Student Debt and Public Policy
June 23, 2015
Post-secondary education has long been considered a prerequisite for career placement and advancement. The reliability of this premise has, however, come into question with the exponential rise in individual, student debt levels due, in part to, increasing tuition rates. According to the Wall Street Journal, the class of 2014 is the most indebted ever, with the average graduate having accrued $33,000 in debt. The worsening trend speaks to the need for intelligent discourse and public policy intervention.
By Alex Kraik, C’16
Student Debt Statistics
Previously only affecting the lower and middle classes, the domestic debt crisis now impacts even society’s affluent. In the 1990s, less than 50% of college students graduated with debt; today this number exceeds 70%. Included in this number are graduates from upper-income households. From the 1990s to the present, the percentage of wealthier graduates with student loan debt has risen from 34% to 62%.
Just as the numbers of borrowers has increased, total borrowings have also risen substantially. In 2013, students borrowed $110 billion, as compared to a mere $24 billion in 1990 (adjusted for inflation). Currently, the total debt of American students sits at a record high of $1.2 trillion. This sum has increased 84% since 2008, and there are no indications that this trend will reverse itself.
Perhaps most troubling is that while students have accumulated more debt, the salaries for those most burdened - workers between 25-34 years old - have reciprocally decreased by a median of 2.2%. Furthermore, the Department of Labour informs that in 2014 there were approximately 273,000 college educated people who made an hourly wage equal to or lower than the federal minimum of $7.25 per hour. Indeed, the average age of individuals who earn minimum wage in America is 36. What this means is that while increasing numbers of students are funding their economic futures through student debt, the job market remains sickly. It is not creating sufficient numbers of (quality) jobs as might permit students to repay aggregate borrowings.
The fact that such a large percentage of young adults are burdened by student debt is not merely an individual matter. Notably, the federal government is the source and backer of most student loan debt. It is troubling, therefore, that in 2012, the Federal Reserve Bank of New York found that greater than 30% of borrowers were delinquent in their repayments (over 90 days behind), with most of those in default being under 30 years of age. Quite simply, any large-scale default on student loans would have catastrophic effects on the American economy, costing taxpayers billions of dollars.
Private sector lenders, usually affiliated with hedge funds, have recently seen a boon in student debt refinancing. These groups generally look for successful graduates of professional schools, offering to undercut governmental interest rates. Relatedly, the portfolio of loans that then remains with the government are those that are riskier or of lower quality. Statistically, therefore, the loans that remain on government books are most likely to default.
At the level of the individual, student debt acts as a severe, economic hindrance. That they had to take out loans higher than historical averages to obtain an education means that they are thereby unable to either consume or invest, both of which support the broader economy. At the same time, as debt repayment levels forestall the possibility of saving, student loan sufferers are much less likely to found businesses, an important side effect in that approximately 60% of jobs are created by small businesses. Stated otherwise, entrepreneurship is hindered because of a lack of personal capital. Concomitantly, home purchases amongst this demographic have sharply lessened, as individuals have neither the financial amounts required for a down payment on a home, or do not possess a credit score that is sufficient to permit taking out a mortgage. In effect, financial strains from college borrowings have precluded this demographic from reinvesting in and reinvigorating the economy.
Public Policy and Student Debt
Congressional deadlock has effectively stalled the passage of substantive reforms in the sphere of student loans. In March 2015, the Obama Administration introduced a proposal called the Student Aid Bill of Rights. This initiative aims to improve the complaint and resolution process about loan services, improve communication between lenders and borrowers (especially about payment deadlines), and put an end to extra fee charges. Practically, these matters all speak to repayment of debt; they do not focus on the more important issue of the accumulation of crippling debt in order to try to fund more secure, economic futures.
Senator Elizabeth Warren (D-MA) is one of the most vocal lawmakers pushing for reform. Her background in bankruptcy law led to the establishment of the Consumer Financial Protection Bureau in 2011, which agency has oversight of student loans. Yet, in late March 2015, the Senate voted against a reformative proposal spearheaded by Warren. This legislation sought to fund lower interest rates on student debt through an implementation of a 30% tax rate for those with an income greater than $1 million.
Not surprisingly, given that increased numbers of younger voters have made it to the polls in the last two presidential elections, student loans and college affordability have the potential to become hallmark issues of the 2016 campaign. On the Democratic side, Sen. Bernie Sanders (I-VT) has proposed a financial trade tax on Wall Street to make public college tuition free. Meanwhile, Martin O’Malley seeks to freeze tuitions, let students refinance loans and cap payments. Hillary Clinton has yet to announce a policy for tackling this issue, but it is expected that a comprehensive reform will be central to her campaign platform. On the Republican side, while candidates have yet to present concrete proposals on this issue, early public statements acknowledge the detrimental economic effects of this runaway problem. On the topic, Sen. Rubio (R-FL) had a 2014 bipartisan bill rejected by Congress that would have tied student loan payments to income rates.
Beyond partisanship, the numerical trends and swaths of Americans suffering from student debt are becoming too great to ignore. The public policy aspects of the issue may be sufficiently pivotal as to determine who gains ascendancy to the White House in 2016. Yet, more so than jostling for political power, proposals must be grounded and pragmatic to bypass a partisan Congress and affect concrete change.
 Izzo, Phil. “Congratulations to Class of 2014, Most Indebted Ever.” WSJ. May 16, 2014. http://blogs.wsj.com/numbers/congatulations-to-class-of-2014-the-most-indebted-ever-1368.
 Fry, Richard. “The Changing Profile of Student Borrowers.” Pew Research Centre. October 7, 2014. http://www.pewsocialtrends.org/2014/10/07/the-changing-profile-of-student-borrowers/.
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 Ungarino, Rebecca. “Burdened with Record Amount of Debt, Graduates Delay Marriage.” NBC News. October 7, 2014. http://www.nbcnews.com/business/personal-finance/burdened-record-amount-debt-graduates-delay-marriage.
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 Cooper, David, and Dan Essrow. “Low-Wage Workers Are Older than You Think.” Economic Policy Institute. April 27, 2015. http://www.epi.org/publication/low-wage-workers-are-older-than-you-think/.
 Lee, Donghoon. Household Debt and Credit: Student Debt. New York City: Federal Reserve Bank of New York. February 28, 2013. http://www.newyorkfed.org/newsevents/mediaadvisory/2013/Lee022813.pdf.
 Lorin, Janet. “Student-Loan Refinancing Boom Could Cost U.S. Taxpayers Billions.” Bloomberg. June 10, 2015. http://www.bloomberg.com/news/articles/2015-06-10/student-loan-refinancing-boom-could-cost-u-s-taxpayers-billions.
 Irwin, Neil. “How Student Debt May Be Stunting the Economy.” New York Times. May 14, 2014. http://www.nytimes.com/2014/05/15/upshot/the-role-of-student-debt-in-stunting-the-recovery.
 The White House, Office of the Press Secretary. Fact Sheet: A Student Aid Bill of Rights: Taking Action to Ensure Strong Consumer Protections for Student Loan Borrowers. March 10, 2015. https://www.whitehouse.gov/the-press-office/2015/03/10/fact-sheet-student-aid-bill-rights-taking-action-ensure-strong-consumer.
 U.S. Congress. Senate. Committee on Banking, Housing, and Urban Affairs. Bank on Students Emergency Loan Refinancing Act. S.2432. 113th Congress. 2d session. September 18, 2014. https://www.congress.gov/bill/113th-congress/senate-bill/2432.
 Knowles, David. “Bernie Sanders Wants to Tax Stock Trades to Pay for Free College.” Bloomberg. May 18, 2015. http://www.bloomberg.com/politics/articles/2015-05-18/bernie-sanders-wants-to-tax-stock-trades-to-pay-for-free-college.
 O’Malley, Martin. “Federal Solutions to Our Student Loan Problem.” The Washington Post. April 23, 2015. Accessed June 15, 2015. http://www.washingtonpost.com/opinions/federal-solutions-to-our-student-loan-problem/2015/04/23/.
 Karni, Annie. “Clinton Student Loan Reform Rlan Has Warren Stamp.” Politico. June 11, 2015. http://www.politico.com/story/2015/06/clinton-student-loan-reform-plan-has-warren-stamp-118865.html.
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The views expressed on the Student Blog are the author’s opinions and don’t necessarily represent the Penn Wharton Public Policy Initiative’s strategies, recommendations, or opinions.