Most student loan payments remain affordable, says Cleveland Fed economist
The dramatic growth in student loan balances has raised concerns that students are coming out of college with so much debt that their ability to purchase homes or start businesses is limited. But monthly payment amounts are less of a hindrance than many believe, says Federal Reserve Bank of Cleveland economist Joel Elvery, who also notes that average student debt burdens are more than offset by students’ average financial gain in the long run.
The average monthly student loan payment for those aged 20 to 30 was $351 in the second quarter of 2015, according to the Federal Reserve Bank of New York’s Consumer Credit Panel data. But fifty percent of the borrowers had payments of $203 or lower, and another 25 percent had payments between $203 and $400.
“This means that 75 percent of student loan borrowers in this age range would be, in the simplest sense, better off with a student loan if going to college increased their monthly take home earnings by $401 or more,” says Elvery. “In 2014, labor force participants aged 20 to 30 who had at least some college earned $2,353 per month on average, $750 more than people the same age with just a high school degree. This is more than double the average monthly payment for all student loan borrowers of the same age, suggesting that the increase in earnings from going to college more than offsets the cost of student loan payments for most borrowers.”
Forecasts suggest that post-secondary education will continue to be increasingly important, both for individuals’ incomes and for the growth of our economy. “If the share of young people pursuing college degrees is going to rise, it will probably be because of increases in college enrollment by low- and middle-income students, to whom student loans are especially important. Like any borrower, a potential student loan borrower should focus on whether the debt is enabling her or him to make a valuable investment in the future.”
Federal Reserve Bank of Cleveland
The Federal Reserve Bank of Cleveland is one of 12 regional Reserve Banks that along with the Board of Governors in Washington DC comprise the Federal Reserve System. Part of the US central bank, the Cleveland Fed participates in the formulation of our nation’s monetary policy, supervises banking organizations, provides payment and other services to financial institutions and to the US Treasury, and performs many activities that support Federal Reserve operations System-wide. In addition, the Bank supports the well-being of communities across the Fourth Federal Reserve District through a wide array of research, outreach, and educational activities.
The Cleveland Fed, with branches in Cincinnati and Pittsburgh, serves an area that comprises Ohio, western Pennsylvania, eastern Kentucky, and the northern panhandle of West Virginia.
Doug Campbell, email@example.com, 513.455.4479