Student debt is ballooning by the day, but just how much is it weighing on consumer spending?
Not much, according to official data, which showed that a long-awaited consumer spending recovery powered the U.S. economy in 2018.
Helped by an unemployment rate hovering at a 49-year low, consumer spending jumped 3.6 percent in the third quarter of last year, boosting the economy to the tune of 3.5 percent.
This trend looks to have held strong throughout the holiday period, with record online spending on Black Friday and Cyber Monday and retailers reporting a robust Christmas season.
But the buoyant spending figures come despite some shocking statistics lurking in the background.
Namely, outstanding student debt reached $1.5 trillion for the first time last year, ballooning from around $600 billion a decade ago and now only second to mortgage debt.
And it’s not just an issue for Millennials, who are being hit by increasing educational costs, as some Baby Boomers are also carrying massive debt on their backs as they step in to help their children and grandchildren pay for college.
While the average college student now leaves campus with $30,000 of debt and a bachelor’s degree — which rises to $43,354 if they go on for a master’s degree — parents are increasingly having to take out crippling loans once their children max out the federal loan limit of $31,000, according to Mark Kantrowitz, a financial aid expert.
Travis Hornsby, founder of Student Loan Planner, a business that helps people to manage their payments, added that with no limit on Parent PLUS Loans, he sometimes sees “60-year-olds with $200,000 of student loan debt.”
The average debt figures also mask some eye-watering statistics, including that as of April, there were more than 100 students with outstanding loans of $1 million or higher, up from 14 students five years ago, numbers from the U.S. Department of Education showed. What’s more, around 2.5 million owe at least $100,000, according to official data obtained by The Wall Street Journal.
Those numbers are only set to get worse as colleges continue to increase fees, combined with access to credit becoming easier, while the Federal Reserve’s plan to keep raising interest rates will also likely exacerbate the situation for those who took out loans with variable rates as it will drive borrowing costs higher.
Despite all this, economists don’t see the student debt burden as one of the headwinds on the horizon that could significantly weigh on consumer spending in the short term. Instead, that crown belongs to the trade war, interest rates and stock market gyrations.
That’s because many people can currently handle their loan repayments thanks to average salaries outpacing debt repayments, with Student Loan Planner’s Hornby citing that people who owe less than $80,000 are repaying it back “pretty aggressively right now because the economy’s good.”
At the same time, the group of people with crippling debt is also actually quite small on a population basis.
“There is certainly a set of people who have a lot of student debt and for that reason they need to postpone buying a home or cut back on other spending or whatever, but that said, it needs to be put into perspective,” said Scott Hoyt, a senior director for Moody’s Analytics. “It is a fairly small subset of the population and a lot of the data we’ve seen suggests that the majority of people who have big student loan debts also have advanced degrees, indicating that they’ve got the capability to manage it. It’s a big issue, but for a pretty small set of folks.”
David Deull, an IHS Markit economist, added that while it does impact some people’s spending habits, from a macroeconomic point it’s still “relatively small potatoes” at roughly 10 percent of total debt, compared with mortgages, which account for around 70 percent.
He also said household liabilities aren’t currently in a dangerous place, with total debt excluding student loans hovering significantly below the level witnessed during the global downturn. “The consumer sector is actually in really good shape in terms of total debt so in that sense incomes are doing their job. They’re keeping up. In fact they’re exceeding the growth of total debts,” he said.
As for whether this will last, much depends on the economic backdrop, according to Moody’s Hoyt.
“I think it’s like anything else: It depends on the economic environment that you’re in. Certainly as long as the unemployment rate is south of 4 percent and jobs are plentiful, wages are growing rapidly, it’s hard to see it becoming a big deal,” he said.
“When the next recession comes and jobs are harder to get and hours are harder to come by, there’s going to be a set of folks who are seriously struggling under the burden. But the other thing to keep in perspective is that overall debt burdens now are extraordinarily low. If you look at the Federal Reserve’s debt service ratio, that’s at a record low. So the impact of debt on consumer spending right now is a good story,” he added.