Economic Effects of Student Loan Debt

Last Updated: October 18, 2021 by Melanie Hanson

Report Highlights. The effect student loan debt has on the economy is similar to that of a recession, reducing business growth and suppressing consumer spending.

  • From 2019 to 2020, the average student loan debt grew 3.5%; meanwhile, the national economy shrank 3.5%.
  • In the last decade, student loan debt increased by an average of $91 billion every year.
  • The average college degree offers a 14.0% return on investment.
  • Adjusted for inflation, 16.1% is the average annual growth rate for the national federal student loan debt.

Related reports include Total Student Loan Debt | Average Student Loan Debt | Education Attainment Statistics | Student Loan Refinancing

Student Debt Economic Impact

Economists compare the rise in student loan debt to “the housing bubble that precipitated the 2007-2009 recession” and the subsequent economic downturn.

  • Since 2006, the total national student loan debt balance has increased 248.19% or at an annual rate of 17.7%.
  • In the 21st Century alone, the federal student loan debt balance has increased 583.84%.
  • The annual growth rate is 27.9% before adjusting for inflation; the adjusted annual growth rate is 16.1%.
  • When expressed as a percentage of the global gross domestic product, the 10-year average national GDP has declined 51.29% since the 1960s.
  • A college degree offers just under a 14% return on investment (ROI) on average.
  • The average student loan debt has a 16.1% annual growth rate.
  • 94% of Democratic voters and 85% of Republican voters support federal student debt relief in the form of refinancing federal loans to current rates (at an historic low).
  • 52.8% of student loan debt holders could benefit from refinancing, reducing their average interest rate 27.6% (from 5.8% to 4.2%).

Student Debt Reduces Spending

Consumer spending is directly linked to personal finance. Economists agree that when consumers have less expendable income due to debt obligations, they decrease spending.

  • Each time a consumer’s student debt-to-income ratio increases 1%, their consumption declines by as much as 3.7%.
  • 35% of student loan holders find it difficult to buy daily necessities because of their student loans.
  • Student debt is the 2nd largest type of household credit (after mortgages).
  • Debt may inhibit spending for decades as 20 years after entering school, half of student borrowers still owe $20,000 each on outstanding loan balances.
  • The total student loan debt balance exceeds the value of some of the national economy’s best-performing sectors; the pet industry alone is worth $95 billion or 5.59% the value of all student loan debt.

Debt Inhibits Business Growth

Small businesses are especially vulnerable to the economic impact of student loan debt as they are the most likely to rely on personal financing.

  • Would-be entrepreneurs are 11% less likely to start a new business if they owe more than $30,000 in student loan debt.
  • The average student loan debt per borrower is $37,693.
  • Businesses with fewer than 20 employees create a net 1.2 million new jobs annually.
  • 99.9% of businesses in the U.S. have fewer than 20 employees.
  • Small businesses of fewer than 500 employees employ 47.3% of the national private workforce.
  • A joint study by Pennsylvania State University and Federal Reserve Banks finds “a significant and economically meaningful negative correlation between changes in student debt and net new businesses employing one to four employees…”

Debt Hampers Housing Markets

Consumers with student loan debt have lower credit scores on average and are more likely to live with their parents.

  • Students with outstanding loan payments are 36% less likely to purchase a house.
  • 13.32% of millennial renters indicate they will never be able to afford to buy a home.
  • In 2019, 8.28% said they would never be able to buy a home.
  • In two years, the rate of millennial renters giving up on homeownership increased 60.9%.
  • The national homeownership rate hit its peak in 2004 at 69.2%.
  • Homeownership declined 1.1% in the 2010s; its low was 62.9% in 2016.
  • The rate of homeownership has increased 4.6% since 1964.

Debt Stresses Social Programs

As more Americans take on greater amounts of student loan debt, they rely on social programs to make ends meet.

  • 1 out of every 5 recipients of food stamps (SNAP) holds a postsecondary degree.
  • Degree holders are half as likely as nondegree holders to use SNAP.
  • 24% of Medicaid users hold a postsecondary degree.
  • Adults without degrees are 2.5 times more likely than those with degrees to use Medicaid.
  • Postsecondary degree holders are 64% as likely to be unemployed as adults without degrees.

Line Graph: Average U.S. GDP As a Percentage of Global GDP

National Economic Trends

While the U.S. appears to have made relatively little economic progress in years following explosive student debt growth, there is no definitive link between market performance and student loan debt.

  • The national economy declined 3.5% from 2019 to 2020.
  • During that same period, the average student loan debt increased 3.5%.
  • At +1.52%, USD$ inflation in 2020 was just below the 10-year average of +1.73%.
  • Since 1960, the U.S. has produced an annual average of 3.03% of the global GDP.
  • In 2019, the national economy grew 2.2% while the global economy grew 2.34%.

Postsecondary Education Value

The ultimate cost of an education determines its effect on the economy. Some argue that the benefits of a college education outweigh the burdens of student loan debt.

  • The financial benefits of a bachelor’s degree decline 0.98% annually for men and 0.75% for women.
  • 6.7% of the world’s population has a bachelor’s degree or higher.
  • 40% of Americans aged 25 to 34 years old have a bachelor’s degree or higher.
  • The average bachelor’s degree holder earns up to $33,000 more annually than a high school diploma holder.
  • Taking into account student loan interest and loss of income, the ultimate cost of a bachelor’s degree may exceed $400,000.
  • Women with bachelor’s degrees earn $506,430 more over a lifetime than women without bachelor’s degrees.
  • The average undergraduate borrows $7,753.
  • Graduate students borrow an average of $27,747.
  • Among all student borrowers, the average amount borrowed has increased 135% since 1995; after adjusting for inflation, the total increase is 35.2%
  • The median annual income for bachelor’s degree holders is $58,874.
  • For graduate and professional degree holders, the median annual income is $78,885.
  • The average undergraduate interest rate is 4.9%.
  • Graduate loans carry an average interest rate of 6.1%.
  • Undergraduates are 3.5 times more likely to default on loans than Graduate student borrowers.


  1. Federal Reserve Bank of New York, Liberty Street Economics: Despite Rising Costs, College Is Still a Good Investment
  2. Independence University, Who in the World Holds a College Degree?
  3. International Monetary Fund, World Economic Outlook Update January 2021
  4. U.S. Bureau of Labor Statistics, Student Loan Debt: A Deeper Look
  5. U.S. Social Security Administration, Research, Statistics & Policy Analysis: Education and Lifetime Earnings
  6. Social Science Research Network, The Impact of Student Loan Debt on Small Business Formation
  7. U.S. Census Bureau, American Community Survey: Subject Tables
  8. Business Insider, Student-Loan Debt and Skyrocketing Housing Prices Have Become So Bad That More Millennials Are Planning to Rent Forever
  9. Chicago Tribune, Millennial Renters are Giving Up on Homeownership, as COVID-19 and Financial Struggles Make 1 in 5 Say It’ll Never Happen
  10. International Monetary Fund, World Economic Outlook Update
  11. U.S. Senate Committee on the Budget, Testimony of Richard K. Vedder: Can College Be Made More Affordable? It’s About More Than Student Loans
  12. U.S. Small Business Administration Office of Advocacy, 2019 Small Business Profile
  13. U.S. Federal Deposit Insurance Corporation (FDIC), The Effect of Student Debt on Consumption: A State-Level Analysis
  14. New America, In the Interest of Few: The Regressive Benefits of Federal Student Loan Refinancing
  15. Scholarship America, The Far-Reaching Impact of the Student Debt Crisis
  16. Canisius College, Life Delayed: The Impact of Student Debt on the Daily Lives of Young Americans