The Student Debt Epidemic: 1 in 5 Households Now Owe Student Loans

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The Great Recession has pushed student debt to historic levels, and for the first time ever, almost 20% of U.S. households have outstanding educational loans.

Over the last decade, the percentage of U.S. households with student debt has been steadily climbing. By 2007, 15% of American households were in debt after taking out higher education loans. That was bad, but it was before the economy tanked.

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According to a new study by the Pew Research Center, 19% of households had outstanding student debt in 2010, by far the highest level ever, and it’s hitting younger Americans harder than any other age group.

Households headed by someone younger than 35 make up 40% of those that have student loans, the highest share for any demographic and another sign of how substantial the debt burden is for many young Americans who have recently graduated with piles of debt and few job options.

The debt burden is not only affecting a greater number of Americans, but those who are in debt owe more than ever before. The average outstanding balance rose from $23,349 in 2007 to $26,682 in 2010. Furthermore, 10% of debtor households owed more than $54,238 in 2007, while the same proportion owed more than $61,894 in 2010.

The student debt crisis has been compared to the subprime mortgage mess that contributed to the recession in 2008-09 and has been blamed for hindering the economic recovery, and these latest numbers show that the problem is only getting worse. While increased student debt doesn’t pose the same risks to the financial system that the subprime mortgage crisis did, having a country full of over-indebted graduates will — to one “degree” or another — slow economic growth.

For those with student debt but who are employed, a significant slice of their income is often going toward paying down their loans, rather than being spent in ways that do a better job of spurring economic growth. And for those who can’t pay, many of the loans go into deferment or forbearance, where they often accrue interest, making them even harder to pay back down the road. The Consumer Financial Protection Bureau has suggested as much, saying that the growing levels of student debt are holding back the overall economic recovery, with one CFPB official arguing that student debt is preventing new graduates from buying homes, further stifling the housing market and restraining the U.S. economy.

Interestingly, while the student loan burden is growing for all demographics and income levels, it’s hurting those at the extreme ends of the income spectrum harder than those in the middle. While lower-income households accounted for 13% of student debt owed in 2010 (which increased from 11% in 2007), the richest fifth of households owed 31% in 2010, up from 28% in 2007.

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Pew researchers also found that student debt is becoming a much larger share of U.S. household debt as a whole. In 2007, 3% of all outstanding debt was student-related, but in 2010, 5% of all debts were student debts, which is not only a reflection of higher total student debt but also of our efforts to pay down other debts like credit cards. According to the New York Federal Reserve Bank, student loans currently make up 8% of all household debt. Considering some of the more current numbers — all of Pew’s are from 2010 — it’s likely that there are already more than 19% of households carrying student debt.

Pew’s findings that more affluent households have been getting hit harder than other income levels also coincides with a Wall Street Journal analysis of Federal Reserve data last month, showing that households with income between $94,535 and $205,535 had the biggest spike in terms of percentage of households owing student debt. According to WSJ’s reporting, those affluent households owed $32,869 in 2010, an increase from $26,639 in 2007, all adjusted for inflation.

While the Obama administration has made attempts to ease the burden of student loans for some borrowers, the overall problem is only worsening. Agencies like the CFPB are urging Congress to act, but Washington seems unable to address the issue in a comprehensive way. And even though the economy is showing signs of improvement, through the eyes of those graduating with student debt, it’s a much bleaker picture.

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