Are Student Loans Really Holding Back the Economy?

It's not clear that student loans are responsible for the moribund market for mortgages. Here's why their effect on the broader economy is equally unclear.

Student loans' effect on the economy seems like an Obvious Story. Student debt has tripled in the last decade to more than $1.2 trillion in total outstanding loans, and millions of young people are starting their lives with absolute wealth at, not just zero, but way below zero. It is, as Kevin Carey told the New York Times, "a big social experiment [to] send a whole class of people out into their professional lives with a negative net worth." If having high net worth makes us spend more—the "wealth effect"—an equal and opposite "student loan effect" should make student debtors spend less.

I say should, because it should be easy to prove that $1.2 trillion in student debt is an albatross around the neck of the economy. But then how do you explain all this counter-evidence...

1. Young borrowers who are current on their payments are actually more likely to have a mortgage than other young adults.

2. Among households under 40, student debtors are (a) just as likely to have a mortgage as non-debtors and (b) considerably more likely to have a car loan, according to Pew.

3. Student debtors are just as likely as non-debtors to have a car loan at 25, according to the New York Fed.

4. And, just as the Pew study found that they are equally likely to have a mortgage under 40, this NY Fed study found that they are about as likely to have home-secured debt at age 30.

The last two graphs show that the share of student debtors with car and home loans is falling faster than the share of non-debtors. This might suggest that student loans are uniquely discouraging young people from taking on more debt after they graduate.

But it's also possible that the overall pool of student debtors has been diluted by more risk-averse households. Between 2003 and 2010, the share of student debtors grew by 70 percent. That means more people who used to ride the red line in the graphs above transferred to the blue line. Since the red-liners historically had a lower appetite for debt, it's predictable that, in the last decade, their transfer would reduce the overall debt appetite of student debtors on the blue line. (Brookings' Beth Akers has made a similar point.)

Second, the biggest story in the last two graphs from the New York Fed isn't the closing of the gap between red and blue lines. It's the downward slope of the lines. Something is turning off young people—regardless of their student debt situation—from getting loans to buy cars and houses.  Jordan Weissmann and I wrote an Atlantic column about this phenomenon called The Cheapest Generation, where we speculated that a constellation of trends, from re-urbanization to the rise of smartphones, could explain the shift away from big-ticket purchases.

But the biggest thing is money. Houses and cars cost money, and young people don't have much money to begin with. Just look at the "growth" of wages for young college graduates since 2005. It doesn't exist. And they're still doing considerably better than non-grads.

There is no doubt that student loans are destroying the lives of some young people. But it's surprisingly difficult to match the Obvious Story—$1.2 trillion of outstanding student loans is holding back the economy—to data that is equally obvious and compelling. The recovery is lukewarm, wages aren't growing, and housing and cars are expensive: For now, that seems to explain most of it.