Student Debt

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In terms of American exceptionalism, student loan debt stands out. No other country imposes the kind of costs on college and university students that the U.S. does, and nowhere else do loans cover so much of those costs. Experts think that the roughly $1.3 trillion in outstanding education debt in the U.S. is more than that of the rest of the world combined. Undergrads at U.S. public and nonprofit colleges who borrowed and left school in 2015 had an average debt of $30,100. It’s a situation that educators, consumer advocates and members of both political parties all decry. Agreement on solutions is harder to find. In the meantime, young adults are delaying setting up their own households in the face of a mountain of debt. Recent studies also show a growing economic divergence between young Americans with and without student loans. There’s widespread agreement as to who is worst off: college dropouts. They’re stuck with debt but without the higher earnings a degree might have brought to help pay it off.

The Situation

In New York, Governor Andrew Cuomo, a Democrat rumored to have presidential ambitions, put forward a plan to cover tuition for any full-time student attending a state or city university whose family earns less than $125,000. His proposal goes beyond those of his party's 2016 candidate for president, Hillary Clinton, who called for a series of incremental steps to reduce student debt and rein in the cost of college. President Donald Trump hasn't offered the same level of detail on the subject. On the campaign trail, he mentioned the government's current role in originating more than $100 billion annually in federally backed loans and spoke of how two of the “biggest problems facing young people” are the cost of college and the challenges of repaying student loans. He has also mentioned the idea of income-based repayment. That's one area where the Obama administration forged ahead without Congressional action. The Education Department has sharply expanded programs in which struggling ex-students make payments calculated as a percentage of income. As of December 2015, nearly 4.6 million low-income borrowers had chosen that option. The income-based programs have a cost too: At least $39 billion over the next decade.  Details also matter: Government lawsuits filed in January 2017 against Navient, the loan servicer that handles about a quarter of all student loans, allege it took shortcuts that minimized costs and inflated borrower balances, perhaps by billions of dollars. Navient denies the charges.

Source: Federal Reserve Bank of New York

The Background

When the U.S. federal student-loan program began in 1965, its goal was to give students reliable access to funds that would help them get through college by deferring some of its cost until they had an income. Most loans were paid off in a few years, while the benefit of the degree lasted a lifetime. As the cost of college raced ahead of inflation, the federal loan program morphed into something larger and different. Commercial banks also ramped up their higher-interest lending for those whose needs exceeded the caps on federal loans. The biggest growth in the program came in the past decade, as student debt rose from $364 billion in 2004 to $1.2 trillion 10 years later, according to New York Fed data. After July 2010, the government cut out banks as middlemen in the federal loan business. Much of the savings was used to increase college grants, but some went to reduce the budget deficit.

The United States of Indebted Students

 

The Argument

Is the problem the loans or the cost of college the loans help students cover? A common criticism of proposals like Clinton's  is that they don’t address the root problem of above-inflation tuition hikes. Making it cheaper to borrow, that argument goes, only makes it easier for schools to raise fees. Obama proposed a system for rating schools on affordability that could be tied to eligibility for federal aid. Colleges hated the idea and it was dropped. Republicans and Democrats have called for giving students more information about their loans. When students at Indiana University were told how much they would owe after graduation, undergraduate borrowing dropped by $31 million in one year. Senator Bernie Sanders, who lost the Democratic nomination to Clinton, was the only presidential candidate to propose anything like the path many other developed nations have chosen, of higher taxes to make public universities free or cheap. It’s an approach that harks back to the U.S. system of state universities. It’s also under pressure almost everywhere in an era of austerity.

The Reference Shelf

    First published July 9, 2014

    To contact the writer of this QuickTake:
    Janet Lorin in New York at jlorin@bloomberg.net

    To contact the editor responsible for this QuickTake:
    John O'Neil at joneil18@bloomberg.net

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