The 2008 recession is still seeing a ripple effect nearly a decade later.
In the years following the recession, as the economy began to put its pieces back together, the job market wasn’t too kind to millennials. During this time, many new college graduates, who were saddled with student loan debt, could not find employment. As a result, some would resort to extreme measures that included either missing payments or moving back in with their parents to help make ends meet.
Nearly ten years later, data is showing the impact of student loan debt on the economy. Researchers found that those graduating in 2013 with student debt are doing much better economically than those finishing up in 2011. With so much money owed to prior tuition efforts, people are spending their hard-earned cash on those payments, rather than letting it flow freely in the world, which is now impacting the equilibrium level of interest rates in the U.S.
Just recently at a press briefing in New York, the Federal Reserve Bank’s President, William Dudley, said the option to charge students rather than providing free tuition was a “political decision.” He also commented on how student debt could be consequential for society: “To the extent that student-loan growth inhibits home-ownership, this could obviously have significant consequences for the economy, because when someone buys a home, that can lead to more home construction, which has a pretty high multiplier.”
To the extent that student debt is now impacting the economy, central bankers have shared that they are unable to raise interest rates due to the economy’s lack of fast growing potential. Whereas today’s equilibrium inflation-adjusted rate is 0.2 percent, it was 2.1 percent in 2007 prior to the recession.
Dudley points to the “aging population, low productivity growth and a reduced willingness by households to spend” as the main reasons why the economy will not likely grow as rapidly as it did before 2008.