Student Debt May Land Double Whammy on U.S. Growth

Agenda-Setting Financial Insight.
March 21 2012 7:02 PM

Student Debt May Land Double Whammy on U.S. Growth

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With the government owning or guaranteeing some 80 percent of the college debt market, most of the pain from either restructuring or forgiving student loans would fall on taxpayers.

Photo by Spencer Platt/Newsmakers

Student loans could be the next asset class to school the United States about poor debt management. Graduates are now forking over more of their disposable income in repayments than 10 years ago, defaults are rising and with Uncle Sam now directly holding $450 billion of student debt, taxpayers are on the hook again. That could put U.S. higher education in the embarrassing position of hindering, rather than helping to fuel, economic growth. 

Here’s how: first, the size of the student loan market has mushroomed. Bachelor-degree debt at graduation has grown 250 percent over the past decade, according to finaid.org. At $867 billion, it exceeds both credit-card and auto debt in the United States, according to a study by the New York Federal Reserve. If this trend continues, by 2021 it’ll be equivalent to 1.3 percent of GDP, triple its current level, assuming GDP cleaves to its 4.5 percent 15-year average nominal growth. 

Next, average payments have risen by 83 percent over the past decade while median income for those aged 25 to 34 has increased by just a fifth, according to the Bureau of Labor Statistics. That leaves less money for graduates to spend or save. Extrapolate ahead 10 years, and former students will be paying $125 billion extra a year. By then, that would equate to two-thirds of a percentage point of GDP. 

That’s assuming all the debt is repaid. But delinquencies on active student loan balances already stand at 27 percent, according to the NY Fed. And a recent National Association of Consumer Bankruptcy Attorneys poll shows bankruptcy lawyers overwhelmingly expect delinquencies to rise. 

As the campus-loads of debt continue depleting graduates’ spending power, calls to reduce the burden of these loans are likely to escalate - especially since borrowers can’t shake off student debt in bankruptcy. Just on Tuesday, a Senate hearing pondered how to provide “fairness” for those stung by the looming student debt crisis. With the government owning or guaranteeing some 80 percent of the entire market, most of the pain from either restructuring or forgiving student loans would fall on taxpayers. That’s an education most would prefer to avoid.

Read more at Reuters Breakingviews

Daniel Indiviglio is a Reuters Breakingviews columnist, based in Washington, where he covers the intersection of politics and business. He joined from The Atlantic, where he provided analysis on topics such as financial regulation, housing finance policy, the Treasury, and the Fed.

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