Terrible things will happen with a young overburdened workforce slaving away for their debt. Politicians are already trying to figure out how to squeeze more social security taxes out of them.
This is bad for the economy, likely to cause extreme class warfare and social upheaval.
These people will have to work. No sabbaticals to find themselves, or time off to spend with a newborn. They'll have to put up with every pointy haired boss and dysfunctional workplace they encounter (at least until they can find another job).
Every day of their lives will boost the GDP. (But it sure sucks for them that their culture didn't steer them down a smarter road when they were 18 and didn't know better).
Economies go great when people are spending money. If a large part of your discretionary income goes to paying off student loans instead of spending on other things, and you put off buying a house or having children due to financial insecurity caused by student loans, then the economy suffers.
https://blog.dol.gov/2016/11/03/spending-habits-generation
https://medium.com/generations-of-spending/meager-spending-a...
Those of the silent generation are what can be most accurately described as frugal spendors.
Again, this tendency is rooted in their surroundings as they grew and developed within the society around them that was facing hard and desperate times.
My own assertions:
(1) GDP measures production. If debtors are incentived to produce more, GDP rises.
(2) The spending of debtors doesn't fall. It is just directed toward different sectors (education and financial products instead of housing, etc.).
(3) Every dollar lost by a debtor is a dollar earned by a creditor. These dollars don't disappear from the system. And even if creditors tend to churn money less than debtors, inflation targeting by the Fed should fully counter any changes in the aggregate velocity of money.
Now, it's possible you're right and I'm wrong. But I think it takes a much more sophisticated (and justified) argument than what you are asserting.
Regarding (3): The money does not disappear, but what is done with it? Already excess money in the hands of the 1% is just going into real estate, the stock market and stupid VC companies. All this is not particularly good for the real economy.
This is of course different from personal experience, where exchanges are essentially one-sided, not two-sided. An individual can exchange money for property. But a closed economy cannot.
What it means, then?
Depending on the policy of the Fed (or other issuer of fiat currency), the money supply may be increasing or decreasing at the same time.
The 'other issue of fiat currency' sounds mysterious.
(Of course, a well functioning government will compensate for that in monetary policy. The US gov just stopped being capable of that by around 2008, it is progressing on recovering some control, but still has very little.)
Quantitative easing was tried, and didn't work. There was nobody to lend money to, so velocity felt in proportion to the new money printed and the whole thing turned into just a hidden bank subside. It may work if coupled with the correct fiscal policy (AKA a temporary universal income), but nobody on the US government has the power to do that.
Interest on reserves is a fringe monetary instrument that is getting support from economists out of desperation. The leading theory is that it doesn't work at all, the fringe theory that everybody is hoping to be right is that it can work if the government restricts the use of paper money. AFAIK, nobody has any idea on what unexpected effects can come from doing it for any long period.
Interest rates are not the only tool, but the US government has already spent all of the orthodox tools. In fact, I do think the lest one to stop working was quantitative easing.
Production is dependent on demand of consumables in the U.S.
2 & 3 are the similar (the same?) point. The poorer one is, or the earlier in life they are (students) the greater % of their income is spent on consumables. I don't think money sloshing around financial services has as direct an impact on the things that most impact production.
Important because, as you mentioned, there is a very large difference in marginal propensity to consume between 'hand-to-mouth' consumers and savers - this affects the velocity of money and GDP. Debatable because at the zero-lower bound, how much effect the Fed really have is very much in question (see: excess reserves at https://goo.gl/NQG2O5).
I personally would disagree - money funneled to creditors rather than in the hands of consumers is more harmful to the economy than the reverse, but is that money passed to capitalists (low consumption) or used for business investment (high investment)? That being said, consumption is about 70% of GDP.
It's reasonable to think that in time much of it will get paid back but there are other kinds of investments that would perform better, and hence the economy would have been better off had these loans not been made and the money were spent on something else.
Also to your comment about sabbaticals and other less productive activities, is that really the common case? I believe that underemployment via career choices and local demand for skills would be more common.
Looks like a huge boost to an economy. Besides, let's not forget that economies are made of people.
I studied in Austria so I'm not too familiar with how student loans in the US work, but as far as I know the Income Based Repayment program limits your monthly payments to a given percentage of your income. You can't discharge those debts, but an upper bound on the monthly payments doesn't sound too bad either.
this is already the reality for many americans. eventually they'll riot