By Edward Hadas
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The fast increase in loans to pay for higher education is a trend that is moving in the wrong direction. The idea that borrowing should play an important role in financing higher education, now standard thinking in the United States and the United Kingdom, is financially dangerous and economically wrongheaded.
Overall, American households are deleveraging. Most notably, U.S. mortgage debt outstanding has fallen to 51 percent from 71 percent of GDP since the end of 2008, according to survey data from the New York Federal Reserve. However, over the same period the ratio of student loans to GDP increased to 5.7 percent from 4.3 percent. The $1 trillion now outstanding is economically significant. In England, the ratio of student loans to GDP is only about half as high as in the United States, but the 80 percent increase over the last five years has been even faster.
For the financial system, the growth is simply bad news. The last thing highly leveraged economies need is an expanding category of debt. Worse, student debt makes the financial system less secure and more complicated, thanks to high default rates and complex repayment terms. Also, student debt, like all debt, distorts behaviour. Heavily burdened new graduates are likely to delay such adult activities as buying houses and having children.
Few people would argue with these negative effects. But after decades of increased borrowing to pay for almost everything – housing, cars, holidays, government spending – it seems natural to use the credit system to put off paying for just one more desirable thing until some fine day when more money is available.