Here’s what we do know about student loan debt: it’s roughly $1 trillion in size, greater than either auto or credit-card debt and second only to mortgage debt in the U.S.
Borrowers in their 30s today owe $28,500, on average. The debt burden has soared just as — and partly because — the recession hit, so younger graduates carrying the highest balances are hit with the double whammy of a weak job market (that still isn’t showing any sign of rapid improvement).
And
this all comes as globalization and technological change have upended
once-reliable career paths, wiped out many mid-level professional jobs
and leave low-paying fields in health, food and beverage services, and
retail as among the fastest growing job markets over the next decade.
Oh,
and consider that student loan debt remains one of the most difficult
types to forgive or discharge in bankruptcy, in part because the federal
government (i.e. taxpayers) made or guaranteed 80 percent of all
outstanding student loan debt as of last year. And finally, that once
loans in deferral or forbearance are excluded, the delinquency rate on
student loan debt was an estimated 27 percent as of the third quarter of
2011, according to a study by the New York Fed. Worried? Americans should be.
Still,
acknowledging the problem is perhaps the easiest step. Much more
difficult is the question of what to do about it. Not surprisingly,
young, heavily indebted grads are calling for forgiveness in full or in
part of their student loan burdens. Petitions on advocacy website
Change.org include calls for federal student loan interest rates to be
capped at 3 percent or eliminated altogether. (Indeed, President Obama
is currently among those urging Congress not to allow the interest rate
on federally subsidized Stafford loans, which are aimed at low — and
middle-class borrowers, to double to 6.8 percent on July 1, matching the
rate for unsubsidized loans.)
And
yet the trouble with those initiatives, or with forgiving student loan
debt in whole or part, is threefold. For starters, the straight
mathematics: the losses from any such debt reduction scheme will have to
be borne by someone, most likely taxpayers, at a time when government
finances are already stretched.
Second
is the issue of “moral hazard,” that is, rewarding and implicitly
encouraging imprudent behavior rather than punishing it. (Of course, it
is easier for the public at large to demand that over-leveraged banks be
punished for imprudence than 24-year-olds trying to further their
education.)
And third is the question of how to keep future
graduates from accumulating a mountain of student loan debt just as
large, if not larger, than the one just leveled.
It
is this third issue which perhaps is most pressing — and most vexing
—and which also offers the most opportunity for innovation. Levying an
“education tax,” making college free and assigning students to
institutions based on a lottery system? Abolishing “college” altogether
for more specialized trade institutions instead, while at the same time
requiring a “gap year” of liberal arts prior to entry? Offering
high-school grads the choice between student loans or business loans to
fund new ventures? These all seem ridiculous, but then so too is our
current state of affairs.
Our current system, in fact, has so failed that
it may now be exacerbating income inequality (by saddling low-income
students with high loan balances and shaky job prospects), economic
malaise (by keeping would-be homebuyers stuck in costly rentals because
of already high debt loans and/or poor credit histories, thereby
damaging both the housing market and potential consumer spending), and
long-term economic vitality (by hampering household and family unit
formations with a higher share of 20- and 30-somethings currently stuck
at home with mom and dad).
This,
in fact, is why it may be far less costly for taxpayers in the long run
to forgive as much of the current student-loan burden as possible.
Before doing anything like that, however, there must be systematic
reform to ensure debt loads simply won’t start to pile up again. (Not to
mention the need for repercussions for those borrowers who most benefit
from any such initiative, for the sake of fairness.) That is why the
need for innovation or overhaul is so pressing.
One
thing is certain: if we do nothing to alter the status quo, we will
have no one to blame but ourselves for the bleak outcome.
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