Graphic: Originally appeared in Wall Street Journal

Congressional Failure: The growing burden of student loan debt in the US

Structural factors, effects, and solutions

Amyaz Moledina
4 min readJul 1, 2013

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Congress has failed to to solve the problem of student loan debt and interest rates and debt burdens will rise. The total student loan debt in the US has reached 1 trillion dollars (New York Fed, 2012). While this may not be a a terribly large percentage of GDP, its still is about 10 percent of total US debt. During the most recent recession, student loan debt became the second largest category of debt after household debt. Why is this debt increasing and what are the implications of such high levels of debt?

Private returns versus social returns

People invest in a college education because they see a private return. The private return on a college education is still pretty high in the US. For example, Cellini and Chaudhary (2012) suggest that “students enrolled in associate’s degree programs in for-profit colleges experience earnings gains between 6 and 8 percent, although a 95 percent confidence interval suggests a range from -2.7 to 17.6 percent. These gains cannot be shown to be different from those of students in public community colleges. Students who complete associate’s degrees in for-profit institutions earn around 22 percent, or 11 percent (more) per year, and we find some evidence that this figure is higher than the returns experienced by public sector graduates.” So clearly the returns vary by institution and program type. But, the private returns are positive.

From a private perspective, investing in a college education most likely gives us a higher return than investing in a similar appreciating asset such as a home (more on this later). I believe however, college education is not really about private return. Its really about social return. One should question a system that defaults to asking private individuals to shoulder the greater burden of the investment costs when the returns are diffuse. For example, Moretti (2003) shows that a one percentage point increase in the supply of college graduates raises high school drop-outs’ wages by 1.9 percent, high school graduates’ wages by 1.6 percent, and college graduates wages by 0.4 percent. The effect is larger for less educated groups!

College education, especially liberal education, can improve civic outcomes and increase innovation (AAC&U). Despite an awareness of the social returns to education, the US continues to decrease its support for public education. Policies seem more focussed on testing a narrow range of skills. Sadly the political rhetoric and reality around education policy does not focus on whether students are indeed learning broadly, or have skills needed to give us better civic and innovation outcomes. Innovation is mistakenly equated to STEM learning. This is a narrow interpretation of what we really need for innovation. But I digress.

Having established that the private demand for education is an important driver of student loan debt, what is the prognosis for the future?

Debt increases into the forceable future.

Since only a 1/3 of the US population has a college degree, the positive returns from a college education will continue to encourage healthy demand into the future. Given that the median US household has experienced wage stagnation, there are more individuals that desire (and need) college, but are increasing not able to pay for it. On the supply side, the US educational system as a whole is not geared to provided additional capacity. The provision of public higher education is compromised by the climate of fiscal austerity (Inside Higher Ed). These and other factors raise the price of higher education in the US. Since the median US household is unable to afford a college education, in the absence of subsidized (public) college education, student loan burdens will continue to increase.

(Dampening) Macro-economic effects

As student loan indebtedness increases, this has the effect of decreasing future consumption. Evidence from the New York Federal Reserve suggests that students who graduate with high levels of debt typically defer major purchases like cars and homes. As a result, US macroeconomic growth may slow. At the very least, student loans could dampen recoveries in US housing and auto markets. I can imagine that if this trend persists, in the long run, changes in consumer behavior may create some sort of structural change in these markets.

Policy bias

Student loans are an underprivileged form of borrowing not consistent with their (social) returns. My understanding is that currently, only upto $2,500 of student loan interest can be deducted from your taxes. Given a certain level of income, the effective interest burden of student loans is higher than that of a home mortgage! Furthermore, student loans cannot be forgiven if you claim bankruptcy. One could argue that we could do much policy-wise to encourage student-loan interest burdens to diminish. It seems Congress has missed the boat on this.

Conclusions and solutions

Source: How America Pays for College, 2012 SallieMae

The demand and supply analysis of the market for a college education in the US suggest that student debt is here to stay. Given the social returns to College education, the high levels of indebtedness and the possible macroeconomic effects, we may consider designing student loans to be interest free. Examples of interest free student loans are those offered by the Bill Raskob Foundation or the State of Massachusetts. More recent innovations are peer-to-peer loan networks such as Common Bond, which in the long-run may be vehicles to offer low-cost or interest-free loans since quite a few students finance their education by borrowing from friends and family.

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Amyaz Moledina

Associate Professor of Economics, Co Founder Social Entrepreneurship, College of Wooster