A recent New York Federal Reserve report suggests the mounting burden of student-loan debt is undermining economic growth. That’s probably true, but policy makers should focus on the underlying problem.
Those in their 20s and 30s account for nearly 70 percent of student-loan debt. Buried under loans, they are unable to participate fully in the economy, putting off major purchases such as homes and new cars.
At least 37 million Americans owe nearly $1 trillion for outstanding student loans. One-third of those borrowers are delinquent on repaying, and more than 10 percent of them by more than 90 days. The highest delinquency rates are among 30- to 39-year-olds. Their average personal debt is about $33,000, compared to the overall average of $25,000. Student-loan debt now exceeds aggregate auto loan, credit card, and home equity debt balances, placing it second only to mortgages.
Student loans are not dischargeable in bankruptcy, much like tax debts, child support and alimony, and unpaid debts continue to accrue penalties. It is a classic Catch-22. Defaulting on a student loan damages a person’s credit and job prospects, and it can keep a person out of the mortgage market for years. The federal government has the power to collect on defaulted student loans by garnishing wages and withholding tax refunds and Social Security payments.
Student-loan debt that young people struggle to repay and continues grow even in bankruptcy is not exactly a ticket to a better life and upward mobility. These debtors are, in effect, semi-indentured servants. It is an arrangement that would put a smile on Ebenezer Scrooge’s face.
It is reasonable to assume that this level of student debt burden will adversely impact household formation and decrease the number of first-time home buyers. First-time home buyers with a median age of 30 usually make up more than 40 percent of the home-buying population; now their share is about 30 percent. student-loan debt has many either renting or back living with their parents, trying to make a go of it, their hopes abridged.
Congress is once again trying to agree on an extension of the current student-loan interest rate. In 2007, Congress cut the statutory interest rate of 6.8 percent on federal student loans in half to 3.4 percent for five years. Last year, Congress averted a July 1 doubling of interest rates by agreeing to a one-year extension. student-loan interest rates are again slated to double for more than seven million people by the end of the month if Congress doesn’t act. Democrats and Republicans say they want to head off an increase to 6.8 percent, but they disagree about how to best manage the interest-rate trajectory.
The Republican-led House passed a measure in mid-May that would link the federal student-loan interest rate to that of 10-year Treasury notes, plus 2.5 percentage points. The measure would cap interest rates at 8.5 percent and allow them to vary annually.
This was greeted with Bronx cheers by the Democratic-controlled Senate, which proposes to extend the government -subsidized rate of 3.4 percent for the 7.4 million students with subsidized loans for another two years at an annual cost of $6 billion. The President proposes to set interest rates for subsidized federal student loans each year based on the Treasury note, but to then keep the rate fixed for the life of the loan.
But the dirty little secret about student-loan debt has nothing to do with the interest rate. It is about college costs, which have been rising faster than inflation for the past 15 years. Since the 1980s, the cost of college has increased by more than 400 percent while the median income has only risen 150 percent.
Getting to the bottom of the student-loan problem and its negative impact on the overall economy will require figuring out just where all that tuition money is going and how we can bring college costs under control.
originally published: June 8, 2013