Student Loan Debt:

Worse Than They Tell Us

By Jones William & D. S. Mitchell

Student Debt

There is a black cloud on the American economic horizon. Student loan debt has tripled over the last fifteen years. According to the Federal Reserve in the first quarter of 2018 student loan debt had ballooned to over $1.52 trillion and is expected to swell to $2 trillion by 2020. Forty four million Americans are carrying student loan debt, with about 7 million borrowers in loan default. The average student loan obligation exceeds $37,000. Forty per cent of borrowers are expected to fall behind on their loans by 2023.

Times Change

Over the last forty years there has been unrelenting pressure on young people to go to college. Many of these students in the past would have been redirected to vocational programs, but apprentice programs like electricians, plumbers and equipment operators have been ignored for the promise of a college degree and the anticipated financial benefits of over $1.2 million dollars in increased lifetime earnings potential. A notable side effect of this move to “college for all” is, under the current system, a lifetime of debt.

Then And Now

College costs have outpaced the Consumer Price Index more than four fold since 1985. The availability of federally backed tuition assistance has made it relatively easy for students to pay for college, but leaving them with a life time debt burden. Things have changed dramatically. I graduated from college in 1972. I was the first member of my family to ever even try such folly. I did it in four years using a cluster of five ( yes, I said 5) small scholarships and a summer job. I left college with a degree in nursing and most important, no student loan debt. The growth of tuition costs relative to teen wages-in fact, all wages-has turned dramatically upwards and what I did would be almost impossible today.

Student Loans have Outpaced Inflation

The proliferation of high-interest student loans has outpaced inflation and earnings growth for college graduates. Unfortunately, graduates aren’t making enough money to handle their debt burden. This is not just a problem for people trying to pay off their student loan debts, but it also has presumptive adverse effects on the U.S. economy . When an alumni cannot pay off their student loan that should be an  indicator that their education failed them. Student loan defaults should be recognized for what they are, the fruits of a failed educational system. It may be time to stop propping up an educational system in need of radical reform and transformation. Colleges should not be allowed to charge too much for course work, and lenders should not be allowed to burden borrowers with excessive interest rates all the while locking people into debt that can’t even be discharged through bankruptcy.

Millennial Time

Millennial are broke. Early in 2018, a Federal Reserve analysis showed that millennial as a whole, and notably millennials of color, have the largest part of their paychecks going toward their student loan debt. Millennials are the best educated component of American society. However, economic instability brought on the 2009 recession and an uneven recovery led many students to take on heavy debt to complete their education. That combined with an outlaw (unregulated) student loan industry has created a distressing situation. Many young people are earning less today than their 1984 counterparts. Faced with accelerating cost in every area including, housing costs, health care charges, childcare, and transportation. Most can do nothing more than try to keep their heads above water.

Default On the Rise

Students who attended for-profit colleges and community colleges represented half of all borrowers in 2011. These people also accounted for 70% of all student loan defaults. According to Judith Scott-Clayton an economics educator said, ” Delinquency is at crisis levels for borrowers, particularly for people of color.  Borrowers who have gone to a for-profit college AND borrowers who didn’t ultimately get a degree”.  The last part of Scott-Clayton’s statement seems counter-intuitive.  Simply put, students need to get a job that allows them to pay off their debt. The delinquency rate will rise as long as students aren’t graduating with degrees that allow them to earn enough to pay back that debt. Making the matters worse, minority students often face discrimination in hiring.

Everything Slows Down

Nearly 20% of the Millennial generation still live with their parents or with others in a co-hab situation. Millennial are putting off financial milestones and limiting spending because of their high student loan debt. They can’t make other purchases because their student debt load is too great. This fact alone should be alarming to government officials. A truism that has emerged, is that college debt delays marriage, delays child-bearing, derails starting a business, reduces chance of higher degree programs, buying a home, buying a car, or boats, or saving for retirement.

Student Loans Are Slowing Economic Growth

As can be expected student debt is curtailing the U.S. economic growth and may in some way worsen the class divide. With the current high college cost in addition to the inevitability of accruing significant debt, many students from the low-income strata if presented with a choice will not take the loan. This will, in turn, create a divide as these poorer people will then lack the skills necessary to compete in the mature, service-oriented, technology-driven U.S. economy.

Similar To The Great Recession?

There is a sharp contrast between the student debt crisis and the 2008 financial meltdown that was the worst economic crisis since the Great Depression. The crash occurred when banks sold too many secondary contracts. Secondary mortgage contracts occur when a seller sells a property to a risky, or unqualified buyer. The contract (mortgage) created by the sale of the property is then sold on the open market. In 2008 the demand for mortgage-backed securities had driven prices to par value and plus! Unprecedented. In normal times such contracts would sell at a 30%-40% discount. When home prices dropped dramatically in 2006, it triggered defaults in this risky secondary market around the country. The housing market was in collapse. The risk spread into mutual funds, pension funds, and corporations who owned these derivatives. This resulted in people losing their homes and the stock market crash and destabilization of banks and insurance companies. As everything in the financial world crashed, unemployment exploded.

Student Debt Hurts Americans

The question that everyone wants to know is whether this crisis will escalate to the levels of the 2008 meltdown. However you can rest assured that the likelihood of that occurring is low. Experts tell us when the real estate market collapsed, the Country’s debt on mortgages was nearly two-thirds of the gross domestic product. The crisis posed by the student loan debt, represents less than ten per cent of the GDP.

The Downside of Student Loan Debt

Although assumed to be less dangerous to the economy than the mortgage meltdown it is easy to see  how student loan debt negatively affects the economy. Here’s everything I found about it: the good, the bad, and the somewhat surprising. Student debts have limiting effects that are quite obvious on a personal level because the debtors have a financial obligation to make timely monthly remittances. On a broader perspective, when close to 44 million Americans are spending a large part of their salaries to pay student debts instead of paying for goods and services, then it becomes both a political and an economic issue. In essence, student loan debt will become so significant it will slow the U.S. economy. Listed below are the six fundamental ways loans can depress economic growth in the U.S.

      1. Student Loan Debt Minimizes Spending 

Student debtors have a reduced capacity to spend money. They can’t afford to buy items they want to buy.  For instance, a large percentage of these debtors tend to put off purchasing a car because of those student debts. To ensure an ever-growing U.S. economy, the spending of money on goods and services is essential. Spending money on student loan debt automatically means less spending on consumer items thus translating to lower corporate revenues and profits. This, in turn, will lead to slow growth financial growth.

      2. Student Debts Slow The Housing Market

The financial weight of student loan debt negatively impacts borrowers who would otherwise be purchasing a home, furniture, washing machines, and cars. Statistics show more than 41% of student loan borrowers have delayed home purchases. Home ownership has been in decline since 2004, and is currently at 64% of the population. Student loan debt means fewer people purchasing homes and creating mortgages thus affecting the banks and investment firms which collect interest revenue from such investments.

    3. Student Debt Holds Back New Business Start-ups

Business start-ups and small business investments are the backbones of the American economy. Student loans are a stumbling block to those who are trying to save money so they can use it to invest in stocks and bonds. More student debt means fewer entrepreneurial start-ups. Recent graduates identify student loan debt as a hindrance to them joining in a new business opportunity. Graduates with higher student debt (those exceeding $25,000) are having to put on hold plans to start a business. Additionally, those who have started a business face enormous difficulty in getting business loans approved because it’s hard to service a business loan when one has heavy student loan debt.

    4. Affects Retirement Savings

Student debt affects those trying to save for retirement. Funds being diverted to service student loans instead of saving for retirement will have profound effects. By the time one can start saving for retirement, the time period for savings has shrunk significantly. As such, people may be forced to rely on other forms of income after retirement, namely Social Security. This fact will have a negative impact on the economy.

Although it is a smaller number, a percentage of Americans age 65 and older are carrying student debt, and the number is growing. Households headed by 65-74 year olds debt grew about 1% in 2004 and 4% in 2010. While those 65 and older account for a small fraction of the total amount of outstanding federal student debt, the outstanding federal student debt for this age group grew from $2.8 billion in 2005 to 18.2 billion in 2013. These patterns are contributing to rising financial fragility in retirement.  One sad statistic, 3% of Social Security recipients had their benefit checks garnished for student loan repayments.

    5. Borrowers Slow To Start Families

Borrowers who are under debt repayment schemes find it hard to start families. A person must  have finances to execute social contracts like marriage. It becomes difficult for those with student loan debt to date and socialize due to cost constraints. When starting a family would be parents recognize there will be increased costs related food, clothing and shelter.

    6. Job Choice

Another notable impact is on job choice by graduates. A person with student debt may be forced to forgo job satisfaction and go for jobs that are likely based on expected income. The students may forego the chance to have a positive impact on society due to this.

Options

It does not have to be this way. A lot of industrialized countries manage to provide education for their citizens without inflicting this long-term debt burden on young people. Whereas the sole purpose of student loan debt is to make sure as many people in the population have access to higher education. The results are often opposite of the desired result. This negative negation is often experienced by those in the low and middle-income bracket who are worried about the consequences, which may ultimately lead to one foregoing college to avoid the risks.

Student Default

Recent studies show that high student debt does not only deter students from beginning college but may also lead to the students terminating their studies before they are done with their education. These situations create more problems as the student is still required to pay the loan without the advantage of a college degree to enable them to have enough income to pay the loan. This scenario encourages students to default on loans, who ultimately fall into the group of students with credits and no degrees.

Business May Help

Debtors are required to pay a fixed percentage of their income for a period of between 20-25 years whereby their student debt is then forgiven. It has become increasingly popular in a tight market for employees to have their debt paid as an employee benefit. Employer participation in Student Debt Repayment Act stipulates that those repayments are to be encouraged by making them tax-free, instead of having those payments as taxable incomes. Legislators could bolster this with incentives to businesses to start or expand such programs.

Non-profit College A Better Choice

For-profit colleges charge exorbitant fees that result in increased repayment amounts and the period required for repayment, essentially worsening the student debt issue. Many of the students who get into trouble are those who have been lured to attend private, for-profit colleges, which encourage students to borrow but provide dubious job prospects. Law makers need to revisit college regulations.

Predatory Rates

Currently, student debt is treated as a toxic liability and is protected against bankruptcy while still at predatory rates (double the rates of car and mortgage loans). Think about it. Should our society value purchasing cars (a depreciating asset) above educating its citizens (increasing wages/taxes & competitiveness)? These rates make higher education untenable for may prospective students.

Not All Debt Is Equal

Lastly, our law makers need to take a look at the student loan program in a new light. Unlike other forms of debt, student debt is typically not dischargeable through bankruptcy. “There is no reason to treat student debt differently than other debt. Debt is debt. Most students are able to repay their debt, but for those who can’t, bankruptcy should be an option. Individuals can struggle for years trying to pay off student loans. Because debtors are unable to repair their credit rating, spending is constrained and borrowing for a major purchase such as a home is unlikely. The economy would be healthier if these people were able to emerge from bankruptcy with the burden of student debt lifted and then able to rebuild their lives.

Should You Have To Pay For Mistakes?

Fed Chairman Powell recently signaled that the growing student loan debt has the potential to hold back overall economic growth and can have long-term negative impacts for people, including poor credit ratings. Allowing borrowers to discharge this debt is better solution than the government (ie taxpayers) having to pay defaults on the loans. Student debt should be governed by the same bankruptcy laws that apply to people who get into problems with other debt they can’t repay. Some students made mistakes taking on loan burdens they really can’t handle, and taxpayers made a mistake in letting the program so big, but at this point its time to admit those mistakes, reform the student loan program and let everybody move forward.” Wow. I would say that Powell signaled for lawmakers to start making changes in the student loan program.

Sources:

Philip Molnar The San Diego Union-Tribune 2018

https://knowledge.wharton.uppenn.edu/article/student-loan-debt-crisis/

Riley Griffin https://www.bloomberg.com/news/articles/2018-10-17/the-student-loan-debt-crisis-is-about-to-get-worse

Miranda Marquit https://studentloanhero.com/featured/student-loan-bubble-whats-next/

Annie Nova https://www.cnbc.com/2018/09/21/the-student-loan-bubble.html

Maggie Thompson and Senya Merchant https://thehill.com/opinion/education/419935-yes-student-loans-really-are-making-millennials-go-broke

Alan Gin https://www.sandiegouniontribune.com/opinion/commentary/sd-utbg-student-loan-crisis-fix-20170922-story.html  “Student loan debt doesn’t just hurt students. It hurts the U.S. economy, too”

Annie Nova https://www.cnbc.com/2018/09/21/the-student-loan-bubble.html “Despite the economic recovery, student debtors’ ‘monster in the closet’ has only worsened”

Chris Quintana https://www.chronicle.com/article/Economic-Boom-Isn-t-Helping/244980 “Economic Boom Isn’t Helping Some Student-Loan Debtors, Advocacy Group Says”

Fabrizio Ferretti https://www.sciencedirect.com/science/article/pii/S0264999315001212