Hope she didn't major in art history.

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Three Charts Explain the Student Loan Mess

Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
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Here are three charts about student loans that have me worried. First, the total amount of student loans in the U.S. has risen steadily, doubling just since the financial crisis: 

This is troubling, although by now it’s a story that most people know. But what fewer people realize is that the federal government has rapidly taken over almost the entire student-loan market since the crisis. Federally owned student loans rose from zero in the mid-1990s, to a bit more than $100 billion on the eve of the crisis, to about $850 billion in late 2014:

This hockey-stick graph basically shows that the private student-loan market has collapsed. When I went to college, I took out loans from banks. That's becoming a thing of the past.

Now for the third chart. It isn’t just that the government is taking over the student-loan market. Student loans are taking over the government’s financial-asset portfolio:

Student debt now comprises 45 percent of federally owned financial assets. Of course, that doesn’t include assets owned by the Federal Reserve, and it doesn’t include real assets like land. Still, it’s a startling figure.
QuickTake Student Debt 

This trend worries me. Why? Because when the government owns student loans, it has every incentive not to fix the country’s student-debt problem.  

Consider the sheer size of the revenue that the government earns from student-loan interest payments. In 2013, it was $51 billion -- almost 2 percent of total federal revenue for that year. That’s more than two-thirds of the lifetime cost of the entire F-22 fighter jet program!

With that kind of money on the table, it’s going to be hard to get the government to take strong action for debt relief. A whole generation of millennials has been economically scarred by the financial crisis -- they borrowed to pay for school just like their older siblings did, but the capricious power of the business cycle left them with fewer jobs and lower wages even as they were saddled with record amounts of debt. It’s no wonder that delinquency rates on student loans have soared.

One way to bring that unlucky generation some relief would be to permit student debt to be expunged in bankruptcy. Democrats in the Senate are trying to allow that. But with Republicans in control of both chambers of Congress, this probably won't happen.

Instead, what we’ve gotten is President Barack Obama’s “Student Aid Bill of Rights.” The list of “rights” emphasizes students’ right to go to college, to take out loans and to pay those loans back quickly and easily. In other words, it’s exactly what you’d expect from a government interested in maximizing the revenue it collects from indebted college graduates.

If you think this sounds unencouraging, you’re not alone.

So what would happen if the Senate Democrats’ plan were to become law? Well, a lot of young people would file for bankruptcy. The federal government would lose some of its revenue, but not so much that it would appreciably change the long-term ratio of debt to gross domestic product. The gap would be made up with future tax hikes and/or cuts in spending. Those future taxes would be paid by successful millennials and their descendants, letting unsuccessful millennials off the hook. So it would have a redistributive effect, part of which would go toward canceling out bad macroeconomic luck.

It also might boost economic efficiency. Students who take out loans don’t tend to follow the strict rational decision-making process that economists often blithely assume. In other words, they fail to calculate carefully whether it’s worth it to take out the loans, and they don’t have a good idea of what it will take to pay off the debt. This means that many students who took out loans might have simply made a mistake -- a mistake that resulted in borrowing more than the economically efficient amount.

That mistake is increasingly being encouraged, aided and abetted by the U.S. government. It’s a shame, because without the constraint of that debt burden, many of our smartest young people would be free to expand their economic choices and boost their productivity. Let’s hope our government can put ideals above its own self-interest.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Noah Smith at nsmith150@bloomberg.net

To contact the editor on this story:
James Greiff at jgreiff@bloomberg.net