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Are Student Loans Holding Back Young Workers?

Is the burden of student loans holding back young workers from making long-term career and investing progress? One recent survey suggests heavy student debt loads are leading many young Americans to hold off on key life decisions, like buying a home or starting a family.

That’s according to the 2015 “Life Delayed” survey from American Student Assistance (ASA). According to a nationwide survey of 1,934 student loan borrowers, more than half of respondents indicated their own levels of debt make economic progress in other areas difficult. And that trend may have implications for the strength of the broader economy.

‘It puts your life on hold’

Project Invested has delved into this issue previously, when we looked last summer at a study published by Standard & Poor’s that probed similar questions about student debt.

ASA’s “Life Delayed” survey fills out that picture by exploring how young graduates view their own financial situations.

“A survey conducted by ASA, taken to gain a better understanding of how debt is impacting the daily financial lives of young Americans, shows that student loans are impacting the financial decisions young people make on a daily basis,” the ASA study notes. “It not only limited their buying power, but makes them reluctant to make major life decisions that require a financial investment.”

The survey notes that there are more than 40 million Americans with student loans, totaling about $1.3 trillion, according to estimates from the Federal Reserve Bank of New York. That total has grown thirty-fold over the last 30 years, due to rising tuition costs and larger numbers of Americans attending college.

The benefits of higher education are clear, and it remains true that college graduates can expect to see higher returns over time in the form of better job opportunities, higher starting salaries and enhanced lifetime earnings.

But those returns must be weighed against the costs of debt-which for many graduates can be higher than expected.

Among the survey’s specific findings:

  • 46% said they “found it difficult or very difficult to make monthly student loan payments.”
  • 35% say they find it “difficult to buy daily necessities because of their student loans.”
  • 52% say debt hampers their ability to make larger purchases like cars.
  • 62% say they are putting off saving for retirement and other investments.
  • 55% say their debt affects their ability to buy a home.
  • Among those who said they were interested in starting a business, 61% say student debt has affected their ability to do so.

As one survey respondent explains, “having [student] loans does feel at times like it puts your life on hold. There is always that cloud looming, which does impact decisions large and small.”

‘A cascading impact on the nation’s economy’

The “Life Delayed” study suggests that this trend “has a cascading impact on the nation’s economy as the generation charged with investing in the nation’s future is delaying their lives because of debt.”

What that means is that, traditionally, the U.S. economy has been buoyed by the economic fortunes of a rising generation of workers launching their careers, making their first adult consumer purchases of cars and homes, starting families and following their entrepreneurial dreams. If today’s young workers aren’t making those moves, it could weigh like an anchor on economic growth-with social costs for all of us.

According to an Economics 21 analysis of the recent Department of Education, “Quarterly Student Aid Report,” the “total direct loan amount outstanding is up roughly 15 percent over a year ago.” The analysis highlights an additional challenge to the overall economy: loan defaults.

The analysis states, “Ten percent of student loans are delinquent, meaning the borrower has missed payments for thirty days or more. Another 13 percent are in deferment, which means payments have been postponed for various reasons. Another 14 percent are in forbearance, meaning the borrower has encountered economic hardship and had their payments suspended or reduced. The remaining 8 percent are in default.”

So what does this mean? According to Economics 21, “high delinquency and default rates will hurt the ability of students to gain access to credit in the future, slowing the economy.”

While that’s a real concern, it’s worth noting that that foreboding outlook isn’t guaranteed. The aforementioned 2015 S&P study offered an alternative scenario.

According to S&P economist Beth Ann Bovino, many young workers may have met with a slow start at the beginning of their careers, but they’re likely to make up for lost time in the near future with better job opportunities and higher wages. That more reassuring scenario, Bovino suggests, means young workers see a slower lift-off in their careers and investment patterns, but may have longer to catch up.

However, a prolonged economic slowdown could change that dynamic, Bovino warns, as debt-burdened young workers are forced to cut back spending in other areas.

What to do about debt?

The ASA study suggests a number of reasonable ways to “limit the negative financial impacts of too much debt.” These include getting a handle on rising tuition costs, expanding grant aid, maintaining low interest rates on federal student loans, and offering flexible repayment terms.

For younger students and their parents who are looking toward a college education, the lessons of the current student loan situation should be clear: be very careful about taking on more debt than you can handle. Can you avoid the need to take on additional debt by working part-time? What about going to a less expensive institution, even if it’s not your “dream” college? Have you started a college savings program to reduce the need to rely on loans? The rising costs of a college education highlight the importance of saving for higher education as early as possible and for younger investors to be smarter borrowers.

And if you’re already struggling with loans? All is not lost! Cut costs and focus on paying off the debt sooner, and get the best terms on your loan. Check out these five tips for tackling your student loan costs in a recent USA Today article for ideas on how to take control of your debt.

Many of the headlines on student debt and young Americans’ finances seem engineered to create the maximum amount of anxiety and stress among young readers (as well as their parents).

In fact, most students who carry some debt to fund their education will find it was well worth it, since a college degree can open doors to higher paying careers and help you to start building a powerful professional network that will see you through the years to come.

On average, according to the Department of Labor, workers with a bachelor’s degree earn 84% moreover their lifetime than those with only a high school degree, and they face much lower unemployment rates.

But student loans, like all forms of credit, must be managed carefully. So go in with clear eyes, know what you’re getting into, and make sure you get the most for your education dollar.