U.S. student debt on scary trajectory

July 18, 2012

By Daniel Indiviglio
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

U.S. student debt is on a scary trajectory. New statistics from the New York Federal Reserve show just how steep it is. Education loans are piling up at an unsustainable rate and delinquencies are rising despite the slowly improving American economy. Instead of trying to tackle the problem, Washington’s policies continue to exacerbate it.

Student loans in the United States have surged to $900 billion from $360 billion in just seven years. Even as the U.S. housing bubble inflated between 1999 and the start of 2006, mortgage balances didn’t grow that fast. The bursting of that bubble triggered the worst recession since the Great Depression. Sure, the numbers were considerably larger. But there’s enough student debt to cause trouble – more than auto loans or credit card debt, for example.

And people are struggling to make their payments. The Fed’s numbers show that a startling 12 percent of borrowers aged 40 to 49 are at least 90 days behind. That’s a demographic that should be in the prime of their careers and free of such stress. The unemployment rate for that group is probably under 7 percent, according to Bureau of Labor Statistics data, significantly below the national average of 8.2 percent. Moreover, though joblessness has declined from its late 2009 peak of 10 percent, most age groups are experiencing higher rates of student loan delinquencies.

The implication is that even as the U.S. economy slowly improves, many Americans will continue to struggle under the weight of borrowing that was supposed to bring them qualifications and well-paid jobs. Most of the loans are backed by taxpayers, raising the prospect of huge writeoffs for the government down the road. But instead of working out how to curb the growth of the loans, policymakers continue to subsidize student borrowing. Just this month, President Barack Obama signed legislation to keep the cost of education loans at a below-market 3.4 percent.

Making further borrowing ultra-cheap is the wrong medicine. At the recent growth rate, Americans’ student debt will exceed their credit card and auto loan balances combined within five years. With incomes growing only slowly, something will have to give.

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This is akin to the healthcare problem, b/c like healthcare, higher education is a truly unique economic good, in that it’s viewed as ‘essential,’ meaning people will pay pretty much whatever the going rate is, and many will pay more for what they perceive as a ‘better’ version, regardless of whether that actually is true or not.

Because of this, higher ed institutions are more or less in a monopoly context, not in that there is only one school to choose from, but there is only one industry to choose from, and as the upper end of that industry (Ivy League, UChicago, Northwestern, Stanford) raises prices due to its huge demand for a tiny supply of slots, others do the same, in order to compete for students and retain faculty.

Until there is an across the board drive by higher education institutions to not only control costs but control them to a point of inflation or less, this problem will never end, and until the idea that “a good university education = success in the labor market” is roundly disproven (it won’t be), this problem will mostly likely never end.

I do not regret the buckets of money I spent getting my two year grad degree, because I was fortunate enough to get into a truly upper tier school, where the money will come back to me. But, it’s truly frightening to see non upper end private schools, whose graduates have not nearly the chances of success, paying literally the same amount of money.

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