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Paying Off Student Debt Is Saving

Paying off student loan debt, just like paying off credit card debt or paying down a mortgage, is a form of saving.

Hate to be the econ nerd here, but this is the sort of thing that folks writing on economics should get straight. (The failure by econ writers to get such things right is one reason that Jonathan Gruber thinks the public is “stupid.”) Anyhow, Catherine Rampell messes this one up in an otherwise reasonable piece discussing differences in saving rates by age.

The piece notes the negative saving rate reported for people under age 34 and then comments:

“These numbers have inspired various condemnatory headlines and think pieces about my generation’s irresponsible savings deficit. The more sympathetic coverage has at least acknowledged the effects of student loan debt and high youth unemployment, but even those articles came loaded with judgment.”

Paying off student loan debt, just like paying off credit card debt or paying down a mortgage, is a form of saving. If young people are actually paying off large amounts of student debt then they would have a high saving rate, not a low saving rate.

The chart accompanying the column is interesting not only for the breakdowns by age, but because it shows the overall saving rate. It shows that the saving rate is actually relatively low, meaning that people are spending a lot. (This would be even clearer if it went back to years before 1990.)

We have heard endless comments from economists and economic reporters trying to explain why people are not spending following the collapse of the housing bubble. The simplest explanation is that they are spending, albeit not at the same levels as when they had $8 trillion of ephemeral bubble wealth driving their consumption. This is one of those points that is far too simple for economists to understand.

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