An Educated Look At Student Debt

My family was ahead of its time in being mindful about the affordability of college. My high school grades were good, and there was no discussion as to whether college was right for me, but our budget for tuition was limited. We had the benefit of living near an urban center, with many universities within commuting distance. I applied to a short list of nearby schools and selected the one that granted the best scholarship support. The financial frame simplified the decision and allowed me to graduate debt-free.

Most collegians do not have the same good fortune. The student debt burden in the U.S. now totals over $1.5 trillion, with over 40 million borrowers carrying a balance. The average loan amount has nearly doubled from $17,800 per individual in 2006 to $34,900 today, according to TransUnion. A quarter of all loans are in delinquency, forbearance, or deferment. Everyone involved in the higher education market: universities, students, parents, employers, and the American government must play a role in addressing this issue. The nation's collective education is at stake.

Schooling is still, in general, a very useful thing. The return on investment in education is positive, granting access to a wider assortment of better-paying jobs. The median lifetime earnings of a holder of a bachelor degree are nearly a million dollars higher than the earnings of a high school graduate. In a knowledge economy, the accumulation of human capital is critical to success.

But higher education has gotten very, very expensive. Increasing demand and stable supply have put the pace of inflation in higher education well above that of general inflation for decades. And a concurrent rise in the popularity of graduate degrees, which usually charge higher tuition rates, has pushed total debt balances ever higher.

Student loans are not like other consumer obligations. Over 90% of student debt is issued by the U.S. Department of Education. The credit decision and interest rates on student loans are not based on the applicant's credit risk. Loans are available to nearly any student enrolled in a degree program. The government's role makes some sense, as education is, in many senses, a public good. But it also means taxpayers are on the hook if student loans go unpaid.

Defaulted loans are treated differently, as well. Unlike home mortgages and auto loans, the education underpinning a student loan is not collateral that can be repossessed. To mitigate the moral hazard of default, student loans cannot be expunged in bankruptcy and will remain on the consumer's credit file as long as a balance remains unpaid. (As shown below, a surprising number of people over the age of 40 still owe student debt.) As of September 2018, 11.5% of student loan balances are at least 90 days delinquent, continuing a rising trend.

Struggling graduates have alternatives to falling into default. In the six months following the student's graduation, the loan enters a grace period in which no payments are due. Deferment is available to payers who return to school, enter military service or experience a temporary economic hardship such as a job loss. Servicers may also grant forbearance in the event of financial hardships, but often on less generous terms than deferment.