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How does debt affect people?

Carrying student debt well in to your adult life can be a heavy burden. Shutterstock

Until now, student debt in Australia has been relatively modest, with low repayment rates, low indexation and high repayment thresholds. This won’t be the case if the government proceeds with changes mooted in the recent budget, including higher fees and higher interest on debts. Australia will move to a student debt model similar to the US, so this is a good place to look at the effects that large levels of debt have on young graduates.

Much recent research from the United States shows that student debt is having profound and negative effects, both at the individual and at the national level.

Graduates living with debt

Purdue University is a public university in South Bend, Indiana. President Mitch Daniels commissioned a large, evidence-based study of the impact of student debt on university graduates. The results, based on a survey of 30,000 graduates, were recently released.

The findings of the study are sobering, on two fronts.

First, student debts weigh heavily on students’ later wellbeing. Wellbeing was measured along five dimensions: life purpose, social engagement, community engagement, financial satisfaction and physical health. Graduates without student debt were seven times more likely to report themselves to be “thriving” along all of these dimensions than graduates (or indeed dropouts) with more than $40,000 in debt.

This finding tends to confirm the results of a major meta-analysis of evidence from the United States, the United Kingdom and New Zealand. The findings suggest that higher levels of debt while a student are significant predictors of stress and secondary negative health consequences. This study also points to other evidence of serious consequences more generally. Higher levels of debt have serious long-term consequences, including mental, neurotic or psychotic disorders, depression, suicide attempts (or suicide completion), problem drinking and drug dependence.

Student debtors delay taking out a mortgage to own their own home. AAP

Secondly, large debt burdens influence choices related to work, careers and lives. Graduates with higher debts are less likely to be entrepreneurial and start new businesses. This is to be expected, as student debt repayments tend to constrain the capacity to borrow for other productive purposes.

In the robust free-market economy of the US, such entrepreneurial timidity among the best and brightest is a source of real and valid concern for policy makers.

Other recent research has shown that students with higher debts tend to pursue higher-paying careers, not pursuing “public interest” jobs in areas like teaching and community services. Over time, this means that public institutions like schools will have to pay higher wages to attract the best and brightest, indirectly shifting some of the cost of student debt back to the taxpayer in the form of higher public sector salaries.

Large student debts have also been shown to lead to delays in home purchases and having children.

Debt ain’t free

Shifting more of the burden for higher education back on to students, and saddling them with huge debts, may seem like a good idea for policy makers, but it will have serious long-term consequences for those students and thus the wider Australian community.

In the United States, the average student graduated with around $30,000 of student debt in 2013. Currently, Australian graduates of three-year business degrees have debt of a similar level.

If the proposed changes lead to higher fees, as most analysts expect, it would be reasonable to anticipate the graduates of 2018 completing their three-year degrees with debt of around $50,000.

It would be naïve to think debts of this level won’t have far-reaching consequences for graduates’ well-being and the work and economic choices they make in their lives. These choices will have serious consequences for our economy and society.

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