The Government’s Monopoly of Student Debt
President Obama highlighted the lingering concerns surrounding student debt during his weekly address. He touted his executive action to limit student loan payments, and he also hinted at enacting a policy to curb rising tuition. Meanwhile, he is pressuring Congress to pass a student loan relief measure to ease the financial burden on college graduates.
As of 2012, more than 70% of 4-year college graduates had student loan debt, and the average debt level for graduating seniors was $29,400, which represents a 25% increase from 2008. From 2007 to 2013, the total American student loan debt doubled, and it now stands at over 2.1 trillion dollars, with only 20% of this debt being held by private banks. Student loans now exceed credit card debt, and earlier this month, the Education Department reported that more than half of federal student loan payments are delinquent.
Politicians have warned of the impending student loan crisis and have compared it to the subprime mortgage disaster that brought the economy to its knees in the late 2000s. As US News recently pointed out, they are hardly comparable. The student debt situation is a crisis on the individual level, but it likely wouldn’t have the same effect on the economy. The housing crisis was a much larger issue. Mortgage debt totaled 2/3 of the nation’s gross domestic product (GDP) while student loans represent 7 to 12 percent of GDP (depending who you ask). Mortgage debt averaged $93,000 for homeowners in 2007, and student debt amounts to about 1/3 of that average. Furthermore, 95% of the student debt, which includes most private student loans, is supported by the US, which means the private loans are practically insured by the government.
The growing threat from student loans has loomed for years, and it is well known. Two months ago, President Obama signed an executive order that increased the coverage of the PAYE (pay as you earn) program to students who took their last loan in October, 2011 or before. The expansion will take effect next year. The order limits student loan payments to 10% of their income and forgives the remaining student debt after 20 years. He is now pressing Congress to pass Elizabeth Warren’s stalled bill that would allow 25 million graduates to refinance their student loans, but its passage looks unlikely.
Obama is appearing to be proactive in the emerging student debt dilemma, but he is treating the symptoms and not the root cause. Federal student loans began in 1958 with the National Defense Education Act and has since evolved into today’s system. Essentially, student loans are approved without considering the borrower’s creditworthiness. These loans are approved with the best of intentions, but good intentions do not always produce good decisions. This is leading to high risk loans, which may never be repaid, and increasing college education demand.
The high demand is contributing to tuition increases, which historically averages 2.1 times the inflation rate, even though 2014 tuition rate increases are some of the lowest in decades. Many states are combating the rising tuition costs by tying their funding to lower tuition increases. President Obama has stated his desire to do the same with federal funding.
Basically, the government has monopolized the student loan sector, and this control has, in many ways, led to the crisis. The government now controls 80% of the market, and private banking institutions cannot compete with federal student loans. As it stands now, the government has seemingly endless capital to loan, boasts lower interest rates than private institutions, gives deferments and forbearances on loans, and even offers partial loan forgiveness. The government has become too willing to hand out crippling loans that saddle young Americans in debt, and Obama is attempting to making it easier for graduates to avoid full repayment.
Obama was right when he said, “Some higher education is the surest ticket to the middle class.” The median salary of young adults with a four year degree was 57% higher than those with only a high school diploma. More Americans are getting a college education than ever. As of 2012, roughly 1/3 of Americans between the ages of 24 and 30 have a college degree, compared to nearly 25% in 1995. However, a college degree doesn’t guarantee employment or necessarily prepare you to join the workforce. Currently, there are 18 million unemployed or underemployed Americans, and there are one million jobs in the United States that are going unfilled because employers cannot find applicants with the right skill sets.
The federal government is now in the business of making questionable loans using taxpayer seed money and driving private banking institutions out of the student loan market. Many of the issues creating the so-called student debt crisis are directly caused by the government’s virtual monopoly of student loans and its poor corresponding policies combined with a perpetually sour economy. The federal student loan program is in dire need of reform. Instead of just creating a safety net for troubled borrowers, President Obama needs to overhaul the federal student loan system and end the monopoly.