Increased Student Loan Debt Creates Ripple Effects That Could Hinder Economic Growth

Our recent Budget Brief on funding for higher education, From State to Student, shows that a growing share of students graduating from California’s public four-year institutions — the California State University (CSU) and the University of California (UC) — are doing so with higher levels of student loan debt, partly due to an ongoing shift of higher education costs from the state to students and their families. At UC, for example, undergraduates who took out loans graduated with an average of nearly $20,000 in student loan debt in 2011-12 — a level that is almost $3,000 higher than in 2006-07, after adjusting for inflation.

This trend is certainly not unique to California. Nationwide, an increased share of young adults are taking out student loans to help pay for their higher education. Furthermore, the average amount owed in student loans by those who do borrow has also risen. In only a decade, from 2003 to 2013, the percentage of 25-year-olds with student loan debt increased from 25 percent to 45 percent, while the average balance owed nearly doubled from around $10,600 to $20,900.

Of course, student loans aren’t necessarily bad. They can help bring higher education within reach of many low- and middle-income students and are a sound investment in one’s future. Also, some programs, such as federally subsidized low-interest student loans, help provide critical access to higher education for millions of young Americans, including many CSU and UC students. And, we know that college graduates have significantly higher average lifetime earnings and face lower unemployment rates than do those with only a high school diploma. In fact, over the past generation only Californians with bachelor’s degrees, on average, made strong wage gains, providing clear evidence that a four-year college degree is closely tied to economic opportunity and mobility.

However, the high level of student loan debt could actually be stifling the nation’s economic recovery. A new report by the Federal Reserve Bank of New York shows that, with escalating education costs contributing to soaring student loan debt, young adults — particularly those with student loans — are significantly more likely to hold off on purchasing homes, cars, and other big-ticket items than they were a decade ago. Worsening the situation is the high unemployment and underemployment rates that young college graduates continue to face. The combination of economic uncertainty and increased student loan debt burden has reduced the amount of money that many young Americans are willing and able to spend on a variety of purchases — thus creating a drag on overall consumer demand.

It’s not just that declining state support for CSU and UC may be creating ripple effects that threaten California’s economy in the short term. Failing to invest in higher education could put our state’s long-term economic future at risk. California is projected to face a shortfall of 1 million college graduates by 2025. Furthermore, a study last year by the Economic Policy Institute (EPI) demonstrated that states with a well-educated workforce are more likely to have strong economies and foster broadly shared prosperity.  The report noted that:

“(P)roviding expanded access to high quality education and related supports — particularly for those young people who today lack such access — will not only expand economic opportunity for those individuals, but will also likely do more to strengthen the overall state economy than anything else a state government can do.”

To help strengthen pathways to economic opportunity for low- and middle-income Californians, policymakers should rebuild state support for CSU and UC and recommit to providing an affordable, quality higher education that is accessible to all eligible Californians. Last week, both of the Legislature’s budget subcommittees on education voted to significantly augment CSU and UC funding above modest increases in the Governor’s proposal. This would represent a step in the right direction.

— Phaelen Parker