According to a new estimate by PPI, Americans under the age of 30 are spending an unprecedented $43.5 billion annually to pay back student loans.
This sum—large and growing—imposes a serious financial burden on young people. By our estimate, $43.5 billion amounts to over 7 percent of the total annual income for people under 30 with education beyond high school (using an average annual income).
Putting this into perspective, in today’s prices, here’s what $43.5 billion could buy:
|
155,413 |
New Homes |
|
339,076 |
Audi R8 Etrons (Iron Man’s ride) |
|
66,923,077 |
New iPhone 5’s |
|
488,764,045 |
Tickets to Disney World |
|
22,307,692,308 |
McDonald’s Happy Meals |
Our estimates also show how fast the income burden on young people from student debt is growing. If their outstanding student debt remained at 2004 levels, the income burden would fall from 7 percent to just 4 percent – a $19 billion difference (in constant dollars).
The increasing burden of student debt exacerbates the economic struggles facing young people. Young college graduates have watched their real earnings fall by 15 percent, or $10,000 annually, in the last decade. Those without education beyond high school are being squeezed down and out of the workforce altogether (something we call “The Great Squeeze”).
The examples above illustrate how student debt is affecting young people’s quality of life. But they also show that it’s not only young people that are negatively impacted by rising student debt. The rising burden of student debt on young people also has enormous implications for the entire economy.
Unless we change course, the spillover effect of rising student debt will only worsen. College students are still forced to take out more debt to pay for a degree. The Federal Reserve recently found both the number of borrowers and the average debt per borrower rose by 70 percent since 2004. Average debt at graduation for borrowers now stands at over $26,000.
By spending more on student debt now, young people are effectively transferring income to older segments of the population right as they can least afford to. Numerous studies show young people may never catch up to their peers in terms of lower incomes and wealth creation in these formative years of their career. That means we should take concrete steps now to address the rising student debt burden.
A final note: To get our estimate of $43.5 billion, we applied a 6.8 percent interest rate and a 10 year repayment term to the over $300 billion in student debt young people under 30 held in 2012. Similarly, comparable figures for 2004 show outstanding student debt was about $178 billion in current dollars, implying an annual repayment burden of just $24.6 billion. The difference between the two comes out to be about $19 billion. This does not include interest payment tax deductions or deferred payments.
