Ask The Experts: How Do We Avoid Student Loan Catastrophe?
In this edition of our “Ask the Experts” series, we discuss the growing problem of student loan debt with experts across the realms of higher education, personal finance, economics, and politics.
It’s no secret that we’re obsessed with using plastic to buy things we really can’t afford. In fact, the problem is so bad that even the Great Recession couldn’t scare us straight for long. After addressing some of the widespread credit card overleveraging that helped bring about the downturn by paying down just over $1 billion of amounts owed during 2009, we’ve added $7.5 billion, $46.7 billion, and $36.3 billion to our credit card tab in the three years since. The result: We actually owe nearly $90 billion more now than we did in 2008.
You know what, though? We unfortunately have a far bigger personal debt problem on our hands, and it’s looming larger and larger with each passing day. U.S. consumers collectively owe more than $1 trillion on student loans, according to the Consumer Financial Protection Bureau (CFPB). Yes, you read that right – Trillion with a “T.”
Debt from student loans surpassed that originating from credit cards in 2010 and auto loans the year after. It now ranks as the single biggest source of non-mortgage consumer debt in the United States, accounting for around 40% of the total amount that we owe. According to a triennial report from Pew, a record 19% of all U.S. households had a student loan balance as of 2010 (the most recent year for which data is available), and that figure surges to 40% for households headed by an individual who is 35 or under. The average household with student loan debt owed $26,682 in 2010 – over 243% more than the average indebted household’s $7,768 credit card balance at that time.
Fears therefore abound that student loans are poised to become the next sub-prime mortgages, swelling until we reach a crisis point and find ourselves getting pulled back into the cold grasp of international economic despair. The hope is that we figure out a solution before the problem gets too far out of hand. But how?
To help answer that question we turned to the following experts in the worlds of higher education, economics, and public policy:
We want people to be financially literate before they make one of the most important decisions in their lifetime, which is whether or not to invest in education. With college costs becoming so high and with the college premium we see in the market, it is more important than ever to acquire financial literacy in high school. It’s much more important today than in the past to choose which college to go to and how to finance that education. These decisions have to be made in high school and we need to equip people with the knowledge necessary to make them.
I don’t think they are prepared either when they come to college or even, many of them, when they leave here. Honestly, one of my goals for myself over the next year is going to be increasing our financial literacy activity, so we’re going to be reaching out to local school districts – high schools – and trying to present some financial literacy information in partnership with K-12. And then also, I’m hoping in the upcoming year that we’ll be able to implement some literacy activities on our campus too. But yeah, [financial preparedness] is sadly lacking. It’s good to talk to students about student loans. Some students are afraid to take on debt, and we don’t encourage borrowing here; we try to minimize borrowing as much as possible. Of course, we would always encourage students to take out federal student loans prior to private or PLUS loans because the rates tend to be better. But a lot of student populations, more of our marginalized populations, don’t always want to borrow. However, sometimes it’s better to borrow and take on some debt and actually get a college education, rather than financial obstacles preventing you from getting that degree. So, I think there’s kind of a balance there that we need to address.
For the most part, despite anecdotes, the literature is quite clear that education is still a good investment even for those who only attend for a year or two and drop out. In the down economy, the value of a college education has proven even more valuable. Therefore, I do not expect the same sudden shift as when the housing bubble burst. … Student loans already to a large extent are guaranteed by the government. They also have special exemptions in bankruptcy law. They also haven’t been bundled and securitized to the same extent as mortgages. Therefore, I really don’t think there is much reason to fear a systemic crisis due to student loan debt.
On the example being set for consumers by government:
I hate it when people take the government as metaphor for personal behavior too literally. The current national debt is about the same as GDP. That’s a bit like a person who makes $50,000 a year having a mortgage that costs $50,000, which really doesn’t sound too bad.
As for the cause of financial misuse, I don’t think it is entirely clear that financial misuse is as widespread as people imagine. There are certainly tons of anecdotes but on average, borrowing money to buy a house or spend on college are eminently reasonable financial decisions. If misuse has increased, it is likely due to changes in availability of credit, either through lower interest rates allowed by global financial market conditions, or new institutional lending forms like payday loans.
As for who should be responsible for personal finance education, economic principles suggest that the party responsible should be the one who could fix the problem at lowest cost. It’s not clear that colleges have a comparative advantage relative to other institutions to remedy this problem.
On his role with the White House:
The CEA [Council of Economic Advisors] had a few major roles. We were the in-house economic consultants, answering questions for the president and cabinet level officials. We helped craft economic policy. And we reviewed pending regulations.
The student debt issue (like most debt issues) is hard to disentangle from the larger eco mess–obviously it is hard to pay back debts when you are not working or working at a low wage job. Surely some people will default. But the key is figuring out a way to keep people form taking on so much debt. In addition to reforming loan practices … something clearly has to be done about sky-rocketing college costs. I work at a college and I know this is a huge problem.
On whether or not recession era bailouts are a key hindrance to student loan forgiveness:
I am not sure. It is hard to confuse students with big banks (or auto companies). But there are equity issues–why forgive student loans and not housing loans? But probably something will need to be done, if only because many people clearly will not be able to pay off the loans they currently have. But of course the long term is more important–we need to prevent problems like this from occurring in the future.
On the role modern political inefficiency has played in exacerbating our country’s economic problems in general:
The American political system was designed to block rapid and significant changes in political policy, right? I mean, everybody has taken a high school civics class, and the whole system of checks and balances and the way the American political system was designed – it’s federal, it has a whole variety of other kinds of structural features – is designed to create a government that can’t be too domineering, that can’t push society too fast in too radical a direction. When times are good, that’s great because it allows the greatest freedom for the very diverse communities that make up the United States. I think what happens, though, is you see when there are times when people perceive the need for pretty dramatic and pretty rapid action, that that system looks very inefficient. Now, I think that it’s probably true today that that inefficiency seems even greater simply because – in addition to the structural or institutional – deadlocks that are built into the American political system, you also have a more divided electorate and that makes compromise much more difficult. I think that it is true that the system is more deadlocked and more stymied today than it might have been in the past, but there are powerful institutional and structural impediments to radical change built into our system that have nothing to do with today.
I would hate public discourse to result in a lack of willingness on the part of Congress to continue to fund student loans because it’s really an importance source for a lot of students and families to make sure that either they themselves or their son or daughter has a chance at getting an education because there’s just not enough grant money to go around. It’s fair as a means of helping individuals invest in themselves if they’ve not had the ability or the discipline – sometimes it’s a little bit of both – to save in the past.
On the cause of skyrocketing student debt:
Well, the economy – as we all know – is a much more difficult place to enter right now with the hope of job prospects than it was, for example, in the early ‘70s when I was entering the labor market. The whole world looked like it was my oyster then because there was just more promise and it was easier to find employment. The problems since 2008 [have] made it a lot harder for young people.
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Ultimately, it seems that a number of different factors have conspired to make student loan debt the gigantic problem that it is today. Students clearly don’t know enough to make the best possible financial decisions, but it’s also much easier to get away with that when a job and a growing economy are waiting for you upon graduation. As our cyclical economy has shown in recent decades, we certainly can’t take such things for granted.
As a result, it’s important that we not only focus on improving financial literacy, but also that we come to think of education more as an investment for the future than anything else. In other words, when it comes time to decide where you want to go to college and what you want to major in, consider how the market for your chosen profession stands to change over the next five, 10, or even 15 years. Obviously, it’s important that you enjoy your job and are good at it, but you should also set yourself up to be increasingly in demand, rather than one of many applicants in a shrinking sector. After all, the fact that overall unemployment was 7.8% in September 2012 yet only 3.3% in the technology sector just goes to show that the right career can be almost recession-proof.
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