The Misunderstood Consequences of the Student Debt Crisis

Americans, young and old, are buckling under the weight of their student debt. It's a threat to the middle class, and a symptom of a malfunctioning education system. 


The student debt crisis isn't like other debt crises. It won't sink a currency, like Europe's sovereign debt crises. And it won't suddenly topple the U.S. economy, like the mortgage crisis.

But give this crisis enough time, and it might just drag down the middle class.

Last week, the Federal Reserve Bank of New York published a study finding that 27 percent of student borrowers whose loans have gone into repayment are now delinquent on their debt. Then on Saturday, The Washington Post reported that bankruptcy lawyers are seeing a growing number of clients seek relief from their education loans.

This is not necessarily shocking news. A year ago, the Institute for Higher Education Policy published a study tracking the dismayingly high delinquency and default rates of the class of 2005. But as the sum of outstanding student loans has climbed towards the $1 trillion mark, passing total credit card debt along the way, the fact that America's students are essentially putting themselves into hock for an education has more than a few people panicking. As William Brewer, head of the National Association of Consumer Bankruptcy Attorneys, told the WaPo, "This could very well be the next debt bomb for the U.S. economy."

Well, "bomb" might not be the right word for it. Bum student loans are not a danger to the economy the same way subprime mortgages were in 2007. According to the New York Fed, total outstanding student debt grew to $870 billion last year. That sounds like a huge number, but it still only accounts for roughly 8 percent of all U.S. household debt. Mortgages, meanwhile, make up 72 percent of household debt, as the graph below spells out.


So no, this is not a stick of dynamite primed to blow apart the U.S. financial system. If a wave of students default, it will not trigger the next Wall Street collapse.

There are plenty of other reasons to worry, though. First, the growth of student debt is making it harder and harder to enter the middle class, or to stay there. When teenagers are forced to take out loans in order to pay for their education -- the median graduate who takes out loans* leaves school $12,800 in debt -- it acts as a tax on their future wages. It postpones their ability to settle down, buy a home, and have children. That's tragic for them, and it's tragic for us, because it means less money will flow into other, more productive parts of the economy.

In other words, think of student debt as an economic parasite -- a tape worm, if you will. It won't kill the economy quickly, but it will sap the life out of it over time.

It's also not just a burden on young people. The New York Fed's study fond that only about a third of all student debt belongs to Americans under 30. Another third belongs to adults between the ages of 30 and 39. And according to one recent study, adults between the ages 35 and 49 are the fastest growing category of borrowers. Part of the reason may be that the tough job market has forced older workers back to school in order to learn new skills. But it's not clear that investment is paying off.

As the chart below shows, older borrowers account for an outsized portion of delinquencies. Note the purple slice of Americans in their forties. The Fed says they hold 16.4 percent of all student debt, but account for 23.1 percent of past due balances.


Americans, young and old, are turning to education in an economy that values technical skills, and has little use for a high school degree. And now they're stumbling under the weight of the debt they've incurred. It would be easy to chalk this up to the bad economy -- and clearly that's playing a role -- but there may be a deeper, harder-to-remedy problem at play.

Simply put: Too many students don't graduate.

As this Atlantic article from February noted, less than 60 percent of U.S. undergraduates seeking a bachelor's degree graduate within six years. Just 30 percent of those seeking an associate's degree finish within three years. It's an abysmal record, and it may go a long way to explaining the trouble borrowers are having paying back their loans. A few months back, the Wall Street Journal profiled a hedge fund that specializes in packaging student loans into securities for investors. The firm had found that whether a student graduated was one of the two most important predictors of if they would eventually pay back their loans. The second? Whether they graduated on time.

Our system of higher education is failing our students and our economy. It's failing by putting young people into debt, and by not getting them through school. It's as if millions of Americans have decided to take out mortgages, but never got the house. Again, these problems probably won't take down Goldman Sachs. But that's just about the only comforting thing there is to say about them.

Image: Reuters


*An earlier version of this article stated that the median graduate left with $12,800 in debt. However, the figure does not include graduates who did not take out loans.