Mounting student loans in the US, causes and consequences

• Rising student loan debt in the United States after the recession
• Impact of student loans on the US economy

The student loans in the United States have witnessed continuous growth since the Great Recession of 2008. The total value of student loans stood at ~USD 1.5 trillion by the end of 2018, which is spread out among approx. 45 million borrowers. This mark a 157% cumulative growth in the last 11 years. Moreover, this is the second largest segment of consumer debt in the US after mortgages.

Furthermore, during the 2008 recession, Americans felt the need to gain the best education and maximise their skills so that their employability in the job market always remains high even during periods of economic troughs. Private colleges and universities took advantage of this situation and marketed their degrees as a value proposition that was sought after by employers. The number of students pursuing higher education in the United States significantly went up. Simultaneously, the tuition fee at both public and private universities also went up and made matters difficult for students. The wages earned through part-time jobs were insufficient to pay tuition fees. Student loans were issued at a very high rate as the demand shot up. Many of these degrees were not as valuable as they were made to appear and left many graduates unemployed or with low paying jobs. Additionally, interest rates on these educational loans also increased and made matters worse. All this increased the debt burden on students. Unfortunately, few students were unable to complete their education. Among the students, who completed their degrees few were employed and amid these some paid their debt after meeting their living expenses and hence, most students defaulted on loan repayments. These defaults began in 2011 when students graduated following the onset of the recession. Further, students attending private universities accounted for almost 50% of the total borrowers and also for 70% of the defaults. The delinquency rate was at its highest in 2012 at 11.73%. Currently, student loans have the highest delinquency rate of more than 10% as compared to other loans. The mortgage loans have a delinquency rate of 1.1% and auto loans have a rate of 4%. The delinquency rate for mortgages and auto loans have decreased since 2010, whereas for student loans this has remained the same. Addedly, the delinquency period for student loans stand at the highest level of 90+ days. All these factors point out to serious concerns in the financing industry. The delinquency rate has remained almost stable after 2012 and as seen in the below chart. Another interesting aspect of the delinquency rate is that the delinquency rate is high for small amounts of debt. This is so because the more expensive degrees such as law and medicine have a high value in the job market. According to the National Center for Education Statistics, 40% of the students pursuing an undergraduate degree do not graduate in six years and this percentage is even higher among students attending private universities. Further, students who complete a bachelor’s degree but are unable to find a suitable job pursue a master’s degree with more debt and eventually increase their debt burden.

The rise in student loans and delinquencies had a considerable impact on the economy. As graduate students faced the burden of loan repayments, they tend to delay their home purchases. This leads to a decline in the purchase of houses and apartments. In addition, the burden of debt affects consumerism as a whole. This impact has become more visible now. The youth below 35 years owned 32.2% of all the houses in the United States before the recession, whereas they owned 28.1% in 2016. and the homeownership of households dropped from 68.4% (2007) to 63.5% (2017). Prior to the recession, the student debt levels were below auto loans and credit card debts, but today it has surpassed these levels. Is this another bubble and can this have a recessionary impact on the US economy? The economists are divided on this issue. Some say that the debt is not a serious issue as mortgages, however, some are of the opinion that this can have a serious impact on the economy. The mounting corporate debt is rather a much graver concern according to many. Following the 2008 crisis, the interest rates on the US treasury bonds were decreased by the government. In such a scenario, the investors preferred to put more than usual money in corporate bonds, many with BBB ratings. It is speculated that the investment in corporate debt has been way more than the safe limit. The value of corporate debt outstanding is estimated at USD 1.4 trillion out of which more than USD 500 billion outstanding is present in BBB rated bonds. According to Fitch Ratings, many of these bonds are at present a downgrade away from being declared as a junk. If a series of downgrades occur, it will lead to a great monetary loss for the US economy. The share of corporate debt outstanding as a percentage of GDP is continuously increasing since 2010 and has now reached around 45%, which signals potential danger.

In conclusion, higher education is significant for any country to develop its human resources and it is a bad idea to do away with it. Many developed nations are able to achieve the goal of imparting higher education to their masses without imposing an unnecessary burden in the form of loans. On the other hand, if citizens of a country do not pursue higher education than this would result in job losses for locals to immigrants or outsourcing of work. A number of recommendations have been made to allay this problem. One suggestion is to make the colleges accountable for student loans. The US government is now considering the student loan forgiveness program but this program is highly debatable and is still under consideration. Alternatively, parents can be given tax credits for their children’s education. Another option would be to allow employees to include their student loan payment as a part of the 401(k) plan. The problem of mounting student debt may not be as grave as other debts, but this is affecting the economy as a whole and a solution to the problem will provide comfort to many.