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Is There a Student Loan Debt Crisis?

posted by Adam Levitin

I've been a skeptic for some time about claims that we have a student loan "crisis" in the United States. For individuals mired with student loan debt, it is very much a crisis, of course.  But my reluctance to term growing levels of student loan debt a crisis reflects the fact that student loan debt is highly concentrated within the population and is generally structured in a way that does not create sharp liquidity crises:  long (and often deferrable) maturities, no sharp repayment shocks, and often offers established repayment and forgiveness programs. (This is more true of government loans than private loans.) And, while student loan debt is growing rapidly, it is still only about a 9th of the size of the mortgage market. All of this has kept the student loan kettle from boiling over.  

Yet at the same time it is precisely because of the concentration of student loans in the younger population that it is concerning.  Large debt loads at the beginning of one's adult life are likely to have very different effects on than debt spread out over a life time.  Moreover, student loans are not incurred based on current income, but on assumptions of future income (if that), so student loan debt burdens are more likely to be poorly calibrated to borrower's actual earning capacity. Additionally, because student loan debt is not dischargeable in bankruptcy (except in extreme circumstances), unlike other types of debt, it likely to stick around.  And, unlike various types of secured debt, there is no "put" option. A homeowner who runs into trouble with a mortgage or a cash-strapped auto loan borrower can always sell the house or car (or let them be repossessed) to pay off part or all of the debt. That's not possible with unsecured debt.  

The real concern with student loans is not an acute liquidity crisis, like a mortgage payment resets or a massive surge in defaults, as with underwater homeowners.  Instead, the systemic danger from student loans is a debt overhang problem in which consumers' consumption habits are altered by the constant drag of debt service. That's not a "crisis" yet, but it's a problem that needs to be addressed before it becomes one. 

To the extent younger borrowers are servicing debt, they are not saving or engaging in present consumption. This is particularly a concern for the housing market as higher student loan burdens mean that the younger population will be slower to enter the home ownership market and will have less purchasing power when they do. Who bears the costs of that shift? Not the Millenials. It's the boomers and Gen X/Gen Y that do. When they look to sell their houses, there will be less demand in the market. In other words, student loan debt poses a threat to older Americans' retirement savings. If you're a homeowner currently, rising student loan debt is your problem too because it is eroding the market value of your home equity. 

Although I'm still hesitant to call student loan debt a crisis, what is clear is that if current trends continue it will become one. Student loan debt has grown on an inflation-adjusted basis 126% since 2006 (when the Fed started tracking student loan levels), and at an incredibly steady linear basis. Even if student loan debt is not yet a crisis, it is good policy to be addressing it now, when there are more options and it is possible to deal with it more rationally than when it has become a full-blown crisis. 

Some other skeptics of a student loan debt problem have argued that student loan debt isn't a real problem because it isn't substantially greater than auto debt, which no one thinks is a crisis about to happen.  There's about $1.36 trillion in student loan debt outstanding, and $971 billion in auto loan debt outstanding.  While student loan debt has much longer maturities than auto loan debt and is frequently deferred, consumers often replace one auto loan with another, so that they are constantly carrying auto debt. That helps make the figures more comparable. Yet, student loans debt burdens are substantively different from auto loan debt because of its generational concentration within the population, lack of income-based underwriting, non-dischargeability in bankruptcy, and lack of a "put" option. Moreover, student loan debt, unlike auto debt is growing at an incredible pace. 

The figure below graphs student loan debt, auto loan debt, and revolving debt from Q1 2006 to Q1 2015. The data comes from the Federal Reserve's G.19 statistical release. The revolving debt is probably 90%-95% credit card debt, with most of the rest being bank overdraft. The inflation adjuster is an annual BLS CPI adjustment. What's really notable about the comparison is how fast (and linearlly) student loan debt has risen on an inflation-adjusted basis.  Auto debt burdens today are basically back to where they were in 2006. Over the past decade, auto debt has grown by 5% on an inflation-adjusted basis.  Similarly, revolving (credit card) debt burdens has grown 19% (but still haven't regained pre-CARD Act heights).  Student loans, in contrast, have grown a whopping 126% on an inflation-adjusted basis. That bespeaks a real problem in the making particularly because they are so heavily concentrated with a generational cohort. 

Student Loans and Auto Loans and Revolving

 

It's not obvious to me how to fix the student loan debt problem; there are drawbacks to all of the proposals around. But we'd do far better addressing the problem now than in a decade or two, when it starts to really weigh on the economy. 

 

Comments

http://www.247bankruptcy.net/
As we observe, our population getting bigger. In every school, no wonder that the population of the students may increased. Many students avail on loans. It may affect and become the crisis. One reason is some are paying irresponsible of their debts and the other is a big population of students using student loans.

You point out that student loan debt is a problem for older generations because it reduces demand when they sell assets. Adam blogged last month that a key argument against making student loan debt dischargeable was an intergenerational problem, i.e. why should people 40+ have to pay indirectly through government guarantees the cost of discharging student loan debts of those under 40. Do you disagree with him?

I don't always agree with myself. : )

In this case, I think I'm both right. Many older Americans are homeowners. Student loan debt for younger Americans will affect their home prices (but how much I don't know). But not all older Americans are homeowners. And even for the ones that are, we don't know how the costs net out.

"Instead, the systemic danger from student loans is a debt overhang problem in which consumers' consumption habits are altered by the constant drag of debt service. Although I'm still hesitant to call student loan debt a crisis, what is clear is that if current trends continue it will become one."

No offense, but your blog worthy attempt at explaining away a student loan crisis seems awfully familiar to another infamous bubble that the best and brightest refused to acknowledged for many years...

1927-1933 Chart of Pompous Prognosticators
http://www.ritholtz.com/blog/2006/11/1927-1933-chart-of-pompous-prognosticators/

Your background is an ivory tower and you live in the alternate reality that is DC. You're not on the ground witnessing the crisis. You haven't seen the bankruptcy petitions of 35 year olds with $40,000 in student loan debt, that by the way, started out at $20,000 before the default/deferment during the recession. You're not in state court defending against the tens of thousands of National Collegiate Student Loan Trust private student loan lawsuits being filed nationally each month. You're ignoring that something like 40% of all student loans are in default, deferment or forbearance and higher for non-direct loans.

You're ignoring the delayed life choices of debtors, such as waiting to get married (if ever) delaying child bearing, delaying buying a house, delaying new car purchases. You haven't seen the $200 a month of debtors go to Nelnet instead of into their 401k or emergency savings.

Me personally, I've been paying hundreds per month to Aunt Sallie and Uncle Nel for the last 10 years to repay my student loans. That money could have gone to consumption or savings, but instead, it helped Al Lord build and maintain his very own private golf course outside of DC.

And for my final and most poignant criticism of your post, I'll quote Upton Sinclair:

“It is difficult to get a man to understand something, when his salary depends on his not understanding it.”

Your very salary as a professor depends on student loan debt. Tuition at Georgetown is $53,130 per year. In 2004-2005 it was $33,055. That's a 61% increase in 10 years. The inflation rate during that same time period has only been roughly 25%...you don't think that the freely available government backed nonchargeable student loans have ANYTHING to do with this?

Again, no offense, but you don't because your salary depends on 22 year old kids taking out $53,000 a year plus room and board to pay your salary, and all you see are the best and brightest Georgetown grads get good jobs in DC or NY. But at your general 4 year local and regional schools that produce engineers or teachers, the debts are enormously burdensome.

http://articles.baltimoresun.com/2007-10-27/news/0710270297_1_lord-sallie-mae-golf

He's building his own, an 18-hole golf course on land he's acquired amid shuttered tobacco farms and grazing horses in southern Anne Arundel County.

Lord, 62, is steering $15 million toward Anne Arundell Mannor, a 7,100-yard, par-72 course for him and up to 100 members in Harwood. During the past three years, the Annapolis resident has assembled about 335 acres with the goal of playing golf his way.

"I hate rules," he said.

Gone will be the limits he finds onerous at private clubs, such as a ban on wearing golf shoes in the parking lot. "There won't be any rules. ... Well, there will have to be some rules. You can't take your car onto the fairway."

Wealthy enthusiasts across the country are putting up millions to build private sanctuaries. Few, though, are spending more than Lord, golf architects said.

"You point out that student loan debt is a problem for older generations because it reduces demand when they sell assets."

As shown throughout this current housing boom, cheap housing prices only marginally results in lower home prices buyers, but rather, institutional investors swoop in and pick up lower priced homes in volume, and their frenzied buying creates an entrenched class of renters, as shown by the 63.7% home ownership rate in the US, the lowest in 25 years...

So really, there isn't reduced demand, just less of an ability to pay higher prices; and the institutionalized investors can always outbid the student loan debtor by a few dollars....

It's OK Adam, self-contradiction isn't a bad thing.

I suppose I would pose the question again: Isn't this talk of intergenerational transfers from discharging student loans just a rehashing of Zywicki's "bankruptcy tax" argument, i.e. debt discharges are bad because someone other than the debtor eats the cost?

Ultimately, we need to put on our utilitarian hats and find the greatest good for the greatest number of people. Discharging student loan debt imposes some cost on older Americans for a benefit to younger Americans, but we've already identified one benefit to old Americans here, even if not all of them will share in it. I'm sure we could brainstorm others. Also, to the extent the US government eats the cost, it's not as if it runs a balanced budget; the increased deficit is something younger Americans will have to contend with decades hence, and a burden they will share in.

My problem with student loan debt is somewhat different. It's unequally distributed, with lower-income graduates much more burdened and likely less able to obtain the kinds of jobs that will enable them to repay their loans easily. High wage jobs not only require a university degree, but a pedigree that makes for a "good fit" in the sectors ruled by others with elite degrees. This will likely exacerbate income inequality in the future, as marginal good jobs are outsourced or eliminated.

If there is going to be a proper student loan "crisis", its cause will likely be rooted in culture. While I agree that the repayment structure of a typical student loan does not pose an acute liquidity risk to the individual debtor, there remains the systemic risk of a potential mass default - not due to an inability to pay, but due to Millenials' disillusionment with the legitimacy of the obligation.

Most of my fellow Millenials do not feel a sense of duty to repay their student debt. They feel they were duped by trumped up promises about the value of their degrees. This article captures the attitude of many of my fellow graduate students re: student debt: http://www.nytimes.com/2015/06/07/opinion/sunday/why-i-defaulted-on-my-student-loans.html?_r=0

Sure, it's easy to place the blame on the Millenials - "You should have done your research about the job market before taking on all that debt!" But honestly, how many of the Boomer generation sat down and performed a DCF on their projected future income to decide whether college or a particular major was worth the investment? How many members of Gen X? The American romance with education has always been grounded in narrative, not in calculation, and Millienials followed the promises of that narrative just as blindly as their predecessors. Now that many of us find ourselves saddled with more debt and fewer prospects than previous generations, we've lost faith in that narrative - and isn't that the root cause of every financial crisis?

There may be no student loan crisis today, but if an entire generation is unable to increase its quality of life after 10 years or so of debt service and subsistence-level living - well...we should be very concerned for the future.

I suppose I shouldn't just dump another perspective on the problem without also proposing some solutions. Maybe we ought to:

1. Examine the feasibility of funding education with equity instead of debt. Some complain this approach smacks of indentured servitude and slavery...but we're already pretty close to that under the current debt regime.

2. Segment and tailor professional education to lower price points (e.g., create a low-cost legal education program to train the lawyer equivalent of a physician's assistant).

3. Find some way to add a little social cache to the trades. It is mind-boggling to me how debt-laden 21-year-olds still sneer at the plumber or electrician who is clearing $70k+ per year.

Another difference between auto loans and student loan debt is that a publicly funded college education used to be (in theory) a public good designed to create human capital that benefits everyone. Not so car ownership. Although student loan debt may still be technically affordable for some percentage of graduates, increasing debt means a steady erosion of the benefits of human capital creation. At a certain point you have to ask if we really want a higher education finance system that eats up the entire college wage premium with debt service.

Also consider the impact on retirement savings ... grads in their 20s not only can't afford to save for a downpayment, but they may also skip funding their retirement accounts, losing a big chunk of compounding interest.

Do you think that somewhere in the creation of these loan products, that someone like Bill Dallas (Mindbox, Ownit, etc.) may have figured the bases were covered because the student debt could be paid off when the students progressed into buying a home? Much like wrapping car loans and credit card debt into an inflated appraisal value? The eternal debt slave theory?

My comments are being eaten. And they aren't even obscene. Unless you're a bankster.

We now have a system where the traditional institutions have put time limits on obtaining degrees, so you don't have the time to work your way through school. They are effectively saying, "Quit that job kid and take on some debt." Then they rain down moral outrage when the graduate can't get meaningful employment and service the debt.

The for-profit schools are even worse. They prey on the most desperate members of society and offer questionable training, because their real purpose is to create nondischargeable debt to be packaged and sold. Want to talk about moral hazard?

We keep asking about the social utility of allowing graduates to discharge their student loans. Perhaps it's time to ask about the social utility of lending to wet-behind-the-ears 18-year-olds and end-of-the-tether 55-year-olds so they can buy a pig in a poke and be stuck in what amounts to a debtors' prison.

Knute Rife -- I checked the spam folder and I did not see any comments from you. If you keep having problems, let me know.

http://www.washingtonpost.com/news/get-there/wp/2015/07/09/these-20-schools-are-responsible-for-a-fifth-of-all-graduate-school-debt/


20 colleges represent 1/5th of graduate student loans for the 2013-2014 school year.

Georgetown was #15 on that list with almost $215,000,000 borrowed.

Um, you might want to look at a per capita debt figure. Aggregate figures could just mean that there are a lot of students with small borrowing. And you might also want to adjust it for cost of living in the region. And once you've done all that, you might want to adjust it for graduates' salaries. At that point you might start to get a meaningful figure. I don't know what that figure is, but I'd wager that G'town isn't in the top 20, as most of G'town's graduate student debt is for professional schools (law, business, med), which have pretty good post-graduation earnings.

I'm just the messenger. Your beef with the figures come from the Center for American Progress (CAP)

https://www.americanprogress.org/

But regardless, the Georgetown U key facts webpage says there are 10,213 graduate students (17,849 students minus 7,636 undergraduates). $215,000,000 divided by 10,213 students is roughly $21,000 per student. That's just Federal money. It doesn't include private student loans.

Again, no offense, but your summary dismissal of the figures above just goes to show how difficult is for not just you but nearly everyone involved in the education industry to admit there is a problem with student loan debt. Your salary is directly correlated with 22 year olds borrowing on average $21,000 in graduate student loan debt per year. The more they borrow, the better income and job security you have. It's self-interest. The problem is that you're an influential professor at a prestigious university who proclaims that debt burdens aren't a problem 'yet' when nearly everyone outside of the industry sees that there is. It's not just among the for profits, it's also among the elite colleges too. And that's an affront to the millions of students out there with student loans out there who've made significant sacrifices in life due to burdensome student loan debt.

There are bail out strategies that don't strike me as particularly expensive. Namely, the interest rates on student loans are simply too high.

Graduate Direct Loans 6.21%
PLUS Loans Grad PLUS & Parent PLUS 7.21%

These might be fair, market based rates considering the risk involved in student loans. However, student loans are supposed to be a social good and if they are justified, they should be further subsidized.

Interest rates are at record lows. A facility to reduce these interest rates to a level of no more than a mortgage seems equitable to me. In a world of 4% mortgages, 4% refinanced student loans seem entirely reasonable. Or, at minimum, a 5 year ARM with a cap of no more than the current rate.

To the extent that these loans are already government guaranteed, there is no reason for borrowers to pay a risk premium.

Cut the interest rate in half and the burden is close to halved. It isn't that this isn't already being done by/for some in credit markets. https://www.sofi.com/refinance-student-loan/

Stamp em, securitize them, and sell them to yield starved investors.

Get the payments below that of a typical car payment. $100,000 in student loan debt financed on the same terms as a 30 year mortgage @ 3.92% would have a monthly payment of $473. $30,000 at 3.92% for 10 years is $303.

Bailouts have an unjustified bad reputation. Refinancing at lower interest rates can, and probably would, reduce the total costs to lenders. The AIG bailout returned $20 billion of cash. TARP as a whole was break-even.

As far as moral hazard ... I don't think students got into these situations intending to default on loans. In the future, schools should limit loans to payments of $100 per month per year for 10 years. That's $10,000 per year at 3.92%.

And if education is an investment, then schools should compete on the basis of price. And if the value added of prestige is an investment, then let the schools bear the risk.

The housing crisis was partially fueled by an assumption that consumption was an investment. And by allowing lenders to fully transfer risk to other parties.

A BA in humanities is a luxury expense and not an investment. And the schools fully transfer the risk to other parties.

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