Economy

3 ways student debt impacts the economy – CNBC

Published

3 years ago

July 2, 2021

During the height of the pandemic, workers with college degrees were spared some of the harshest consequences. The Bureau of Labor Statistics reports that workers with a bachelor’s degree are less likely to be unemployed and earn 67% more than those with just a high school degree. Plus, college graduates live longer than those without a college degree.

While student loans can be crucial in helping Americans access these benefits, economists say that student debt is holding the economy back.

Approximately 45 million Americans collectively owe $1.7 trillion in student debt. And even though federal student loan payments have been paused since March 27, 2020, the student loan crisis is still looming. The moratorium is set to expire Oct. 1, 2021 and politicians and experts warn that millions of borrowers may be thrown into “extraordinary financial hardship” when payments resume.

CNBC Make It spoke with Nela Richardson, chief economist of human resource management firm ADP, about three of the biggest ways student debt impacts the economy.

1. Generational inequality

Richardson stresses that student debt is a concern because of the way it disproportionately impacts young people today more than in previous generations.

Decades of cuts to education funding means that students pay much higher college costs than previous generations did. Over the past 10 years, college costs increased by more than 16% and student debt totals increased by 99%. Today, not only do roughly 70% of college students take out loans to pay for their education, but they take out larger volumes.

Plus, recent college graduates have entered the workforce during one of the most hostile labor markets in history for young workers. According to an analysis of BLS data by Pew Research Center, 2020 college graduates saw a bigger decrease in labor force participation than those who graduated during the Great Recession.

“Student debt falls heavily on the shoulders of young people. They have the lowest incomes and are most likely to have recently finished college,” says Richardson. “We know from our data that young people were disproportionately impacted by the pandemic. They were more likely to report a job loss, a reduction in job responsibilities or a pay cut. When you add that to student debt, that creates quite a sizable hurdle.”

The result is growing generational inequality that will have significant long-term consequences, she warns: “It’s about macro growth. We should care [about student debt] because it does affect the future of GDP growth when there’s a lack of investment among young people.”

Federal Reserve data indicates that millennials control just 5% of U.S. wealth while baby boomers control over 52%. In 1989, when baby boomers were around the same age as millennials are today, they controlled 21% of the country’s wealth.

2. GDP

Student debt impacts borrowers over time by raising debt burdens, lowering credit scores and ultimately, limiting the purchasing power of those with student debt. Because young people are disproportionately burdened by student debt, they will be less able to participate in — and help grow — the economy in the long run.

“What you want is widespread opportunity for investment over time. That’s what’s good for the economy. That’s what’s good for Wall Street,” says Richardson. “If you don’t have that, then you’re looking at slower growth from the prime-aged working population — and that’s problematic.”

The Federal Reserve estimates that student debt shaves roughly 0.05% off GDP per year. While the current impact may appear relatively small, as borrowers struggle to buy homes, save for retirement and invest in the stock market, the impact may become more significant.

“All those assets that the boomers have been accumulating to feed the economy, who’s going to buy those assets? Who’s going to take over to make sure that the stock and asset markets keep going up?” asks Richardson. “Maybe boomers can leave those through inheritance to their children, but that just concentrates wealth, which gets back to the issue of inequality.”

3. Delinquency

Finally, there is the concern that many borrowers are expected to default on their student loans.

Currently, about $158.5 billion worth of federally managed student loans are considered in default — and this total may increase once the pause on federal student loan payments expires. Brookings estimates that by 2023, nearly 40% of borrowers are expected to default on their student loans.

“If you have delinquencies, that lowers credit scores, and that’s problematic in terms of doing anything in the economy from getting a credit card to getting a mortgage,” says Richardson, citing ADP data that suggests student loans account for 35% of severely derogatory loan balances, more than three times the delinquency rate of mortgages.

Richardson fears that because of student loan difficulties, borrowers will be held back from generating wealth through means such as buying a home or starting a business. “When you think about how the middle class builds wealth over time, there’s two ways in the U.S.: homeownership and entrepreneurship,” she says.

While consumer spending appears to be stable for now, Richardson stresses that the student debt crisis should be addressed in order to maintain economic growth.

“If you’re very focused on the here and now and the present economic recovery, you can shrug off consumer debt,” she says. “But if you care about the future, and you think about what leads to feature growth and investment, then student debt is one thing that can block that.”

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Economy

S&P/TSX composite rises, U.S. markets also make gains Monday

Published

21 hours ago

September 30, 2024

Anne Joseph

TORONTO – Canada’s main stock index posted modest gains Monday, while U.S. markets also rose near the end of the day to kick off the week in the green.

Stocks were down earlier in the afternoon in part because of comments from U.S. Federal Reserve chair Jerome Powell, said Anish Chopra, managing director at Portfolio Management Corp.

Powell said Monday that more interest rate cuts are coming, but not quickly.

“We’re looking at it as a process that will play out over some time,” he said at a conference in Nashville, Tenn.

“It’ll depend on the data, the speed at which we actually go.”

The Fed isn’t in a hurry to cut its key interest rate, said Chopra, as it weighs the upside risks to inflation and the downside risks to the job market.

“Inflation could go up, it could go down, but they believe that if the data remains consistent with what they’ve seen, there will be two more rate cuts coming, but they will be smaller,” said Chopra.

Though the central bank has already signalled it expects to make two more quarter-percentage-point cuts this year, market watchers had been hoping for another outsized cut before the end of the year, he said.

“So I think Powell’s comments from this afternoon disappointed the markets and investors in the sense that if they were anticipating bigger rate cuts, that’s not the news they got.”

In New York, the Dow Jones industrial average was up 17.15 points at 42,330.15. The S&P 500 index was up 24.31 points at 5,762.48, while the Nasdaq composite was up 69.58 points at 18,189.17.

The S&P/TSX composite index closed up 41.31 points at 23,998.13.

At the end of this week, markets will get the latest report on the U.S. labour market, perhaps the most closely watched economic data right now after a couple of softer-than-expected reports prompted fears that higher rates were having too hard an impact on jobs.

If the report is weaker than expected this time, that could change the Fed’s thinking around its interest rate trajectory, said Chopra.

However, the Fed’s next rate decision is in November, he noted, so there’s still another labour report after this week’s release for the central bank to weigh.

Overseas, Asian markets had a frenzied start to the week, with Japanese markets down 4.8 per cent while stocks in China saw their best day in almost 16 years.

Japanese markets sank because investors are questioning whether the new government will be supportive of higher interest rates, said Chopra.

Meanwhile, Chinese markets rallied on the news of more stimulus to the country’s economy, he said.

The Canadian dollar traded for 73.93 cents US, according to XE.com, compared with 74.08 cents US on Friday.

The November crude oil contract was down a penny at US$68.17 per barrel and the November natural gas contract was up two cents at US$2.92 per mmBTU.

The December gold contract was down US$8.70 at US$2,659.40 an ounceand the December copper contract was down five cents at US$4.55 a pound.

— With files from The Associated Press

This report by The Canadian Press was first published Sept. 30, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

S&P/TSX composite down as base metal stocks fall, U.S. stock markets mixed

Published

1 day ago

September 30, 2024

Anne Joseph

TORONTO – Canada’s main stock index fell in late-morning trading, weighed down by losses in base metal stocks, while U.S. stock markets were mixed to start the trading week.

The S&P/TSX composite index was down 44.33 points at 23,912.49.

In New York, the Dow Jones industrial average was down 101.56 points at 42,211.44. The S&P 500 index was down 0.67 points at 5,737.50, while the Nasdaq composite was up 3.97 points at 18,123.56.

The Canadian dollar traded for 74.04 cents US compared with 74.08 cents US on Friday.

The November crude oil contract was up 66 cents at US$68.84 per barrel and the November natural gas contract was up two cents at US$2.93 per mmBTU.

The December gold contract was down US$14.90 at US$2,653.20 an ounce and the December copper contract was down seven cents at US$4.53 a pound.

This report by The Canadian Press was first published Sept. 30, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

Tentative deal reached in Metro Vancouver grain strike, federal minister says

Published

3 days ago

September 28, 2024

Anne Joseph

VANCOUVER – Canada’s labour minister says striking grain terminal workers in Metro Vancouver and their employers have reached a tentative labour deal.

Steven MacKinnon announced the agreement between Grain Workers Union Local 333 and the Vancouver Terminal Elevators’ Association in a post on social media platform X, but provided no other details.

The union confirmed the tentative deal in a statement on Facebook, saying its members will conduct the ratification vote by Oct. 4.

The notification from the union also says picket lines were to be removed Saturday and members will return to work pending ratification, ending the strike that had paralyzed grain shipments from Metro Vancouver’s port.

The dispute had previously led to picket lines going up at six Metro Vancouver grain terminals on Tuesday as about 600 workers went on strike.

Canadian grain producers had urged a resolution in the dispute, noting about 52 per cent of the country’s grains moved through Metro Vancouver terminals last year en route to being exported.

Farmers say the strike, happening during crop harvesting, would result in as much as $35 million per day in lost exports.

The Western Grain Elevator Association said on Friday that talks had stalled after two days of negotiations this week, with the employer saying it had increased its offers to settle “outstanding issues.”

The employers group had said they’ve reached the end of their “financial ability to conclude an agreement that industry can absorb” with the last offer, and it was up to the federally appointed mediator to report the results to MacKinnon for the next steps.

MacKinnon says in his tweet that both parties put in “the work necessary to get a deal done.”

This report by The Canadian Press was first published Sept. 28, 2024.

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