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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

The political crisis dujour is U.S. student loan debt which, at more than $1 trillion, is now greater than American credit card debt, according to the Consumer Financial Protection Bureau.

This is the latest of the hardy fiscal perennials we have been dealing with since the 2008 financial crisis. These matters are like food and drink to politicians, the media and the special interests that can be counted on to describe the issue as anywhere from alarming to frightening.

We are told that student loan debt is the next calamity, comparable to the mortgages that created the disastrous housing bubble. Those in the know are “gravely concerned” about this latest “threat to our economic future.” Needless to say, our leaders must “act swiftly and decisively” to stem the tide.

The issue is front and center in Washington, D.C., because the Senate failed to agree on a plan to keep the current federal student loan interest rate of 3.4 percent from doubling to 6.8 percent on July 1. More than seven million loans could be affected by the hike. Both President Barack Obama and former Massachusetts Gov. Mitt Romney support keeping the interest rate at 3.4 percent. The change is estimated to cost the average loan holder between $7 and $25 a month.

In 2007, while we were swimming in a sea of red ink, the folks in Washington- including then-President Bush- cut the statutory 6.8 percent interest rate in half on these federal loans. This provision was to expire in five years. Time is up July 1.

A largely unasked root question is what does keeping federal student loan interest rates do? Does it lead to more student borrowing? What about its impact on costs? Since the 1980s, the cost of college has increased by more than 400 percent while the median income has only increased by 150 percent. Continuing to make federal funds freely available to students makes it easier for colleges and universities to raise their prices year in and year out.

Colleges and universities are arguably the biggest beneficiaries of student loans. In addition to making it easier for them to raise prices, they also increase revenues with no credit risk. Meanwhile, many students graduate with a toxic combination of mountains of debt and dismal job prospects.

Loan default rates are even more dismal. Nearly three of 10 student loans have past-due balances of 30 days or more.

The Senate voted twice last Thursday to keep the student interest rates low, but got nowhere. They rejected competing Democratic and Republican plans to stop rates from doubling because of – you guessed it- partisan bickering over how to pay for it. The “world’s greatest deliberative body” argues about how to pay for $6 billion in annual costs even as it is borrowing $1 trillion this year.

Is this another example of temporary largesse becoming a permanent entitlement, thanks to election-year pandering to a special voting bloc? Do we really need more of this bush league stuff when we should be raising taxes and cutting spending to deal with a $1 trillion deficit and nearly $16 trillion in public debt? The faintly good news is that given the political incentives in this general election year, senators will likely arrive at an 11th-hour bipartisan compromise to increase the federal student loan interest rate subsidies. Both parties will then do an elaborate and extended touchdown dance.

Thank goodness the Senate doesn’t have the pandering equivalent of the NFL’s penalty for excessive celebration. If they did, there might not be any senators left.

originally published: May 31, 2012