President Obama, to his credit, is doing what he can to address problems in two of the three big debt markets in the U.S. He's rolled out a plan to enable borrowers who are underwater on their mortgages to refinance, taking advantage of historically low interest rates. And now he's turned his attention to student loan debt, which has ballooned in recent years as the cost of higher education has risen beyond the rate of inflation.
That leaves credit card debt and to a lesser extent auto loan debt. We're unlikely to see anything on that front, however, because the government doesn't backstop that kind of lending.
The student loan initiative is being driven by the crappy economy. Students have borrowed very large sums to fund their educations, but in many cases they can't get jobs in the face of 9 percent national unemployment. If they can find work, the pay isn't enough to service the debt. And overall student loan debt is now massive, at more than a trillion bucks.
This is a serious problem because student loan debt has always been seen as "good" debt — borrowing that makes America more competitive, improves the lot of citizens, and puts students on a trajectory to earn far more money in their lives then they would if they didn't go to college. It makes sense for the government to subsidize it, keeping interest rates low — around 7 percent, versus upwards of 15 percent for private loans.
At the Atlantic, Dan Indiviglio puts his finger on the problem:
[S]tudent loans have grown by 511% since 1999. Meanwhile, disposable income has grown by just 73%...most outstanding student loan debt (82%!) was accrued by students over just the past decade.
So what we have is a student loan debt bubble, inflated by the ever-escalating cost of higher education, which is increasing at 6 percent annually, or twice the rate of inflation. Enter Obama and an executive order that enables the problem to be attacked without congressional action. Again, Indiviglio:
The president...will create an executive order that has three components.
- He will clear the way for borrowers with direct government loans and government-backed private loans to consolidate their balances. The White House estimates that this will cut the effective interest rate on student loans by up to 0.5%.
- He will limit the amount of student loan payments to 10% of a graduate's income. (Currently, the limit is 15%.)
- He will allow debt still outstanding after 20 years to be forgiven. (Currently, forgiveness occurs after 25 years.)
This is a modest proposal. Others have called for more extreme measures, including swifter debt forgiveness — essentially a debt jubilee for beleaguered student borrowers — and a change to bankruptcy law that allows student loan debt to be discharged (it's not now treated in the same way as other debts).
Of course, you could also make the argument that debt is debt — you borrowed the money, and now you have to pay it back or face the consequences of bad decision-making. But that's far too harsh a stance to take where something as critical as education is concerned. The last thing we want is a generation of students deciding that college isn't worth the investment.
My take is that Obama's plan is more political than anything else; college grads and young people generally are an important part of his re-election strategy. The plan is a step in the right direction, but it's unlikely to drastically improve the lot of graduates. Unfortunately, students who are laboring — or not laboring, because they're unemployed — under a crushing debt burden now may have to grapple with this for the rest of their working lives. To fix the problem, we're going to need to look at the rising cost of higher education.
It's critical that we don't push students away from borrowing as much as they need to fund their educations, preferably at four-year colleges. But the government needs to scrutinize why college costs so much, relative to the past. Colleges also need to devise ways to expand their financial-aid options, to keep students out of debt in the first place.
We don't want student loans to end up like mortgages — debt that we always thought was good but are now worried might be going bad.