The student debt crisis is showing no signs of slowing down, according to a recent Bloomberg analysis of federal and private loans.
Currently, the $1.5 trillion in federal student debt is held by approximately 44.5 million borrowers nationwide, according to Nerdwallet. Only $67 billion — or 7.65 percent — of all student debt is privately guaranteed, meaning the vast bulk of the student debt crisis comes from Department of Education loans.
Federal Reserve data also shows that between mortgages, student debt, taxes receivable, and U.S. Official Reserve Assets, student debt is the single largest federal asset to date.
In fact, the federal government’s student loan portfolio has grown so much in the last decade that, according to Bloomberg’s analysis, it’s far outpaced auto loan debt, credit card debt, and mortgage debt combined. In the last 11 years, student debt has grown by 157 percent, while credit card and mortgage debt has gone up by just one percent. Auto loan debt grew by 52 percent.
This ceaseless increase is likely due to two key factors: The ever-increasing cost of college and the stagnation of working-class wages. Figures from the National Center for Education Statistics, the U.S. Department of Labor, and the National Association of Colleges and Employers found that while tuition and fees increased by as much as 183 percent between 1987 and 2016, early career salaries only increased by 2.9 percent.
As the above chart shows, the cost of tuition and fees increased significantly following the 2008 financial crash and resulting Great Recession. When state governments made budget cuts during the recession years, many of those cuts were made to public colleges and universities.
According to a 2017 report from the Center on Budget and Policy Priorities, this resulted in a “lost decade” of higher education funding. After adjusting for inflation, researchers estimated that overall funding to public two-year and four-year colleges was $9 billion less in 2017 than in 2008, before the recession. This naturally resulted in universities charging ever-higher tuition and fees to cover for budget cuts, meaning higher debt loads for students.
The student loan bubble might not be so large if federal loans were able to be discharged through bankruptcy, which has been essentially impossible since 1976. Debtors can still have their federal loans discharged through bankruptcy, but only after aptly demonstrating that paying back their loans would cause an undue financial hardship — which, as Student Loan Hero shows, is a notoriously difficult process for most borrowers.
Given all these factors, financial analysts are predicting that there may be a massive student loan default in the near future. According to CNBC, the rate of student loan defaults doubled between 2003 and 2011, and 40 percent of student borrowers are expected to default by 2023. This could have a long-term macroeconomic impact.
“The fact that we’re not going to have a Lehman Brothers’ moment doesn’t mean that there aren’t tremendously important effects of student debt on the broader, macro economy and on growth,” University of Chicago professor Constantine Yannelis told CNBC.
However, one potential solution that would alleviate both student debt woes and economic concerns is to simply issue a government bailout of all $1.5 trillion in outstanding federal student loans — roughly the same cost as the Republican tax cut bill of 2017 that overwhelmingly benefited the wealthy. A Bard College study published earlier this year suggests a student loan bailout would inject local economies with an additional $1.1 trillion, and could create up to 1.5 million new jobs in the process.
Tom Cahill is a contributor for Grit Post who covers political and economic news. He lives in Bend, Oregon. Send him an email at tom DOT v DOT cahill AT gmail DOT com.