Student debt: How big a risk does it pose to the economy?
Student debt represents a financial challenge for America, some economists say, but in a way that's different from the big buildup in mortgage debt that led to a deep recession.
Surging student-loan debt has become a burden on the US economy – and President Obama is warning of a "tremendous blow" that could occur for millions of students in the form of an interest-rate hike in July.
So how big is this issue? Does student debt represent a brewing crisis?
Student loans pose a significant financial challenge for America, some economists say, but in a way that's different from the big buildup in mortgage debt that ended in a housing bust and deep recession.
"It's not a bubble that will burst," says Chris Christopher, an economist at IHS Global Insight in Lexington, Mass. "People still need to go to college.... The [financial] returns of education are still very vast."
Yet the debts resulting from college are a high and rising burden that now totals more than $1 trillion, by one official estimate. For a graduate, the burden can be like paying a second rent check each month. And the job market is still in poor shape, meaning that many grads face the loan payments while unemployed or underemployed.
The result is additional weakness in the economy. "People are delaying marriage," postponing having children, and taking a pass on home purchases, Mr. Christopher says. "They're living with their parents. They're not spending as much as they otherwise would have."
The problem is big enough that it's putting pressure on the US government – the nation's major provider of college loans and financial aid – to provide some sort of relief.
In an appearance at the University of North Carolina in Chapel Hill on Tuesday, Mr. Obama proposed that one major step should be to keep interest rates on federal college loans from jumping on July 1, when a government-orchestrated discount is set to expire.
More than 7.4 million students would see their interest rate on federally subsidized loans double if Congress fails to act, the White House says, with the rate climbing from 3.4 percent to 6.8 percent.
"Stopping this from happening should be a no-brainer," Obama said. "The Stafford loans we're talking about, they're named after a Republican senator.... This shouldn't be a partisan issue."
Although the problem is large, the $1 trillion in student loans is only about one-tenth the scale of America's home mortgage debts. And fewer than 10 percent of recent graduates are defaulting on their federal loans, finance experts say. That means this isn't the kind of issue that's likely to cause a new recession or cause a fiscal crisis for the federal government.
But the economic impacts – such as delaying marriage – are already felt, and they could persist for some years.
Alongside the interest-rate issue, where proponents of an extension see an urgent deadline, the buildup of student debt is prompting other calls for action:
• Rep. Hansen Clarke (D) of Michigan is proposing a Student Loan Forgiveness Act of 2012. It wouldn't wipe away all student debt, but would forgive loan balances remaining for Americans who have made payments equal to 10 percent of their discretionary income for 10 years (the typical payback period for student debts).
• Some lawmakers hope to change bankruptcy law so that privately issued student loans could be discharged in bankruptcy, like other consumer debts such as credit-card or auto loans.
• Obama argues that, alongside federal programs to expand access to higher education, the government needs to send a signal to colleges that generous federal aid is not an excuse to keep raising tuition faster than the overall inflation rate. If colleges can't control their costs, Obama told students in North Carolina, "then funding you get [from taxpayers] will go down."
• Others are promoting better information, so it's easier for students and parents to evaluate the costs and expected benefits of a postsecondary degree. Obama touted one step that has recently been made with this goal, a "know before you owe" initiative being launched by the new Consumer Financial Protection Bureau. The CFPB is also developing a "college cost comparison worksheet."
The backdrop for Obama's Tuesday speech in North Carolina was clearly political. Although not framed as a campaign speech, he cast himself as a populist defender of ordinary Americans, standing up against Republican skeptics of federal student-aid programs.
"This generation is not getting off to the same start as previous generations," the president said. "There are fewer grants. You get a lot more debt. Can I get an amen?"
He got more than a few amens and cheers from the crowd, as he told them how he and his wife worked for years to pay off their own student loans (finishing that task only eight years ago).
North Carolina is seen by political analysts as an important swing state, potentially winnable by either party in November. Obama, seeking to galvanize the youth vote, was scheduled to address the same topic Tuesday evening in Colorado, another state that's up for grabs.
But the issue is about much more than politics, financial experts say.
The nation's future prosperity depends on having growing cohorts of highly trained workers, on helping young people better match their talents and goals with likely fields of employer demand, and on managing the costs of education efficiently.
A sign of the times: growing discussion of whether getting college degrees is worth it, when tuitions are so high and the job market is so weak.
He says people are absolutely right to worry about how they're going to pay the debts before they borrow.
Mr. Kantrowitz, like other education experts, says that a college typically offers rewards that more than offset the costs. But it may make sense to chase your dreams from an in-state public college, if the alternatives would mean much higher debt, he says.
The debt issue is a top-of-mind concern for students like Stephanie Simone, a freshman at Northeastern University in Boston. With plans to major in business administration, she's hopeful of pursuing a career that will allow her to manage the debt burden. But since she's tapping both federal and private loans, "it's something to think about," she says.
Referring to the more expensive private loan, she says, "I'd like to pay it off as quickly as possible."
Nearly two-thirds of college students rely partly on some form of financial aid, whether that be grants and scholarships or loans. And for a grad who borrows, the typical balance as he or she leaves school is about $25,000, Obama said.
Most borrowers can make ends meet after they graduate, Kantrowitz says, especially if their starting salary is higher than their outstanding debt.
One challenge currently is that the economy often works against students in two ways: After school, it's harder to get a good job. And while in school, it's easier to rack up debt because parents may also be struggling, perhaps with college savings that were depleted during the recession.
That doesn't mean that high-priced colleges are necessarily out of reach. In a recent report, the Project on Student Debt pointed to four colleges that pair high tuition with "no-loan" or "reduced-loan" aid policies for low- and middle-income students. The result at these colleges (Pomona, Princeton, Williams, and Yale) is students graduating with average debt below $10,000.
Similarly, Bloomberg Businessweek recently found a wide range of outcomes when it teamed up with the Seattle firm PayScale to rate colleges on their financial payoff. The rankings compared the typical cost of degrees with the expected earnings of graduates over 30 years.
Some Ivy League schools did well on bang for the buck, because of their generous financial aid. Meanwhile, "return on investment" tended to be highest in fields like engineering and science.
As Obama's personal story bears out, college loans isn't a new story in the lives of young Americans. But with the scale of debt rising, some economists predict that Congress will intervene to restructure the system at some point so that fewer Americans feel that government-provided loans are a permanent millstone.
"Maybe the government has to take a haircut in some way," says Christopher at IHS Global Insight. "The pressure is building."