform and forgiveness at taxpayer expense, without understanding that they are part of the problem.

It’s trendy these days to predict student loan crisis, but I am among the few who thinks the student loan crisis is mostly overblown and is another example of a media-generated crisis. The media hopes that by fanning the flames of a student loan crisis, it will become self-fulfilling. And the click-powered media profits greatly from generating fear and spreading misinformation.

Here’s an excellent article Why The Student Loan Bubble Won’t Burst:

The mechanisms behind student loan debt really make it impossible to have a mass exodus like we saw during the housing crisis in 2007-2009. Unlike other forms of debt – notably mortgages and auto loans, the collateral that backs student loan debt is the borrower’s future earnings.


In other debt bubbles, the mechanisms behind the debt allow a “popping” to happen – a relatively quick unwinding of the debt and economic factors underlying it. For example, in the housing crisis, if a borrower struggles to pay their mortgage, the bank can foreclose on their house. The bank would then sell the asset, even at a loss, and the bubble can pop. This can happen relatively quickly, though the economic pain can be immense.


The same can happen with auto loans (repossession), credit cards and personal loans (balance sheet write-offs).


The problem is, this quick unwinding cannot happen with student loan debt. Given that student loans are a collateral on earnings, as long as there is earning potential, the ability to have the loans quickly “pop” via any financial mechanism is rare. Yes, bankruptcy for student loan debt is possible, but once again – rare.


Instead, our system has setup mechanisms around student loans that make it drag on borrowers – income driven repayment plans that artificially lower the repayment amount, loan forgiveness programs that are tied to specific milestones that take a decade or more to achieve. These mechanisms to eventually discharge student debt take years – the longest over 25 years!

Although it’s a good article, I disagree with the author here:

Because student loan debt is a drag on household spending, the ability for those with student loan debt to consume in the economy is diminished. They cannot buy housing, vehicles, or spend on consumer goods. Their ability to participate in the financial markets (i.e. invest) will be limited. All of these factors will have a negative trend on the economy – and it will happen over the long run as borrowers navigate these long term repayment plans and options.


And we’re already starting to see the signs – homeownership by age 30 has been on the decline for the past 6 years even though we are in a period of economic growth. Millennials have been said to be killing countless industries, but it’s more due to the fact they don’t have discretionary income to spend.

Student loan debt is no more of a drag on the economy than auto debt, mortgage debt, or any other kind of consumer debt, yet there are few fewer doom and gloom articles about car loan debt or people taking on credit card debt to buy electronics. Also, student loan debt has much lower interest than credit card debt. Money that is spent on college goes into the economy like any other form of consumer spending, too, such as cars, vacations, electronics, healthcare, or houses, or whatever else. This is why the U.S. economy has been so strong since 2009 in spite of record high student loan debt, and why student loan debt is not a drag; from 2017-2018, the U.S. economy posted among its strongest quarters of GDP growth in many years…hardly a drag.

Also, compared to other forms of consumer spending and debt, a college degree is, comparatively speaking, a good investment, especially in STEM. A new car loses half its value after you drive it off the lot, but a degree gains value in terms of inflation-adjusted wages, which means a degree eventually pays for itself. Very few forms of consumer spending can lay stake to that claim. Of course, there are caveats; not all degree holders get good-paying jobs, but, on average over many years, degree holders tend to come out ahead. The point is, the media is obsessed with student loan debt and ignores that there are other types of debt that are more common and far worse.

And finally, in regard to crisis, the media has a very poor track record at predicting these kind of things. For every crisis they correctly predict, they are wrong 100 times. Check all the failed predictions from 2009-2017 of another financial crisis, recession, bear market, Web 2.0 bubble, or student loan crisis. Here are a bunch of failed predictions courtesy of Google of student loan crisis/bubble from 2005-2013. We need to hold the media accountable for spreading undue fear and being wrong all the time.