America’s debt-laden students need better policy solutions
Millions of American students are now embarking on that modern rite of passage: starting college. But as they begin classes, there is a chilling statistic that we all should study. Since 2006, outstanding student debt has quietly tripled to $1.6tn — nearly $35,000 per borrower.
That makes it the biggest source of non-mortgage consumer lending, representing around 7 per cent of economic output. It also makes the American government “the largest consumer lender in the United States”, since most loans have federal backing, as Caitlin Zaloom, an anthropology professor, notes in a compelling new book Indebted.
This is startling — and scary. Doubly shocking is that this explosion has hitherto sparked little sensible policy debate or action. Elizabeth Warren, a leading candidate for Democratic presidential nominee, recently made waves by proposing a tiered system for cancelling student debt, based on income. Bernie Sanders, her rival, wants a more radical blanket amnesty.
Those ideas sparked scorn from Republicans and unease from moderate Democrats. But there is a paucity of alternative plans — this is alarming, not just for American families but investors. The debt creates a debilitating economic drag by reducing consumption, entrepreneurial activity and household formation among millennials. “We have been building a bigger bubble [with student debt] than the real estate bubble,” says Dan Rosensweig, chief executive of Chegg, which provides student services. He argues that “the impact is much bigger than most people realise”.
What explains the tardy policy response? Prof Zaloom suggests that voters, until recently, were reluctant to scream about their pain because it is taboo in America to reveal details of household finances — and college attendance is a defining trait of middle class identity. “Most parents and students view their struggle . . . as a personal and private problem,” she writes.
The lobbying power of the education finance business has also impeded reform. In addition, student debt is a slow-burn crisis that rarely delivers headline-grabbing events.
However, senators Warren and Sanders have now thrown the issue into the spotlight in a way that should force other politicians to respond. Not least because these two now enjoy high popularity among younger voters, partly because of their stance on debt.
In reality, their proposals for mass debt forgiveness are unlikely to fly. Another cultural trait of modern America is distaste for debt amnesties. Note that Barack Obama did not deliver debt forgiveness for subprime debt, even though the latter helped cause the 2008 crisis and hurt many poor voters.
However, there are other ideas being tossed around that should be adopted. One is to develop occupational alternatives to college. These are already emerging: Mr Rosensweig points out that some company executives are so spooked by the mounting debt that they are offering in-employment training.
This company training could be supported by additional tax incentives. More radically, groups like Chegg think students should be allowed to count more of their loan repayments against income tax. (Right now, borrowers can only deduct up to $2,500 of interest each year.)
There is also a strong need, as President Donald Trump has acknowledged, to make the student finance system more transparent and simpler. And there is a very strong case for slashing the interest rate on loans. This currently stands at 4 to 7 per cent for federal loans, and close to 10 per cent for private debt, which is outrageous given current Treasury yields.
My favourite idea is one recently put forward by Sheila Bair, former head of the Federal Deposit Insurance Corporation: “income share agreements” in which a lender funds education in exchange for a small percentage of the borrower’s future income. This would reduce the strain on young workers. Right now one-quarter of federal loans fall into default. However, it would be more fair than blanket debt forgiveness, given that college-educated workers tend to have higher salaries.
Of course, a huge drawback is that “income share agreements” are not as eye-catching as a blanket amnesty. But it could probably win widespread support, even on Wall Street. Many financiers are becoming seriously concerned that the student loan problem is creating economic drag and fuelling anti-establishment politics.
Either way, ignoring the issue now looks as untenable as a student ignoring homework. America’s grown-up politicians should take note.