Do you think that student loan debt is only a problem for college students and perhaps their parents? Think again.
The escalation of student loan debt in the past decade is a millstone around the neck of the entire economy, and you are touched by its effects. Especially if you or someone you know has had a hard time finding a job or selling a home, part of what you are experiencing is the effect that escalating college costs, combined with the weak employment and income prospects of college graduates, is having on the economy.
This is a key reason why it is important to support Massachusetts Sen. Elizabeth Warren's legislation to lower student interest rates to 0.75 percent, the same rate that the nation's largest banks and private lenders pay to borrow money from the government. Simply put, the economy will continue to stumble as long as college students are carrying a student-loan debt burden that does not allow them to invest in their futures and choose to start a family.
During 2012, the amount of outstanding student loan debt in the country topped $1 trillion threshold, exceeding all types of consumer debt but housing. Just since 2003, the percentage of 25-year-olds and over with student loan debt increased from 25 percent to 43 percent, and the average loan balances have increased by more than 90 percent in that time, to $20,326.
Two government reports in the past month have raised the alarm about what that student-loan debt burden is doing to the economy as a whole.
The Federal Reserve Bank of New York released a report that included some stunning details. One of the most startling: Home-ownership rates among 30-year-olds with college debt dropped twice as fast during the Great Recession and afterward as did those without student loans. As a consequence, today 30-year-olds without a student loan, including those who have not attended college, for the first time in at least a decade are more likely to have a mortgage than those who are carrying a student loan. The trend lines are similar for car buyers.
A Consumer Financial Protection Bureau report released last week highlighted similar findings. "Generally, high student debt burdens limit borrowers’ ability to take on new financial obligations," the report said. "Younger consumers have increasingly shied away from forming new households," are finding themselves hindered in starting up new businesses, and are choosing to avoid such professions as teaching or primary care medicine, where pay is not high enough to enable them to pay down their loans.
This rising student loan debt is directly related to sharp increases in college tuition well in excess of inflation and a 25-year-low in state and local spending on college education. Robert Reich, former secretary of labor during the Clinton administration, recently compared student loan debt to the housing crisis, predicting that it is a bubble that will soon burst.
Similarly, economist Joseph E. Stiglitz described college debt as "a crisis that is about to break out" in a column in The New York Times posted Sunday night. "Like the housing crisis that preceded it, this crisis is intimately connected to America’s soaring inequality, and how, as Americans on the bottom rungs of the ladder strive to climb up, they are inevitably pulled down — some to a point even lower than where they began," he wrote.
College debt is the insult that adds to the injury that this economy is doing to people under 30. For 53 straight months the unemployment rate for 18-29 year olds has remained above 10 percent. Debt-ridden and either jobless or underemployed, too many of America’s youth are delaying once routine rites of passage: becoming first-time home buyers, getting married, saving for retirement and purchasing a car. In an economy where no one is spending, businesses have no incentive to invest and grow, reinforcing the downward cycle. It has prompted talk that for many people college no longer provides a positive return on investment. The only people profiting in the end are the lenders themselves, having used their political muscle to keep these loans from being refinanced or forgiven under certain circumstances.
Stiglitz points out that "America is distinctive among advanced industrialized countries in the burden it places on students and their parents for financing higher education." And he warns that the price the country will pay for not emulating countries that consider higher education a national investment rather than a personal privilege.
Without more help from the government, students and the economy will continue to flounder in the face of bleak opportunity. Warren's bill to lock in the same rock-bottom interest rates – 0.75 percent – for students that big banks receive is only one slice of what has to be a comprehensive plan to rebuild the economy so that it works for all of the young people trying to grab onto and climb the economic ladder. But it is an eminently reasonable key step. Sign here to support her bill and lift this millstone that is burdening the economy.
Derek Pugh contributed to this post.