PMC Weekly Review - October 28, 2016

A Macro View – The Trillion Dollar Problem?

Nearly 45 million Americans, representing about 40% of those between ages 20 and 40, have student debt. Total loans outstanding recently eclipsed $1.3 trillion—higher than the amount all of Americans owe on credit cards—so it is no surprise that these figures have captured widespread attention. Throughout this heated presidential election season, the issue of student loans has been a common topic of conversation between both candidates. With the dollar amounts so daunting, and the number of Americans affected by student debt increasing, politicians, economists, and voters alike debate whether student loans benefit the overall domestic economy, or instead, could be the catalyst for the next financial crisis.

By way of background, student loans, sponsored by the United States Government as part of the National Defense Education Act, were first issued in the 1950s, and initially were offered only to select groups of students. The Higher Education Act of 1965 made student loans available to a wider group, and by the 1970s, students were borrowing billions of dollars each year. According to the Wall Street Journal, new federally backed student loans today total roughly $100 billion annually, as the price of education has increased far faster than the rate of inflation, and more people are pursuing college. Additionally, looser borrowing requirements and restrictions have made it easier to obtain student loans than in the 1950s.

With more than a trillion dollars in loans outstanding that are held mostly by millennials, those opposing the current student debt system believe this debt burden creates an unnecessary strain on our economy. Most notably, it is likely that student loan burdens prevent the younger working generation from making large purchases, such as automobiles or their first home, and even starting families—all of which support economic growth. Carrying this weight is also detrimental to this generation’s (and the economy’s) future, as it creates challenges in saving for retirement and building wealth at a crucial stage in their careers. Furthermore, this same group is concerned that the ease of borrowing and the sheer figures described earlier could signal a looming bubble that could, in turn, ignite another financial crisis. This can be compared to the housing crisis experienced several years ago, when lenders were overly lenient in their loan-approval process, and defaults ensued that sparked the Great Recession.

Conversely, proponents of student debt argue that in general, these debt instruments are more beneficial than detrimental to the economy. They point out that the majority of borrowers who are unable to repay their loans are those who dropped out of university and represent the minority of all student loan borrowers. Those who do graduate, particularly those with the largest student debt balances, go on to above-average paying careers and add to economic productivity, as they have been taught the skills employers seek. This group also contests the notion that our national student loan liability resembles the mortgage bubble, noting that student debt currently is a substantially lower portion of aggregate disposable income than mortgage debt was in 2007 (9% vs. 84%, according to the Wall Street Journal). Thus, this statistic, coupled with the fact that most borrows who default on student loans have lower debt balances, is not likely to trigger the next financial crisis.

Both sides of the student debt story are far more complex, but there is no doubt the issue has captured the public’s attention, as evidenced by its prominence in the presidential race. Although it seems unlikely that student loans will precipitate the next financial crisis, growing evidence suggests that America’s substantial student debt is a burden both for millennials and potentially the overall economy. Whoever wins the election would be wise to address the issue in a substantive manner.

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