Will Student Defaults on Loans Bring Down the U.S. Economy?
In tales of the economic miasma of the early 21st century (none but the great and powerful Krugman dare speak the D-word), the Debt-Ridden Student has become a stock character. She or he has graduated from college or is about to, saddled with mammoth loans accrued in order to pay rising tuition—and arrives in the work world only to find that the high-paying jobs that were supposed to repay all that debt have vanished along with Lehman Brothers.
In recent months, though, a new worry has emerged: In addition to destroying their own lives, are today's debt-ridden college graduates going to trash the economy as well?
It's the meme that will not die, reappearing with every study reporting new levels of student indebtedness. (Over $1 trillion! More than Americans' cumulative credit-card debt!) Mincing few words, William Brewer, chair of the National Association of Consumer Bankruptcy Attorneys, told The Washington Post last month, "This could very well be the next debt bomb for the U.S. economy."
Brewer minces only slightly more words in a conversation with the Voice. "My concern is same song, second verse," he says, noting that bankruptcy lawyers were among the first to raise red flags about the mortgage crisis. "We're seeing a tremendous amount of defaults." He points to a Federal Reserve Bank of New York study released last month that showed that 15 percent of Americans with credit reports have student debt, and more than a quarter of those are behind in their payments. While he acknowledges that student debt's "tentacles into the economy are not the same," Brewer foresees a "chilling effect" on such things as new-car purchases and the housing market, as graduates deep in debt are unable to qualify for mortgages.
Hogwash, responds Center for Economic and Policy Research co-director Dean Baker. "The numbers are just totally different," says Baker, who has some cred of his own when it comes to mortgage-bubble gloomcasting, having warned of an eventual housing crash as early as 2002. "We're talking about something on the order of a trillion dollars in student-loan debt. The housing-market peak was over $20 trillion."
What about indebted students reducing their spending as a result? "It's a damper, no doubt about it," Baker says. "That list of big purchases—first car, new house—those are things that undoubtedly many people will have to put off." As for the overall economy, though, he notes that the rule of thumb is that people spend 4 to 5 percent of their wealth each year. Even if you double that under the assumption that young people burn through their money like energy drinks, that's still only $80 billion a year. "That's a little over half of 1 percent of the GDP. It's not trivial, but it's not anything that's going to put us into a recession."
Still, that's not likely to be much comfort if you're one of those holding a share of that trillion dollars in debt—especially if you came of age in the last decade, when student debt was falling to historic lows. That all changed starting a few years ago, to the point where in the class of 2010, two-thirds of students graduated with some outstanding loans, according to the California-based Project on Student Debt. Average debt load per student: $25,250.
That number is rising an average of 5 percent a year, with no signs of slowing down, says Lauren Asher, president of the Institute for College Access and Success, which runs the Project on Student Debt. "Student debt has become a fact of life for more and more Americans and for the majority of college graduates," she says. "That was not always the case."
While rising tuition has gotten the most press, Asher blames a number of factors: "With the down economy, you have this painful convergence of less money in state coffers, less money in family bank accounts, more need and demand for education, and more eligibility for aid." The upshot, she says, is increased costs when students can least afford them.
As a result, loan-default rates are rising as well, in some cases, dramatically so. The number of students who default within two years of leaving school—"the tip of the tip of the iceberg of student distress," Asher says—has risen from a low of 4.5 percent in 2003 to 8.8 percent in 2009, the most recent graduating class for which numbers are available. And a study by the Institute for Higher Education Policy further found that for every student debtor in default, two more have already fallen behind in their payments.
A look at the New York City default numbers shows wide variation from campus to campus. Where most colleges, including NYU, Columbia, and CUNY, sport default rates in the low single digits, two schools—ASA in Downtown Brooklyn and Manhattan's Apex Tech—managed to send more than 1,000 indebted students out into the world (with or without degrees—the numbers don't distinguish) in 2010, more than 20 percent of whom have already defaulted.
ASA and Apex Tech are both private for-profit schools, and Asher says that this is par for the course for the growing industry: Nationwide, students at for-profits are more than twice as likely to default on their loans as those at public schools and three times as likely as students at private nonprofits, according to Department of Education data. (Not all for-profits are created equal, though: For-profit Monroe College in the Bronx managed to cut its default rate from more than 10 percent to just 5.6 percent in the most recent report.)
"Too many are borrowing a lot of money to get degree certificates that turn out not to have the value that they were led to expect," Asher warns. In some cases, students have gotten federal student loans to attend accredited schools, only to find that their particular courses were not themselves accredited, leaving them ineligible to take licensing exams.
Steve Gunderson, president of the Association of Private Sector Colleges and Universities, counters that because they cater largely to a poorer, more adult-student population, for-profits are inevitably going to see more defaults. "We're dealing with a constituency that, if not for grants and loans, would not have an opportunity to pursue higher education," he says.
Although students defaulting on their federal loans is a concern for the government, which gets stuck with paying off the lender and then acting as collection agency, it's no walk in the park for the indebted, either. Student-loan debt is unlike mortgage debt: Where a homeowner can, in a worst-case scenario, walk away from an underwater house and leave their bank holding the bag, you can't dump an unwanted college degree. Nor can you even duck out on student debt by declaring bankruptcy, as lenders are allowed to keep after you for repayment even if you've gone bust.
The only exception is in cases of "undue hardship," and Brewer warns that it's nearly impossible to qualify for. When clients come to him staggering under student-loan debt, Brewer says, he'll sometimes jokingly hand them a bus schedule. "They say, 'What's the bus schedule got to do with it?' I say, 'Well, you walk out in front of my office here, step in front of a bus, get yourself in a coma, I probably can prove undue hardship.'"
For those staring down a mountain of student debt, there are some options—so long as they're standard-issue government loans, at least. In 2009, the U.S. Department of Education launched Income-Based Repayment, under which debtors with low incomes can defer making payments on their student loans and can be absolved of debt altogether after 25 years. Indebted graduates can get loan forgiveness in 10 years if they're working in a public or nonprofit job, and under new rules issued by the Obama administration, starting in 2014 low-income debtors can have their payments capped at 10 percent of their income, down from 15 percent currently. (Asher's group runs a website, ibrinfo.org, that includes a debt calculator to see if you're eligible for the program; the new federal Consumer Finance Protection Bureau offers its own debt-repayment assistant at consumerfinance.gov.)
As bad as "stay poor for 25 years, and you're off scot-free" sounds, it's a breeze compared to what awaits those who've taken out private student loans, which make up an estimated 10 to 20 percent of all student borrowing. With private loans, warns Asher, "you're really at the mercy of your lender. They're underregulated, they mostly have variable rates—they have a lot in common with exploding mortgages." Loan companies can place you in default for being even a day late, as opposed to nine months of nonpayment on government loans. Some private loans don't even discharge on the borrower's death.
Several solutions have been proposed to untangle the student-debt mess. Brewer's group, predictably, would like to make it easier to unload student-loan debt through bankruptcy—something that was possible with private loans until 2005 and which U.S. senator Dick Durbin of Illinois has proposed be reinstituted. At the same time, a few dozen colleges, including Columbia, have pledged to change their financial-aid policies to cap or eliminate debt for low-income students, though it's uncertain how long this voluntary commitment will remain in place.
Meanwhile, students are casting a harder eye on the costs they'll rack up while earning a degree—when they can figure it out at all. Since last fall, all colleges have been required to post "net-cost calculators" on their websites, showing how much you'll actually pay per year based on your income level. These are still a work in progress, though: They can be hard to locate on school websites, and some (Columbia's in particular) require students to enter a daunting amount of financial information before learning how much they'll be expected to pay toward tuition.
"College pricing is still a lot more opaque than it should be," Asher says, and the convoluted loan world doesn't help any. She recalls an award letter she received during her time in graduate school for public policy. "I could not tell what was a grant and what was a loan. I had to call the office and say, 'Can you tell me what this acronym means?'"
With a student-loan system like this, the economy had better not hang in the balance.
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