Over the last week, student loans have crept back into the national spotlight in good measure driven by presidential politics and Congressional brinksmanship. Although the timing of politicians’ interests in student loans draws a certain amount of skepticism over anything but their political motivation to gain the support of the younger vote, these election year gymnastics should not overshadow a serious set of long-term economic problems facing this country. Behind the seemingly cerebral surroundings of our colleges and universities is the fact that private and public higher education is a big money business that has been greatly facilitated by generous federal subsidies for decades for student loans. Most estimates place the outstanding amount of student loan debt at nearly $1 trillion, with the federal government providing 80% of that aid through its Stafford loan programs. The issues confronting our society and elected officials are how do we ensure a future for college graduates that allow them the same opportunities as previous generations to purchase a home, save for retirement and their children’s educations while at the same time demonstrating fiscal responsibility at a time when federal bailouts seem to be the norm for industries and homeowners, among others.
The numbers themselves paint a gloomy picture for the US as a whole and graduates with student loans. Shockingly, Americans 60+ years and older owe $36 billion in outstanding student loans. At a time when this segment of the population should be thinking of solidifying their retirement plans, they remain mired in student loan debt from in many cases decades earlier. Moreover, the average student loan obligation these days is over $23,000, up more than 25% in the last decade. In 2007, Congress passed legislation that halved the interest rate on federal student loans from 6.8% to 3.4% that expires July 1st and would affect 7.4 million people. In the sideshow that is election year politics, agreement that interest rates not be allowed to go back up is a bit surreal at first glance but importantly illustrates the gravity of the situation.
From an economic perspective, providing a well-educated work force is critical in an increasingly competitive global economy. Innovation and productivity are dependent upon highly educated workers – but not just in white collar jobs, but also in manufacturing and other blue-collar positions. The fact that 90% of parents want their children to go to college is notable and encouraging; however, strong vocational programs are also needed along with basic math and science skills where US children have been lagging behind for years relative to a number of other countries. The surge in 4-year college enrollments in the last decade in some sense resembles the artificial demand in housing that took place in the years preceding the financial crisis due to a variety of market and government-related factors. In the case of higher education, demand was induced in part by significant federal subsidies that in turn facilitated major tuition increases by colleges over the last decade (i.e., 67% increase in tuition, board and room over this period). These burdens place graduates in a precarious position; with a nearly 30% 30-day past due or worse delinquency rate on student loans, the product is a difficult one for private lenders to make acceptable margins on and we’ve seen some large banks exit the market as a result, leaving the federal government as the primary student lender. But unlike housing where personal bankruptcy can lead homeowners out from under crushing mortgage obligations, no such relief exists in general for the discharge of federal student debt, placing extraordinary financial pressure on the next generation. To be clear, bankruptcy should only be a final and extreme solution for borrowers facing financial difficulties. However, from a long-term economic growth perspective, the drag on future growth is real and worrisome. With such burdens, an extremely fragile and still recovering housing market stands little chance at robust growth if the market for first-time homebuyers is unable to qualify for a mortgage due to excessive nonmortgage debt obligations. Herein lies the dilemma for Congress and the Administration – initiating a legislative fix to the interest rate subsidy doesn’t tackle the large outstanding student debt, and it must be paid for somehow, which means an additional $6 billion in taxpayer support per year at a time when our fiscal house is already falling in on itself. Like social security, health care and tax reform, student loans have languished in terms of meaningful legislative reform that is both equitable and budgetarily responsible. At a minimum, Congress and the Administration need to meet halfway and extend the 3.4% cap and do so in a budget neutral fashion. More important, a long-term fix to the way we think about higher education subsidies, the cost of securing such education and the expectations of students and educators to provide a world-class highly educated workforce for all economic activity must be a priority for the next administration.