Nancy Folbre is an economics professor at the University of Massachusetts, Amherst.
Current and prospective college students are receiving real-world instruction in the dismal political economy of public finance.
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Unless Congress can overcome its partisan differences, interest rates on federally guaranteed Stafford loans, an important means of paying for college, will double to 6.8 percent in July.
With the Bank on Students Loan Fairness Act, Senator Elizabeth Warren, Democrat of Massachusetts, proposes to reduce this interest rate to the same level that large banks pay for loans from the Federal Reserve Bank — 0.75 percent — for at least one year, during which longer-term remedies could be explored.
The bill, one of many aimed at addressing the scheduled interest-rate increase, seems unlikely to win passage. But it highlights the double standard that puts the interests of banks and other businesses well ahead of those of students and ordinary people when it comes to debt relief.
As Robert Kuttner explains (both in The New York Review of Books and in his new book “Debtors’ Prison”), bailouts and bankruptcy proceedings both provide a means for businesses to get out from under bad debt. The obligations of a college loan, by contrast, “follow a borrower to the grave.”
The rolling thunder of accumulating student debt sounds a lot like the perfect storm of mortgage liabilities that threatened major financial institutions and precipitated the Great Recession in 2007.
According to a recent study by the Federal Reserve Bank of New York (nicely summarized in a publication by the Federal Reserve Bank of St. Louis), the dollar value of college loan debt in the United States now surpasses both auto loan and credit card debt.
As states have steadily reduced their support for public higher education, tuition and fees have increased far more rapidly than the rate of inflation. Slow economic growth and persistently high unemployment rates have made it harder for parents to help with tuition bills, while students feel increasing pressure to gain a credential that could improve their job market chances.
The number of student borrowers increased 54 percent from 2005 to 2012, while the average debt per borrower increased 56 percent, to $25,000.
Whether or not you call it a bubble, evidence shows something is likely to pop.
Both delinquency and default rates have increased substantially since 2005. According to the Institute for Higher Education Policy, only a little more than a third of 1.8 million borrowers who entered repayment in 2005 repaid their student loans successfully without delay or delinquency for the first five years.
Low-income minority students, disproportionately likely to attend for-profit schools, are the most vulnerable.
Like the tranches of mortgage securities that were labeled “sub-prime,” their federally guaranteed loans, often arranged by for-profit schools positioned to cash in on them, are the least likely to be repaid.
The New York Fed study reports that students at private, for-profit colleges account for nearly half of all student loan defaults, though they represent only 10 percent of total enrollment.
In a speech titled “Subprime Goes to College,” Steve Eisman, one of the few major investors to anticipate and profit from the earlier mortgage crisis, has drawn explicit parallels between loan-peddling in both realms.
In both cases, federal and state regulation was weak. Yet regulatory tools clearly work. Default rates on college loans declined sharply in the early 1990s, after federal policy makers began penalizing for-profit colleges with default rates greater than 25 percent.
More recent efforts to impose higher loan-repayment standards on colleges have run into legal obstacles.
Meanwhile, many students, like older family members who found themselves underwater on home mortgages, don’t fully understand the complex process of loan renegotiation. The new Consumer Financial Protection Bureau, a hard-won political response to the mortgage crisis, has noted that students who feel confused about the terms of their loan are particularly likely to default. The National Consumer Law Center offers a detailed policy agenda for reducing default rates.
The Obama administration has put in place an important income-based repayment system that could considerably alleviate stress for many student borrowers by limiting the amount they pay monthly to a fixed percentage of their income. Yet the details are complicated, and some students may fear the prospect of paying a larger total amount of interest if they spread their payments out over time.
Like mortgage debt, which discouraged many homeowners from either selling their homes or buying new ones, student loan debt has knock-on effects, making it harder for young people to buy cars or homes.
The reduction in major purchases by the younger generation slows economic growth and contributes to persistently high unemployment and underemployment rates that leave some college graduates with no recourse but default.
High default rates in turn, raise the cost of the loans, fueling the conservative argument that interest rates on them should be set much higher than those on loans to banks.
Of course, loans to large banks are more secure in part because they are bailed out when they get into temporary trouble. My students wish that they, too, were too big to fail.
Article source: http://economix.blogs.nytimes.com/2013/06/03/mortgaged-diplomas/?partner=rss&emc=rss
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