Are student loans the next big threat to the U.S economy?

Several questions have been raised about the threat to the U.S economy, when the student loan debt reached a staggering $1.2 trillion (of which $1 trillion are federal student loans); with many unable to repay the loans and taxpayer’s being forced to foot the bill.

In the United States, loans are channelled to the students through two sources, federal lending programs and private student loans. Federal lending allows more students to access loans, whereas in the private lending system only privileged students can avail the loans. Student lending is inherently riskier as unlike physical capital, human capital or the skill acquired through education cannot serve as collateral against the loan. Moreover, the federal system guarantees that students receive higher education irrespective of their ability to repay.

Student-Loan-Debt

Most of the student lending takes place through the federal program because the interest rates are much lower than that on private loans. Interest rates on federal loans are set by legislation and do not depend on the likelihood that a borrower will default. Federal student loans carry additional benefits such as those who face financial hardship after leaving college are eligible to request reduction of monthly payments, and even forgiveness through a number of repayment programs.

Public universities increased their fees by a total of 27% over the five years ending in 2012. For two decades ending in 2012, college costs rose 1.6% more than inflation each year. Government funding per student reduced by 27% between 2007 and 2012 and student enrolments rose from 15.2 million to 20.4 million from 1999 to 2011, but fell 2% in 2012. There were around 37 million student loan borrowers with outstanding student loans in 2013. However, despite these figures there are conflicting views on how serious a threat this debt really is.

A crippling debt of $100,000 is true however, for only 1% of the graduates and according to ‘The Institute for College Access and Success’ (TICAS), the average borrower graduates with a debt of $26,600. The so called threat therefore may just be a mild hiccup. According to the findings of the brown institution (brookings) there is no evidence to suggest that the situation of borrowers has become worse with time. According to them, the average growth in lifetime income among households with student loan debt easily exceeds the average growth in debt, indicating, households in debt today are in a better financial position than households in debt two decades ago.

This being said, the staggering student debt is holding back the economy. The purchasing power of college graduates is greatly impaired due to the burden of debt. According to billionaire entrepreneur Mark Cuban “Anytime you create easy money, you’re gonna create a bubble or inflation and that’s what’s happening with college tuition”. A hike in college tuition has left a unconstructive social impact on society. After becoming aware of the debt they would owe after graduation the students of Indiana University reduced undergraduate borrowing by $31 million in a year. In recent years, tuition has been rising due to the cuts of government funding in education. For example, the University of Pittsburgh has had an increase in tuition of 3.9 percent for the academic school year of 2014-15. Moreover, taxpayer’s are suffering from heavy repercussions from this debt. A hike in tax to make universities cheaper has in fact left many consumers financially uncomfortable and has drawn heavy criticism.

The government has proposed several solutions such as low interest rates, having very liberal payment policies, offering more online courses, and constricting the standard number of years for a college degree from four to three. However, low interest rates and liberal payment policies both don’t reduce the debt but encourage borrowing. Also, increasing online courses defeats the purpose of development of quality classroom education.

According to Mark Cuban “The best way to fix the student loan bubble is to limit the allotted amount of loans each student is allowed to receive each year to no more than $10,000, that a cap on student debt would force universities to lower tuition and curb spending.”

Even though perhaps ones financial position is better now than two decades ago it doesn’t necessarily mean that it is all that good. The consequences of this debt have not only financially ill effects but also leads to social retardation with sceptical views on higher education. The opportunity cost of this debt is far too high to outweigh the few positives.

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