Student-Loan Debt: A Federal Toxic Asset
Only about 56% of borrowers are making payments. At the peak of the mortgage crisis, 10% fell behind on payments.
Only about 56% of borrowers are making payments. At the peak of the mortgage crisis, 10% fell behind on payments.
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Let's call her Alice. One of us has known her for years. She earned her Ph.D. in the mid-1990s when academic jobs were scarce, and she wound up an academic gypsy. She left graduate school to take a one-year full-time academic appointment, but then found herself cobbling together part-time teaching jobs at different community colleges in a large metropolitan area, earning a couple of thousand dollars for each course she teaches. She is a dedicated teacher, but her annual income is between $30,000 and $40,000.
Alice owes $270,000 in student loans. She only borrowed about $70,000 to pay for grad school, but she's never been able to afford much in the way of payments, and after consolidating her loans and accumulating interest charges for years, she's watched her debt roughly quadruple.
If Alice taught students in a low-income high school or was a recent graduate, she would be eligible for various programs that would allow her to discharge at least some of her debt. But since she graduated at a time before income-based repayment and loan-forgiveness programs, there is no federal program to help established part-time community-college faculty discharge their old student-loan debts.
In fact, the federal government is quite content with Alice's situation. The $270,000 she owes is carried on the government's books as an asset. The government reasons that, since it is nearly impossible to discharge student loans through bankruptcy, it will eventually collect all of the more than $1 trillion in federal student loan debt that Alice—and millions of other student borrowers—owe.
Not likely. Because Alice has figured out how to avoid repaying and still stay in the government's good graces. She is able to defer her loans without accruing additional interest by enrolling in two community-college courses per term while she works toward a business degree that she hopes will lead to a new career. Meanwhile, her $270,000 balance remains on the books, growing all the time.
She doesn't think of herself as a deadbeat, but making a $1,200 monthly payment for the next 30 years is daunting. Within a few years, she'll be of an age to collect Social Security, and at that point she expects the government to begin withholding about $30 from each monthly check to pay her student loans. That will hardly offset the hundreds of dollars of interest charges that accrue each month. Meanwhile, Alice has friends with full-time jobs who are appalled by her taking courses to avoid repayment, but she says she has to choose between paying for a place to live and repaying her loans.
But it is Alice's place in the larger picture that is the more important story. The federal government assumes that almost all student-loan debt can be treated as an asset because federal loans are not dischargeable under normal circumstances. So it really is not a problem if the total debt exceeds $1 trillion ($2 trillion around 2020 on current trend), since all that money is sure to be repaid.
But that assumption looks more and more fanciful. Studies by the New York Federal Reserve Bank show that only about 56% of borrowers are making payments. Among those under 30 and in repayment—that is, they have not received permission to postpone payments—more than a third are delinquent. That's a lot: At the peak of the recent housing crisis, only about 10% of borrowers fell behind on their mortgage payments. But Alice is part of the 44% of borrowers who are not repaying student loans for various reasons.
Why isn't this high percentage of borrowers who are excused from making payments alarming federal policy makers and most of the analysts who study student loans? There is really no prospect that Alice is going to be able to cough up more than a quarter-million dollars and pay off what she owes. At some point, the government is going to have to reclassify billions in loans and interest as losses. Meanwhile, as college costs rise and more students pursue higher education, student borrowing grows. According to the Department of Education, students borrow over $100 billion annually, and the figure rises with each new academic year.
This is a big problem. Unexpected write-offs of billions of unpaid student loans will confront Americans with a set of ugly choices: Will we raise taxes to cover the losses—which is impossible to imagine in today's political climate? Do we cut other federal spending—which is nearly as unlikely since we're talking about substantial sums? Or do we significantly increase the national debt. This will be a continuing crisis; each year's increased borrowing will require confronting the same choices in future years.
Washington recently acknowledged that there are a lot of Alices; in mid-September, the GAO issued a report documenting the rapid increase in the student debt among those over 65. But many of the proposed reforms, on tinkering with interest rates and the like, would increase—not reduce—total student-loan debt. A larger issue, so far ignored, is that unless college costs are brought under control, things will only get worse, and the federal government will continue to accumulate Alice-like "assets" in the federal direct-loan portfolio.
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