Saturday, November 5, 2011

Ballooning student loan debt

The Occupy Wall Street movement has brought attention to student loans.  Student loan indebtedness is large and growing.  The Economist reports that student debt is at least $500b and could be as much as $750b, and will soon reach $1tr.  The federal government has taken over most student lending but has failed to consolidate a bewildering array of programs.  Roughly 10 percent of loans are in or near default, a much higher ratio than for credit card debt.  Unlike mortgage debt, it is hard to walk away from student loan debt, even in bankrupcy. 

The OWS crowd wants student loans to be forgiven.  President Obama is not quite ready to go that far, but has eased repayment terms.  A few personal observations (and a disclaimer -- a federally insured student loan with interest subsidies helped me pay Harvard tuition; I repaid on schedule):
  1. It is difficult to imagine a way in which private capital markets could by themselves finance anything close to the existing volume of student loan demand.  Put yourself in the position of a financier trying to guess which members of the freshman class each year will graduate and become successful.  Which ones would be worth betting on?  
  2. Any government-run program is going to be politicized in some way.  One must ask, however, whether there might be some useful role for regulation of which academic programs are eligible for student loans.  Do we want to continue to support programs with extremely low graduation rates or abysmal career prospects?  See this post on Marginal Revolution about the MFA from UConn who specialized in puppetry and ran up $35k in debt -- who is now occupying Wall St. 
  3. Critics charge that student loan programs help create a vicious cycle of rising tuition that feeds into more loan demand. Roughly one-third of all undergraduates take out student loans.  Making student loans more difficult to obtain could very well have a bigger effect on enrollment than on tuition.


  1. Thank god ballooning is a stress reliever. :-)

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