[ChainsawSurgery]

> doesn't threaten the rest of the economy in the same way that housing loans did

I dunno about that - it's probably just a lot more insidious and less panic-y.

Adults repaying student loans aren't spending that money on other things. If you're paying $300 a month to Sallie Mae, that's $300 you're not spending on:

1) Savings/retirement/etc

2) Goods and services

3) Capital investment

4) Etc.

Given the compounding nature of some of these things, and the fact that these payments constitute a higher % of your income early on (assuming steady career progression), it's a problem that may just slowly unravel as time goes on.

Don't forget we live in a service economy - adults not spending money on a diverse set of services (as opposed to say, just student loan services) will hurt us in the long run.

[ssharp]

We financed almost all of my wife's law school and decided once she graduated and had a job, that we'd pay off her loans as quickly as possible. We're almost done, but it's been two long years of getting by on one paycheck. That, along with having twins, means that we're not spending money like we did in our DINK days.

However, the extra financial discipline has been very beneficial. We've learned to coupon a lot of stuff for next to nothing, redid our retirement savings, set up savings for the babies, and have put together a financial roadmap for the next few years. I'm sure having the kids had a lot to do with it, but cutting your net income in almost half makes you reconsider a lot of things.

Doing things this way will save over $150,000 in interest over the next 30 years. The government will gladly hand you a 30-year refinancing of your loans, with an attractive monthly rate, but the amount of interest that you end up paying is staggering. I know most people graduating aren't in the same position we were in to aggressively pay down the debt and those who can't are starting out life in a financial pit.

Seeing that type of amortization and interest on anything other than a house (and even then...) is pretty eye opening, especially when the amortization schedule has your name on it!

[ChainsawSurgery]

That's awesome! Congratulations. Financial discipline is definitely a nice side effect of this mess - sink or swim, as it were.

That being said, frugality is also not necessarily great for the economy =). It's obviously a fantastic idea for individuals, and you're much better off the way you are - on the whole though, we want people to be spending money on goods and services.

Sorta like how college is a great idea for the individual, but if everyone goes to college then value of those degrees goes down as a whole.

[existencebox]

An honest question about that; since I've heard the "we need people to spend money" a lot, and for the most part think I understand and agree.

However, even if someone saves, (especially if they save via wealth growers like investments to counter inflation) that money doesn't just go into the ground with them when they die. I'd assume the majority of it does go to pay out goods and services in the future, probably nearer to the end of life. As such I'd assume that rather than having everyone buying all the things all the time, you could provide an equivalent effect to the market with only those in the end of life spending at a much higher rate than they would have if they stayed uniform across their lives.

Is there any reason this wouldn't be sufficient to provide the same effect, as well as providing individual benefit? (In blunter words, someone tear a hole in my argument please :) )

[ChainsawSurgery]

Aha:

> I'd assume the majority of it does go to pay out goods and services in the future, probably nearer to the end of life

Most of those expenses involve healthcare, which is probably not a sector of the economy that needs to see more money right now. You typically want to encourage diverse spending to avoid concentrating money in just one segment of the economy (the ol "dont put all your eggs in one basket" rule).

> that money doesn't just go into the ground with them when they die.

No, it doesn't need to - much of it can go onto next of kin, though, which encourages generational wealth that you typically dont want to encourage too much (which to our benefit, we do somewhat through things like estate taxes).

Additionally, and I have absolutely no reasoning behind this one at all, but spending in such a way lends itself to be extremely susceptible to age demographics: if you have a glut of older people (like we do now with baby boomers) then your economy might do fantastic if everyone spends money at the end of their life.

Conversely, when a low-population generation reaches old age, you're sorta doomed to suffer at that point.

[yodsanklai]

> I'd assume the majority of it does go to pay out goods and services in the future

I don't know the answer to your question, but my guess it's that people want to make profit now and not in the future.

Digressing a little bit, I made myself the same reflexion concerning fracking. There's a lot of pressure on my country's government to authorize fracking. Supposedly, it would be very beneficial for the economy. However, since this gas isn't going anywhere, i'm not sure why there's such a hurry to get it. Especially considering that it may be cheaper to extract it in the future.

[iopq]

Yes, but when going to college a lot of college employees got paid using that money. Current students paying money to the college is stimulating the economy, while former students paying the debt off is shrinking the economy.

[ChainsawSurgery]

> Current students paying money to the college is stimulating the economy

Ehh, it's stimulating the higher education economy.

And even that's debatable depending on how that influx of money gets spent: Paying 100 extra student workers $10/hr isn't really stimulating the economy since most of that money's going right back to the college.

Plus, it's not smart to put all of your stimulus eggs in one market basket, ya know?

[iopq]

The salaries of professors, lecturers, college employees, construction workers, etc. go to rents, food, other necessities. That money doesn't go back to the college, but rather to the general area these people live in and spend their money in.

[ChainsawSurgery]

> The salaries of professors, lecturers

Most professors don't earn that much money[1], unfortunately.

> college employees, construction workers,

Why do you think it's going to them? For reference, the average salary of a construction worker hasn't changed that much in the past decade [2].

I posit that the majority of that money is going to higher education administrative costs, and so the "stimulus" is occurring entirely in higher education. Stimulus entirely in one class and market of employment worries me for the inevitable market correction (for what seems like an unsustainable path, i.e. the current state of higher education costs). It also comes at the expense of a diverse service economy: It would be extremely shortsighted to support living in a world where higher ed and student loan companies are the thriving sources of the economy.

[EDIT] I removed an argument about "trickle-down" because it felt forced.

1: http://www.salon.com/2014/09/21/professors_on_food_stamps_th... 2: http://money.usnews.com/careers/best-jobs/construction-worke...

[AndrewKemendo]

My question was, what is the macro impact of them defaulting on student loans.

Seems like based on your point, everyone would be better off because PPP would go up slightly. I'm not sure I agree, but only because I am not sure of the impact massive student loan default would have on capital markets for debt holders.

Basically would mean that Sallie Mae could tank significantly.

[ChainsawSurgery]

> My question was, what is the macro impact of them defaulting on student loans.

My mistake, I thought your question was more about the impact of student loan debt as a whole on the economy going forward.

My point was that there's probably no bubble (unless at some future point the govt decides student loan debt is dischargeable in bankruptcy), but that doesn't mean it won't be detrimental nonetheless.

> Seems like based on your point, everyone would be better off because PPP would go up slightly.

How do you figure? I haven't seen the data myself but it would be shocking if total accrued student loan debt (adjusting for inflation of course) doesn't skew heavily towards the 18-30 age range.

That leaves the older generation with significantly more purchasing power, and if the younger generations avoid student loan debt it benefits them as well.

> Basically would mean that Sallie Mae could tank significantly.

I think that's a very real scenario that will play out in another decade or two. I very much doubt today's toddlers will accrue as much student loan debt as millenials have.

[cjslep]

$300 a month seems low. I went to North Carolina State University, generally regarded as a cheaper school (compared to neighboring UNC Chapel Hill or Duke) for a solid quality engineering education as an in-state student. I graduated after four years in 2013 and my monthly payment to Navient (formerly Sallie Mae) is easily triple that.

[GabrielF00]

Average student loan debt is about $30,000. A 10-year loan at 5% interest works out to about $318 or $345 at 6.8%.

The 5% choice is a bit debatable. I figured most people have some combination of loans at 6.8%, 5% and 3.4%.

Of course there's so much variation between schools that the average might not be too useful, but it seems like $300-$350 is a pretty reasonable figure.

[ChainsawSurgery]

Ouch. Sorry to hear that. I'm guessing you have easily a small mortgage in student loan debt =\, which is probably not that uncommon these days.

(if not you're totally getting screwed on interest rates)