Thesis: Fear that the federal government’s student debt holdings have become too large is overstated – partially because the increase in holdings fall in line with expectations, and partially because the default rate is inflated by declining for-profit college students.
The federal government’s current student loan holdings are the highest they have ever been, sitting at about $876.1 billion. As this graph of Fed data, published by QZ, demonstrates, the value of student burdens held by our government been steadily rising for the past two decades or so, with a shocking spike occurring right as the recession hit and no deceleration in sight. The slow rise can be attributed to more and more Americans deciding to attend college over the past few decades, and the sharp rise can be attributed to two factors: students fretting about the job market and returning to school, and a reform of federal subsidies for student loans, which made the federal government the sole lender to students. While we are likely seeing a permanent increase in loans, it is less shocking once one considers the circumstances – of course the federal loan holdings had to increase as the government captured the entire share of the student lending market. And unlike the increased holdings, the increased rate of loan accumulation is not permanent – it will almost certainly begin to level off as the economy continues to grow and the job market improves, giving young Americans less desire to reach for higher levels of education.
In its current state, the government’s loan portfolio provides a positive revenue flow, since the government borrows money at a much cheaper rate than students pay. Despite this, some are worried about the size of that portfolio, as evidenced by a Bloomberg article which called it an “$800 billion gamble.” Critics quoted in the article point to the high default rate on student loans (which hovers around 14%), claiming that the default rate may hit a breaking point, and the high level of federal lending will leave taxpayers to front a massive bill. But that default rate is skewed by students of for-profit colleges, who take out (and default on) loans at a higher rate than the rest of the population. And said colleges will soon be facing new regulations effective this July, per the Washington Post, meant to limit the amount of debt their students accrue. This reform will have a huge impact on the riskiness of the government’s student debt holdings – as the article mentions, students at for-profit schools “represent only about 11 percent of the total higher-education population but 44 percent of all federal student loan defaults.”
Regardless of the risk that taxpayers may have to front a bill for a student loan default crisis, one cannot deny the necessity of educating our nation’s populace. Critics argue that not every citizen should decide to attend college by default, claiming that college isn’t worth it for everybody as tuition continues to rise. But a study conducted by the Brookings Institute indicates that the income of college graduates has kept in pace with the increase in debt loads: between 1992 and 2010, the annual income of an average household with student debt increased by $7,400 while their debt burden increased by $18,000, meaning that the student debt essentially pays for itself with increased income in about two and a half years. As we look towards a future where competition is fierce due to global competition and low-skill jobs will begin to disappear to sophisticated machines, it’s important that our country provides as much opportunity as possible to hopeful students in securing the means necessary to receive a higher education.