American students are well over $1 trillion in debt, and it’s starting to hurt everyone, economists say. Across the country, students are taking on increasingly large amounts of debt to pay for heftier education tuitions. Figures released last week by the Federal Reserve of New York show that aggregate student loans nationwide have continued to rise. At the end of 2003, American students and graduates owed just $253 billion in aggregate debt; by the end of 2013, American students’ debt had ballooned to a total of $1.08 trillion, an increase of over 300%, Time reports. In the past year alone, aggregate student debt grew 10%. By comparison, overall debt grew just 43% in the last decade and 1.6% over the past year.
According to a December study by the Institute for College Access & Success, seven out of 10 students in the class of 2012 graduated with student loans, and the average amount of debt among students who owed was $29,400. There’s no clear end in sight. “The total amount of student debt is growing basically at a constant rate,” Wilbert van der Klaauw, an economist with the Federal Reserve Bank of New York tells TIME. “The inflow is much higher than the outflow, which is likely to continue in the future as reliance on student loans for college is expected to remain high.”
Debt is painful for many students, and an increasing number of graduates are unable to pay back their loans on time. Delinquencies on student loans have risen dramatically over the past decade: 11.5 percent of graduates were at least 90 days late on paying back their loans at the end of 2013, compared with 6.2 percent delinquencies on student loans in 2003. Moreover, the Fed’s figures on delinquencies hide more stark data: nearly half of all students with debt aren’t currently in repayment thanks to deferments and forbearances and the fact that students are not expected to pay while they’re in school, according to van der Klaauw. What that means is that for the graduates who are actually expected to pay their loans now, the delinquency rate is roughly double the 11.5 percent figure.
Why are student debts and delinquencies continuing to rise? One answer is that the cost of higher educations is increasing. Between the 2000-2001 academic year and the 2010-2011 academic year, the cost of a degree at public and private 2- and 4-year institutions rose 70%, from an average of $10,820 to $18,497, according to data provided by the federal government’s Institute of Education Sciences. Families’ incomes aren’t rising at the same rate, so students are forced to take out more loans.
On the plus side, more students than ever before are attending college, which is a certainly a good thing, as van der Klaauw points out, even if it is a contributing to factor to overall debt increasing. A degree is usually worth the cost of college, even if the price tag is increasingly tough to bear. “It is always important to keep in mind that the average returns to a college degree remain high,” van der Klaauw said in the TIME interview.
But a more pernicious explanation of rising debts is that outstanding student loans tends to linger for years, as interest rates accumulate debt and students decide to pay off other loans first. Student debt piles on because it takes years to pay them off, and they can’t afford to pay back such hefty loans until later in their careers. For example, some dentistry school graduates sometimes intentionally choose to default on their student loans in order to pay the staggeringly high costs of opening their own dental practice.
Avoiding default on student loans may involve some clever thinking once a student graduates. Students claim to have entertained the idea of joining the military, or moving to a state with no income tax, like Texas, in order to pay off college debts more quickly. As one student told TIME, “When you take out loans, you’re taking years off of what you want to do and where you really want to be.”
Students across the country are trapped by their debts and often unable to take advantage of the freedom that a college degree should theoretically afford them. Julia Handel is the marketing manager for celebrity New York chef David Burke. The 2012 Ithaca College graduate is making over $40,000 a year, which is better than many of her friends. But she had $75,000 in loans, and it’ll take her at least 15 years to pay off her debts. For now, Handel is officially on her parents’ lease but crashing with her boyfriend, pinching pennies and paying back $700 every month. She may have to give up her dream of going to culinary school, and at this point, she can definitely cross off the idea of renting her own apartment.
What are the roads not taken because students must take out loans for college? A collection of studies shows that the burden of student debt may well cause people to make different decisions than they would otherwise — affecting not just individual lives but also the entire economy.
For one thing, it appears that people with student loans are less likely to start businesses of their own. A new study has found that areas with higher relative growth in student debt show lower growth in the formation of small businesses (in this case, firms with one to four employees).
The correlation makes sense. People normally have only a certain amount of “debt capacity,” said Brent W. Ambrose, a professor of risk management at Pennsylvania State University and a co-author of a preliminary paper on the research along with Larry Cordell and Shuwei Ma of the Federal Reserve Bank of Philadelphia.
When students use up their debt capacity on student loans, they can’t commit it elsewhere. “Given the importance of an entrepreneur’s personal debt capacity in financing a start-up business, student loan debt, which cannot be discharged via bankruptcy, can have lasting effects later in life and may impact the ability of future small-business owners to raise capital,” the study says.
Considering that 60 percent of jobs are created by small business, “if you shut down the ability to create new businesses, you’re going to harm the economy,” Professor Ambrose said.
Student loan debt also appears to be affecting homeownership trends. According to research by the Federal Reserve Bank of New York, fewer 30-year-olds in general have bought homes since the recession, but the decline has been steeper for people with a history of student loan debt and has continued even as the housing market has recovered.
Total student loans outstanding have risen to $1.1 trillion, compared with $300 billion just a decade ago, according to the Fed’s study. The average total debt for student borrowers was around $30,000 in 2013. No wonder borrowers have been reluctant to start businesses or to buy homes.
Student loan debt may also affect career choices. Having a college loan appears to reduce the likelihood that people will choose a low-paying public-interest job, according to a 2011 study by Jesse Rothstein of the University of California, Berkeley, and Cecilia Elena Rouse of Princeton.
They arrived at their conclusion by studying a well-off university that began meeting students’ financial needs through a combination of work-study money and grants, and dispensing with loans altogether. (The school insisted on anonymity as a condition for participating in the study.)
Before the new policy started in the early 2000s, students were more likely to choose well-paid professions like investment banking and consulting, Professor Rothstein said in an interview. After the policy took effect, more students chose jobs in areas like teaching and the nonprofit sector.
In many cases, the choices that student borrowers make are just common sense, based on the financial realities they face. Taken together, they seem to be having a substantive — many would say negative — effect on the economy.
Is that enough reason for schools or the government to step in with a solution? Not many schools are like Anon U (as the researchers above called it), which could afford to take loans off the table. If society wants to change the skewing effect of student loans, some tough decisions about allocating educational resources may well lie ahead.