Student Loans Are a Drag on the Economy

Maggie Severns, an editorial fellow at Mother Jones examined the student debt crisis in nine charts. More than any other type of debt, student loans are now more likely to be delinquent. Interest rates on federally subsidized Stafford student loans doubled today to 6.8 percent, but Congress still has a small window to lower interest rates before students begin taking out loans for school in August.

Students who leave college with unmanageable levels of student debt payments can’t participate in the U.S. economy in any significant way. Lower interest rates are critical at a time when students are being forced to borrow more money as states cut their budgets for education. When I enrolled in college as a freshman at UC-Irvine, tuition and fees for the academic school year were $4,555 a year. Those costs have skyrocketed for students now attending about a decade later—tuition and fees for the last academic school at UCI were $14,046 (take a look at how much tuition has grown at your school—it’s incredible). The one thing we can do for students now while the cost of college skyrockets every year is maintain low interest rates on student loans. Average mortgage and car loan rates are below 5 percent, and there’s no reason student loans can’t be below that as well.

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12 Comments / Post A Comment

Whether the loans are delinquent or not they are a drain on the economy. I’m not delinquent on my loans, but when I send $262 off to Sallie Mae each month, that’s $262 I’m not spending on goods and services. Even if they turn right around and loan it back out out to a student, that’s one person who gets to spend the $262 versus two. If anything, a delinquent loan is actually better for the economy in the short term because it means the borrower is spending money in the real economy and not to adjust their balance sheet.

Bettytron (#111)

@stuffisthings Definitely agree. And having existing loans means not being able to get credit for big purchases like a car or a house, those things that are traditionally supposed to be sort of stabilizing and “adult”.

deepomega (#22)

@stuffisthings Um, doesn’t this argument apply to any debt whatsoever?

@deepomega Yes!

ETA: Except government debt to a certain extent.

deepomega (#22)

@stuffisthings “The only good debt is government debt!” – a socialist

@deepomega Nah in real socialism the government also owns all the enterprises and expropriates private savings from time to time.

No, government debt isn’t “good” but it behaves differently from private sector debt for a variety of reasons (which can be simplistically boiled down to the ability to print money). In the present moment, many governments can also borrow near-unlimited amounts at near-zero real interest rates. If someone was willing to lend me, say, $100 million at 0.75% interest for 10 years, my student loan debt would no longer be a major constraint on my spending.

deepomega (#22)

@stuffisthings Haha, just joshin’. My real question is: what the hell do you do if you think all debt is an economic drain? (I don’t actually think this – I think debt is, you know, leverage. Some of it is awful, some of it is not.)

@deepomega You’re right — debt is fine when it’s used to finance a productive investment. Also different forms of interest are counted differently in GDP — interest on government bonds is not counted, interest on business investments is, and I believe interest paid by consumers to financial institutions as counted as part of their income. So I’m not sure how an interest payment to Sallie Mae would be treated.

So nobody really cares if GE wants to issue some bonds to build a new turbine factory or whatever. And outside of a financial apocalypse scenario, household mortgage debt is usually also pretty alright, because it substitutes for rent and builds equity.

Student loan debt, as I’ve argued before, does seems like a particularly dumb way to finance what is fundamentally a good investment (college education). To use my favorite analogy, it’s like forcing everyone to take out a $100,000 loan to finance all their future road use when they want to get a driver’s license.

@deepomega In answer to your question “what should we do” I think some combination of the following:

1) Free tuition paid for by higher taxes OR free tuition paid for by a highly progressive time-bound surtax on college graduates

2) More aggressive cost-control measures for federally-funded universities to reduce tuition inflation

3) Treatment of private loans as regular unsecured debt (with the idea that this would kill the private student loan market, and if 1 + 2 are done this is OK).

ETA: To clarify my previous comment, I think some forms of interest are counted in the income method but none (?) are in the consumption method and somehow this evens out. Basically, all debt is on its own an economic drag, but this is usually balanced out by the things bought with the debt.

UrbanGarlic (#4,303)

@stuffisthings “highly progressive time-bound surtax on college graduates” How would you structure this?

RachelG8489 (#1,297)

@UrbanGarlic Well, there’s a proposal in Oregon right now- I think it was a requirement that community college grads pay 2% of their income, and 4-year school grads pay 4% of their income, both for 20 years. So if you don’t find a job that pays a lot, you don’t pay a lot.

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