How Student Loans Are a Big Drag on the Economy

24/7 Wall St.

While carrying some student loan debt may be inevitable, higher and higher balances can strain finances for a decade or more.

About 37 million Americans now owe more than $1 trillion on their student loans, with the average household having about $26,000 in debt. Each check that a college graduate writes to pay off his student loans means less money for investing in a home or contributing to a retirement fund.

The net worth for a household with no outstanding student loan debt is nearly three times the net worth of a household with student debt, according to a study published in the Federal Reserve Bank of St. Louis Review last September.

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William Elliott and Ilsung Nam of the University of Kansas School of Social Welfare found that in 2009 the median net worth of a household without student loan debt was $117,700. The median net worth for households still paying off their loans? $42,800. Furthermore, the study found households that include a four-year college graduate with student loan debt have a net worth loss of 63% compared to similar households with no debt.

Student loan debt is also a drag on the U.S. economy. Sen. Tom Harkin, D-Iowa, warned of a student loan bubble in an interview with NPR on Thursday. Harkin’s Health, Education, Labor, and Pensions committee held a hearing later that day to discuss overhauling the federal student loan program as part of the reauthorization of the Higher Education Act. Federal loans total $100 billion each year, and the committee wants to simplify how that money gets paid back.

Harkin also said at the hearing that more needs to be done to ensure student borrowers understand their rights and responsibilities and that they have adequate counseling about their borrowing and payment options.

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