William Dudley, president of the Federal Reserve Bank of New York, delivered a speech on Wednesday morning that drove home just how dangerous an investment student loans are for American taxpayers.
Speaking at a conference on student loan data, Dudley outlined the consequences of the unique way the U.S. government lends money to people for college.
Government student loans are the only type of consumer debt that gets issued without the lender accounting for the possibility that the borrower wont repay the loan. Dudley explains:
“Unlike virtually all other forms of credit, student loans are generally not underwritten: They are frequently offered to young borrowers who have little or no credit history and little to no current income.” (Since it is not getting paid for the risk it takes in the form of superhigh interest rates, the government takes draconian measures to make sure it gets its money back, making it basically illegal to discharge student debt in bankruptcy and reserving the right to extract payment from people's wages, tax returns, and Social Security income, in some cases.)
Obama has expanded programs that allow students to make payments based on how much they earn, which is good for financially stressed students, but it also means that debtors are paying less back to the government. Dudley notes that people whose student loans became due in 2009 have paid off only 17 percent of what they originally owed.
On balance, research has shown, going to college and becoming a deeply indebted twentysomething is a sacrifice worth making, for many people. The financial return of going to college, vs. leaving the classroom after high school, is higher than it has been in a long time.
That's exactly the point of sending people to college on the government’s dime: generating human capital—college graduates with the skills and degrees to land good jobs that let them pay taxpayers back—that will theoretically make the economy healthier.
This doesn’t mean that college is right for everyone, or that all colleges are right for anyone. People who got vocational training or went to certain for-profit schools could earn less over their lifetimes than those who attended more mainstream colleges, Dudley noted. “Some people who take out student loans don’t end up with these high average returns. The net returns for some may, in fact, be negative.”
So when the government invests in the potential for an educated labor force, it disburses loans to everyone at the same interest rate, not just the people likely to join that crop of well-employed future workers with valuable credentials. In turn, that investment yields uneven results. Dudley’s speech suggests that for taxpayers, and for some students, student loans are often a bad deal.