Are Student Loans Destroying the Economy?

No. But by trading cars for college (and homes for homework), some young people are investing in themselves rather than in the economy's biggest-ticket items
More

570_Student_Debt_Protesters_Reuters.jpg

Reuters

Recoveries are powered by two things. Houses and cars. And young people aren't buying either.

That's the conclusion from a new study out of the New York Fed, via Brad Plumer, that can be easily read as blaming student debt for holding back the recovery by squashing home and auto sales.

The share of 30-year-olds with student debt who have taken out a mortgage has collapsed since the recession struck (ditto those without student debt).

6a01348793456c970c017eea329212970d-450wi.jpg

And the share of 25-year-olds with student debt who also have an auto loan has fallen since the crash, as well (ditto again those without student debt).

total debt young1.jpg

This study seems to feed into a familiarly scary story about student debt as a dangerous bubble that is piling unprecedented levels of debt on young people, and is wrecking the economy by preventing them from starting their lives.

There's two problems with that story. First, as Jordan Weissmann and I wrote for The Atlantic, there are so many reasons that cars and houses are falling out of favor with young people beyond student loans (and even beyond the miserable economy) that it's impossible to pick a single culprit. For example, companies like Ford are vocally worried that smartphones are replacing cars as symbols of grown-up sociability, and young people are bunching in urban and urban-lite areas with many apartments and good public transit.

Second, it's a myth that college graduates have more debt than they used to. In fact, they have less. Total debt for 20-somethings has fallen since its peak in 2008, as it has for every age group in this period of deleveraging. Families that feasted on credit in the last decade have spent the last few years paying back what they owe and cutting back their excessive spending. Young people, with and without student loans, have done the very same.

total debt young.jpg

Average debt among twentysomethings is at its lowest since 1995, according to a recent Pew Research Center report. More than a fifth of young households in 2010 didn't have any debt at all -- the lowest in 30 years.

What's really changed is what kind of debt they have. Young people have swapped student loans for mortgage and auto loans. They've traded cars for college and homes for homework.

And that's okay! Compared to cars and houses, higher education is a much safer investment. For all the media criticism about college losing its luster, you could make a good argument that it's never been more important. While the returns to college have flattened recently, wage growth has been even weaker (or negative) among non-college grads. As a result, the "bonus" that young workers get from going to college, which economists call, the "college premium," has tripled in the last 30 years. Today, the share of the 18-24-year-old population enrolled in school is at an all-time high 45 percent today.

I tend to regard the most educated generation in American history as good news, but even good news has its downsides. The downside here is that millions of young people invested in their human capital during a period of overall deleveraging. Little was left over for cars and houses. And the twin engines of the consumer economy were starved for fresh fuel.

Meta Brown and Sydnee Caldwell, the authors of the New York Fed study, end on a pessimistic note ...

While highly skilled young workers have traditionally provided a vital influx of new, affluent consumers to U.S. housing and auto markets, unprecedented student debt may dampen their influence in today's marketplace.

... but here's a more optimistic read. With youth unemployment kissing 18 percent through 2010, more young American realized that the opportunity cost of leaving the labor force to go to school had never been lower. They wouldn't have bought homes, anyway. They wouldn't have bought cars, anyway. The economy was too rotten. So for many of them, the choice wasn't been a four-bedroom house and four more years of school. It was between school and underemployment. They chose wisely.

So, optimistically, today's debt swap could work like a reverse-stimulus, sucking energy from the economy in the short-term but empowering our labor force in the long-term when, eventually, some of these students will get married, buy a house, and put some wheels in their garage, having invested in their education before they took out their first car loan.

Jump to comments
Presented by

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

Get Today's Top Stories in Your Inbox (preview)

Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.


Elsewhere on the web

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register. blog comments powered by Disqus

Video

Adventures in Legal Weed

Colorado is now well into its first year as the first state to legalize recreational marijuana. How's it going? James Hamblin visits Aspen.

Video

What Makes a Story Great?

The storytellers behind House of CardsandThis American Life reflect on the creative process.

Video

Tracing Sriracha's Origin to Thailand

Ever wonder how the wildly popular hot sauce got its name? It all started in Si Racha.

Video

Where Confiscated Wildlife Ends Up

A government facility outside of Denver houses more than a million products of the illegal wildlife trade, from tigers and bears to bald eagles.

Video

Is Wine Healthy?

James Hamblin prepares to impress his date with knowledge about the health benefits of wine.

Video

The World's Largest Balloon Festival

Nine days, more than 700 balloons, and a whole lot of hot air

Writers

Up
Down

More in Business

Just In