20 July 2015

A Closer Look at the Student Loan "Crisis"

I put crisis in scare quote because Adam Levitin doesn't believe there is one, at least not as commonly understood. Read his post here.

My occasional posts on student loans have focused on their use by for-profit and other schools as a means to subsidize substandard education (here and here). I have also explored the challenges of discharging student loans in bankruptcy (here and here).

Levitin takes a macro-level approach and concludes there's no student loan crisis as the word crisis was used in connection with sub-prime mortgages:
Student loan debt is highly concentrated within the population and is generally structured in a way that does not create sharp liquidity crises: long (and often deferrable) maturities, no sharp repayment shocks, and often offers established repayment and forgiveness programs.
In other words, student loans do not put at risk the edifice of America's financial system. Student loans do, however, put at risk America's long-term capacity for credit-financed (and is there any other kind?) growth:
The real concern with student loans is not an acute liquidity crisis, like a mortgage payment resets or a massive surge in defaults, as with underwater homeowners.  Instead, the systemic danger from student loans is a debt overhang problem in which consumers' consumption habits are altered by the constant drag of debt service. That's not a "crisis" yet, but it's a problem that needs to be addressed before it becomes one.
America's economy is driven by consumer debt. Without the capacity to incur debt, consumers won't consume as much and corporations and their employees, suppliers, etc. will face slow growth. In turn, this will depress the prospects for employment of everyone. In other words, a vicious cycle.

What to do about the problem isn't clear to Levitin: "It's not obvious to me how to fix the student loan debt problem; there are drawbacks to all of the proposals around. But we'd do far better addressing the problem now than in a decade or two, when it starts to really weigh on the economy."

Shutting off the spigot seems like a plausible solution but that's hardly feasible politically. After all, government-backed student lending is one of the prize entitlements of the middle class. Thus, I can confidently predict that nothing meaningful will happen.

How's that for going out on a limb?

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