From SCORE Richmond by Doug Carleton:
Long-range weather forecast – possible strong storms on the horizon. Federal student loan debt is the only consumer debt segment that has continued to grow since the last recession, also leading to a rising default rate. Over the last eleven years student loan debt has grown almost 157%. According to the Federal Reserve there was $1.5 trillion in student loans outstanding through the second quarter of 2018, and the number continues to grow. At the same time student loan debt currently has the highest 90+ day delinquency rate of all household debt, and these delinquency rates are within about a percentage point of their all-time high in 2012. Couple that with the fact that interest rates are continuing to slowly increase and you have the possibility for those severe storms on the horizon to do some serious damage. One of the most severe effects of the student loan crisis is the potential negative impact on the broader economy which is continuing to slow down, albeit slowly. But it is definitely slowing.
One segment of the economy potentially affected by defaults on student loan debt is small business. Debt financing of many kinds such as working capital loans, equipment purchases and real estate acquisition is often critical to a business, but if there has been a default it can have a serious negative effect on a credit rating making getting loans more difficult or even impossible to get. An unpaid student loan on a credit report is close to the kiss of death. I had a borrower turned down for a loan because of an old – very old, unpaid student loan payment. The number was almost tiny; the business owner had been trying to pay it off but could never get a response from the servicer. The borrower was very strong including a high credit score, but that unpaid student loan killed the chance to get a loan.
As young adults struggle to keep up with student loan payments they are forced to make financial concessions such as delaying starting families or buying a house – two things that generate substantial economic activity. It is a serious problem that is only going to get worse before it gets better and could also have a negative effect on the formation of new small businesses.