Student Loans Could Cripple The Economy

STUDThe parade of graduation commencement speakers starts soon, and hopefully Rick Rieder won?t be among them. Because the message from BlackRock?s chief investment officer of fundamental fixed income to all those fresh-scrubbed graduates would be a big downer: Your student debt could cripple the U.S. economy.

Rieder doesn?t actually blame college grads for student debt reaching almost $1.2 trillion last year, its highest level ever. It?s what they and their parents must borrow to pay for college?what he calls ?this long-term unmitigated acceleration in the cost??that he targets. It?s something people should be concerned about even if no tuition or student loan looms in their future, he says. Rieder cites four interrelated reasons why college debt could hurt economic growth.

The debt burden has older workers working longer

Parents saddled with huge debt burdens from helping to pay for their kids? college expect to have less in savings, and more in debt, when they reach retirement age. And so they work longer. Which is kind of a perverse dynamic that helps keep more recent graduates out of the labor market.

Student loans kill any prospect of saving

More than half of student loan borrowers carry heavy debt burdens into their 30s, says Rieder. ?In spite of thinking of student loans as young persons? debt, by 2014, two-thirds of all balances were owed by people over 30,? Andrew Haughwout, an economist and senior vice president at the Federal Reserve Bank of New York, said during an April presentation. And the average balance for each student loan borrower has risen 74 percent in the past decade, according to a recent report.

That doesn?t mean less saving for young people?it means no saving. And that means no ability to harness the power of watching your money compound over long periods of time. Unless something changes in future years to lower college costs or lessen debt, the younger generation will perpetuate the debt cycle and struggle when it comes to planning for their own children?s education.

Homebuying will take a hit

No saving means no money for a down payment on a house. A decline in home sales means less real estate-related employment and fewer purchases of all the goods and services that go into building and maintaining homes.

The chasm between haves and have-nots will widen

Without a college education, one?s job prospects and earning capacity can decrease, which can contribute to the inequality divide. Going to college, research has shown, has a high return over one?s life.

There are other risks lurking in all that debt that Rieder doesn?t mention. Activist investor Bill Ackman said recently that the biggest risk in the credit market is student loans. The government?s financing of the loans is one of the largest potential costs for U.S. taxpayers. The gains the government makes on student loans are projected to shrink, and on subsidized student loans, which are the most basic kind, the government could start losing money next year.

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