Student Debt

The Rising U.S. Burden

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In terms of American exceptionalism, student loan debt stands out. No other country imposes the kind of costs on college and university students that the U.S. does, and nowhere else do loans cover so much of those costs. Experts think that the $1.2 trillion in outstanding education debt in the U.S. is more than that of the rest of the world combined. It’s a situation that educators, consumer advocates and members of both political parties all decry. Agreement on solutions is harder to find. In the meantime, the level of student loans is increasingly seen not just as a burden on students but as a drag on the nation’s economy. Young adults are delaying setting up their own households in the face of a mountain of debt while default rates rise to dangerous levels. Recent studies also show a growing economic divergence between young Americans with and without student loans. There’s widespread agreement as to who is worst off: college dropouts. They’re stuck with debt but without the higher earnings a degree might have brought to help pay it off.

The Situation

Most of the proposals being debated in Washington wouldn’t reduce students’ debt loads; they’d just make loans cheaper or easier to repay. Republicans in the U.S. Senate last month filibustered a proposal by Senator Elizabeth Warren, a Democrat sometimes mentioned as a possible presidential nominee, to let about 25 million holders of student loans refinance their debt at a lower interest rate. A House Republican bill would make defaults on student loans less likely by automatically withholding a percentage of earnings from paychecks. President Barack Obama announced two administrative measures. One expanded a program in which ex-students make payments calculated as a percentage of income. The other ordered the Education Department to require companies servicing federal student loans to do a better job of explaining to borrowers an often-bewildering set of payment options. In the U.K., where English students in particular face sharply higher tuition, the opposition Labour party is warning of a fiscal “time bomb” from the expansion in student loans that accompanied the increase.

Source: Federal Reserve Bank of New York
Source: Federal Reserve Bank of New York

The Background

When the U.S. federal student-loan program began in 1965, its goal was to give students reliable access to funds that would help them get through college by deferring some of its cost until they had an income. Most loans were paid off in a few years, while the benefit of the degree lasted a lifetime. As the cost of college raced ahead of inflation, the federal loan program morphed into something larger and different. Loan limits steadily increased, and parents and students at for-profit colleges also became eligible to borrow. Commercial banks also ramped up their higher-interest lending for those whose needs exceeded the caps on federal loans. Students could find themselves holding a complicated portfolio of loans with different rates and several servicers. The biggest growth in the program came in the past decade, as student debt rose an average of 14 percent a year, to $966 billion in 2012 from $364 billion in 2004, according to New York Fed data. After July 2010, the government cut out banks as middlemen in the federal loan business. Much of the savings was used to increase college grants, but some went to reduce the budget deficit.

The Argument

Is the problem the loans or the cost of college the loans help students cover? A common criticism of proposals like Warren’s is that they don’t address the root problem of above-inflation tuition hikes. Making it cheaper to borrow, that argument goes, only makes it easier for schools to raise fees. Obama has tried to address college affordability by proposing a ratings system for colleges that could potentially be tied to eligibility for federal aid. The idea is supported by some groups including the Education Trust, but many colleges have opposed the plan. Others think that less sweeping steps could make a difference, particularly in terms of helping students and their parents understand just what they’re getting into. Both Republicans and Democrats have called for giving students information about how much they’ve borrowed each year instead of when they begin or leave a program. When students at Indiana University were told how much they would owe after graduation, undergraduate borrowing dropped by $31 million in one year. Scarcely debated in the U.S. is the path many other developed nations have chosen, of higher taxes to make public universities free or cheap. It’s an approach that harks back to the U.S. system of state universities. It’s also under pressure almost everywhere in an era of austerity.

The Reference Shelf

First Published July 9, 2014

To contact the writer of this QuickTake:

Janet Lorin in New York at jlorin@bloomberg.net

To contact the editor responsible for this QuickTake:

John O'Neil at joneil18@bloomberg.net