Student Loan Debt Is Preventing Economic Recovery

Despite a few positive indicators, America’s economic recovery is still lagging. The Federal Reserve predicts the economy will grow 2.1% in 2012, but it’s not exactly the boost that we’ve been waiting for.

One of the causes for this sluggishness appears to be the large amount of student loan debt that many consumers of all ages are struggling with, making it tougher for them to fulfill their professional and financial potential. This point was highlighted last Wednesday by Rohit Chopra, the student loan ombudsman for the Consumer Financial Protection Bureau, in an interview with the Financial Times. He said, “student debt may be more intertwined with the housing market than we realize, and it may prove more important every day to understand that connection.”

In fact, student loan debt is causing serious problems for the economy in several ways. When people are worried about paying their student loan bills, they’re not able to make other kinds of investments that have traditionally sparked our economy — such as buying a home, purchasing retail goods, and even investing. What we’re seeing instead is that so much of these borrowers’ discretionary income is going toward their student loan payments that they don’t have room left in their budget for much else.

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With unemployment rates remaining high, particularly for young people, many college graduates are still out of work or are treading water in low-paying jobs. That creates a vicious cycle where young professionals are unable to make the financial contributions made by those of previous generations. This lack of spending only prolongs the current nationwide economic slump.

As if that’s not concerning enough, experts are now reporting that the student loan bubble shows signs of being similar to the subprime mortgage mess. Over the last decade, while many private lenders loosened the credit qualifications necessary to obtain student loans, borrowers were not always given enough information to accurately predict how much they’d be able to pay back once they left college. The result is that there are many student loan borrowers who have defaulted or who are getting close to doing so.

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So if you’re among those who are struggling with student loan debt, what can you do? Well, luckily there are a few programs in place that might help you get some breathing room. One of the most impactful is the Income-Based Repayment program, which allows you to reduce your monthly payments to about 15% of your disposable income. To qualify, you have to demonstrate partial financial hardship and submit an application.

And while that program is for federal student loans only, many private lenders are willing to work with you to agree on a modified repayment plan if necessary. Furthermore, what might be even more helpful to some borrowers is the Public Student Loan Forgiveness program — which allows for any remaining loan balance you have after 10 years to be forgiven if you have worked in a qualifying public service job during that time. Careers in federal or state government, including teaching jobs, and those in non-profit organizations generally qualify for this program. For more information, see the Department of Education website.

Ultimately, we can hope that political leaders do not ignore Rohit Chopra’s warning: “policymakers cannot sit by as passive observers.” Continued action will be necessary to address the student loan debt problem and kickstart the economy.

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Image: Sarah Reid, via Flickr