Part One of a three-part series on student debt and the middle class. Click here to read Part Two and click here to read Part Three.
Although the American love affair with easy credit hit a rough patch during the recession as families delayed the purchase of new cars and ever-larger flat-screen TVs to collectively pay down nearly a trillion dollars in outstanding household debt, one sector of the credit market continued to grow unabated. Total student debt is up over 500 percent since 1999, and is predicted to reach $1 trillion this year, surpassing both total credit card debt and auto loans. By 2020, it could be as high as $1.4 trillion, leading some experts to warn that student loans “could very well be the next debt bomb for the U.S. economy.”
Not all forecasts are so dire. Moody's Analytics expects that “despite its rapid growth… student lending is not likely to turn into the next subprime crisis.” That's because the student loan market is less than one tenth the size of the mortgage market that tanked the economy in 2007. And unlike residential mortgages, 90 percent of student loans are federally guaranteed.
Still, the incredible growth of student debt has sobering implications for the future of the middle class and the U.S. economy. Last year, approximately one million students graduated a four-year college in debt—more than $23,000 on average and nearly $35,000 for those attending a private school. That's one million young people whose entry into the middle class will be delayed by a decade of debt servicing. Unlike the baby boomers, who spent their 20s and 30s buying homes, creating families and investing in the economy, today's youth face a trillion dollars in loan repayments, two-thirds of which is held by people under 39. It's enough to discourage an entire generation.
A weak economy and tough job market have made the situation even worse. Close to 25 percent of recent college graduates are unemployed, up from 19 percent in 2000. Of those employed, less than half work at a job that actually requires a pricey college degree.
The delinquency rate, too, has skyrocketed. Although the number of graduates behind on their payments was initially estimated to be around 10 percent—in line with the delinquency rate for other kinds of debt, like mortgages, car payments and credit cards—a new study by the Federal Reserve Bank of New York puts the true number at 27 percent, far higher than in other sectors of the credit market. As many as 47 percent of student loan borrowers are in deferral or forbearance while they wait for their luck to change.
But it's not just recent graduates who are struggling to repay their loans. Three-quarters of past due student loan balances—$85 billion in total—now belong to people over thirty, many of whom chose to go back to school and learn new skills during the recession. And while investing in an additional degree typically yields high returns in terms of future wages, a greater debt load also means delaying savings and putting normal patterns of consumption on hold. With close to $700 billion of student debt held by people over the age of 30, it may be a long time before we see middle class consumer behavior return to normal.
Part of the problem is that tuition rates have grown much faster than median family income, a trend that has accelerated in recent years. A lesser known problem, as noted in the Atlantic, is that too few students actually graduate on time, if at all. According to the National Center for Education Statistics, just 60 percent of undergraduates seeking a bachelor's degree complete their education within six years. The other 40 percent still have to repay their loans—but with none of the added benefit of the college degree wage premium. Creating education policies that encourage these students to graduate on time could go a long way towards lowering the socioeconomic cost of their debt burden.