Student debt is generally a good type of debt. But understanding the details really matters.
According to Time, total student debt in the U.S. exceeded credit card debt in 2010. It grew larger than car loans in 2011, and it passed $1 trillion in 2012. As of 2016, the total student debt outstanding reached $1.3 trillion. About 70 percent of recent college graduates (graduate students and undergraduates) are in debt, according to Marketwatch; newly minted undergraduates owe on average $37,000. This is a large amount of debt on the shoulders of graduates starting careers.
Some face complications. These following statistics state the percentage out of all surveyed students who borrowed for education: 69 percent had problems making payments, 12 percent delayed marriage, 28 percent delayed buying a house, 37 percent delayed saving for retirement and 44 percent cut back on day-to-day expenses. Moreover, 38 percent didn’t even graduate, but they still needed to make payments, and 45 percent declared college was not worth the cost, according to the National Research Center.
Dr. Gene Steuerle says that students who are likely to borrow large amounts are the same ones expecting to graduate with degrees that often come with the highest future incomes. For instance, students borrow hefty amounts as they pursue degrees in medicine and law. Fully 40 percent of debt is held by the 20 percent who can expect higher incomes. With this in mind, if the goal of those who want to cancel student debt is to help the poor, then prioritizing cancellation of debt for the poor makes more sense than canceling debt for all types of ex-students.
In Sweden, 70 percent of students have loans worth $20,000 or less. In Australia, students borrow about $30,000. These figures are somewhat comparable to those in the U.S. Yet, there is less of a sense of crisis in Sweden and Australia than in the U.S. In part, this is because the repayment time spans 25 years in Sweden, and in Australia, payments automatically adjust to income. Other countries have similar protective policies; loans are paid over 20 years in Germany and over 30 in the U.K. By way of contrast, many loans in the U.S. must be repaid over 10 years, and are not necessarily adjustable to the ex-students’ incomes, according to The New York Times.
How did we get here? According to Reveal News, in 1965, President Johnson signed the Higher Education Act through which students were able to take out loans secured by the federal government. Before that, they had to pay for college with their own resources or scholarships. In 1972, President Nixon created the Student Loan Marketing Association, nicknamed Sallie Mae, to buy student debt from banks. In doing so, Nixon created a mechanism that, in effect, gave banks more money for students to borrow.
In 1994, the act was revised, and Sallie Mae was privatized. After that it could make federal-backed loans to students and was able to buy debt collection companies. To some extent, it was able to work as a bank itself. Under the leadership of Albert Lord, Sallie Mae developed a massive loan expansion, which together with stagnant educational spending and associated tuition rises, encouraged students to borrow on a sizable scale.
Should we discourage students from borrowing to get a degree? No. We just want students to make good financial decisions. According to the Federal Reserve, a college degree will lead to pay that is $800,000 more than someone with a high-school diploma over a lifetime. Borrowing to obtain a college degree is like any other loan, the cost benefit analysis is an important part of the decision-making process.
John Hoffmire is director of the Impact Bond Fund at Saïd Business School at Oxford University and directs the Center on Business and Poverty at UW-Madison. He runs Progress Through Business, a nonprofit group promoting economic development.