The American student-debt system is so big and complex that there’s almost no aspect of it that the experts can agree on. Some commentators see a bubble overdue to burst: a trillion and a half (or so) dollars that could vanish at any moment; a housing crisis 2.0 ready to happen. Others see a well-oiled machine that is successfully expanding college access and increasing affordability — a machine that has the most stable economic foundation possible. Even when there are numbers, there is disagreement over which ones to use and what they mean. There is evidence to support both of the above positions, and we might not understand the true character of student debt for decades. After all, these are long loans.
Still, we can work with the best evidence we have. Forty-two percent of all American adults under 30 have student debt, according to a study from Harvard University’s Institute of Politics, and 79 percent agree that debt is a problem, whether they have it or not.
If everyone agrees student loans need to change, then what’s the problem? Here’s an overview.
One traditional progressive solution when a private industry is failing to serve the public good is nationalization, or at least a government-run competitor. In the health-care debate, for example, the left wing of the Democratic Party pushed for Medicare for all, or at least a public option. (They got neither.) In student lending, however, the government already took over. They just didn’t tell anyone.
As a cost-saving element of the Affordable Care Act in 2010, the Obama administration ended the federal practice of securing private student loans, which effectively nationalized over 80 percent of the market. The Obama administration didn’t publicize the change — probably because being associated with the student-loan checks Americans have to send every month isn’t a smart political move.
Nationalization has not, however, made much of a difference when it comes to how the student-lending system works. Now, instead of private companies profiting off the loans, the federal government cashes the checks. As long as there is debt, borrowers will have to pay. The next target for reformers is loan fees themselves, and the Democratic Party has been promoting the idea of “debt-free college” — though if passed into law the promise would likely include a lot of asterisks.
Before 2013, interest rates on federal loans were caught in limbo. While rates were officially set at 6.8 percent, Congress was using extraordinary action to hold them at 3.4 percent. Borrowers couldn’t be certain what their interest rate was going to be the next year, never mind 15 years down the line. The Bipartisan Student Loan Certainty Act sought to change that.
On this issue, Democrats and Republicans cooperated in a way we’re not used to seeing these days: Both sides took positions and they compromised in the middle. Republicans got higher interest rates and pegged them to Treasury rates, while the Obama administration got a modest pay-as-you-earn option. According to the Congressional Budget Office, the two more or less cancel each other out. For borrowers, the compromise was a wash. And if Treasury rates increase (as they inevitably will), then borrowers could be looking at interest rates of 8.25 to 10.5 percent, the maximum under the law.
Many commentators — notably self-styled maverick billionaire Mark Cuban — have been warning about the imminent collapse of the student-debt system. On first look, this alarmism seems prescient: Like the housing market, college costs have been rising out of control. Post-nationalization, student loans comprise a rapidly escalating percentage of the federal government’s asset profile — between one-quarter and nearly half, according to different estimates.
Cuban and those like him worry that the government, with its easy loans, has allowed college costs to escalate beyond their value. As with the housing market, they think much of the trillion-plus dollars in outstanding debt simply will never be recouped. The class of 2014 averaged $28,950 in debt (according to the Institute for College Access & Success’ Project on Student Debt); they might never make enough to pay it all back.
It’s a compelling story, but the government probably is too big to fail as a lender. It passes laws, self-regulates, and literally prints money. The Treasury doesn’t have to worry about holding money in the form of debt owed by 20-somethings; it can stretch out repayment for decades. Those 20-somethings will be 40-somethings and 50-somethings, and eventually they’ll get Social Security payments. The feds can wait.
The biggest difference between college degrees and houses — since the costs are now basically comparable — is that you can walk away from a house. If you take out a mortgage and the value of your property tanks and you end up owing more than it’s worth, you can leave, and the bank takes the hit. With education, there’s no way to give your purchase back to the bank because you agreed to pay more than it’s worth.
When the federal government made a real push to subsidize higher education in the 1960s, it occurred to policymakers that some people might take out all the loans they could carry, go bankrupt after graduation, and run away with a free degree. To prevent the possibility (there’s no evidence it ever happened at any scale), they made student debt extremely difficult to escape. You can’t discharge it in bankruptcy, and the feds have extraordinary collection access. As a result, the Treasury recovers an average of nearly 100 percent of student-loan principal, even from borrowers who default. With the government collecting, defaults are not much of a threat.
Although there’s not much difference between Democrats and Republicans on the subject of student loans, there is what we could call an “extra-parliamentary opposition.” When Occupy Wall Street took over a square in downtown Manhattan, it had a whole litany of complaints and it was hard to find two occupiers who agreed. But when economist Mike Konczal reviewed posts to a Tumblr of OWS supporters’ stories, he found that student debt was the overwhelming central issue among the protesters.
The occupation is long finished, but it has inspired further anti-debt activism: As late as 2014, the group Strike Debt was using donations to buy up debt (though not mostly student-loan debt) at a discount, after which they forgave it. A few borrowers have even refused to repay their student loans, urging others to join them. The future of student debt could depend on how the government responds to these outside protests. We’ve seen the demand for debt-free college go from Occupy to Bernie Sanders to Hillary Clinton’s campaign. Meanwhile, the numbers keep piling up.