Sunday, May 6, 2012

We Need to Address Student Loans & Student Debt
Today, we have reinvented debt-bondage via the university system. In the US, the OECD country where tuition rates are the highest relative to median income, the cost of decent tertiary education often exceeds $100,000 for a bachelor's degree and $150,000 for a master's. Given actual income and salary figures for Americans with a bachelor-level education, this constitutes an unsustainably high price level for education. 

Even in the best of economic times when jobs are plentiful, young people with considerable debt burdens end up delaying life-cycle events such as buying a car, purchasing a home, getting married and having children.  

The Effect on our Society
The amount of student borrowing crossed the $100 billion threshold for the first time in 2010 and total outstanding loans and exceeded $1 trillion for the first time in 2011.   Essentially, students and workers are borrowing extraordinary amounts to cover the rising cost of university education.  In fact, Americans now owe more on student loans than on credit cards. Furthermore, the National Association of Consumer Bankruptcy Attorneys reports that 25% of student loan recipients who graduated in 2005 have gone delinquent on the loans at some point, while 15% have defaulted. With rising debt comes increased risk, both to borrowers and to the economy in general. 

For the economy, higher private indebtedness levels mean less consumer confidence  (and indeed, less consumption), increased dependence on the economic cycle, and increased vulnerability to economic crises, unemployment, or anything else troublesome. It also means that people will be doing less investing in both themselves (such as by seeking more education), and in the market (which might have generated more employment).

On the personal side, high indebtedness amounts to serfdom. Ever-increasing tuition costs relative to other costs will not only lead to fewer Americans graduating from university, but also to increased mortgaging of the future for those who do. Just as the housing bubble created a mortgage debt-burden that absorbed the income of consumers and rendered them unable to afford to engage in the consumer spending that sustains a growing economy, student loans are beginning to have the same effect, which will be a drag on the economy for the foreseeable future. What’s worse, Bush-era bankruptcy law reforms make student debt completely undischargeable under bankruptcy proceedings.

Accumulating student debt in middle age is even more problematic because there is less time to earn back the money. It may also mean facing retirement years still deeply in debt.  Furthermore, parents who take out loans for children or co-sign loans will find those loans more difficult to pay as they stop working and their incomes decline.



How we Should Treat the Issue?
We need to invest properly in the productivity and competitiveness of our nation. Investing in human capital secures dividends for our nation, our economy, and our society. Like most OECD countries, the US has an economy that depends on the knowledge-base of its human capital-driven service industry in order to be competitive on an international level. OECD and US research indicate that this trend will only get deeper in the future. The more we drag our feet on this issue, the further behind the US will get compared to countries like Japan, Korea, and Germany.

In order to address the situation, a two-pronged approach is best. On one hand, tuition costs should be mostly paid by taxpayers. The argument for this can be justified by the simple fact that most of the benefits of higher education actually accrue to society at large, rather than the student. This comes in the form of increased employment levels and international competitiveness, as well as lower incarceration rates and improved health. On the other hand, currently outstanding student debt should be drawn down as efficiently and quickly as possible. This should take place by means of statutory pro-debtor statutory changes, as well as interest rate caps, and stricter application of anti-predatory-lending principles.

A 2012 study by the US National Association of Consumer Bankruptcy Attorneys found that aside from the proportions of the student debt problem and its productivity-draining effects on our economy, the stability of US student-loan debt may become the next trouble spot on the financial markets. The study recommends statutory reforms including re-instating the dischargablilty of student debt, and improved oversight of private student lenders.

About the Author:
Max Berre is a financial sector regulatory economist at the EDHEC-Risk Institute (Ecole Des Hautes Etudes Commerciales du Nord) who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands.

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