Financial Crisis Is Over for Housing But Not for Student Loans
(Bloomberg View) -- The financial crisis and the bursting of the housing bubble are now a decade behind us. But at least one consequence persists: a pile of student loans. Those loans, and the government’s relentless efforts to collect on them, continue to haunt Americans years after names like Lehman Brothers and Bear Stearns faded into memory.
Since the recession began in 2008, federally owned student debt has grown from around 5 percent of all household debt to around 30 percent:
Relative to national income, student debt has more than quintupled:
This isn’t because a lot more people suddenly decided to go to school. U.S. college enrollment rose from 16.4 million in 2008 to 17 million in 2015 -- an increase of about 4 percent. Nor is it because college tuition suddenly soared. Average net tuition at public four-year universities, for example, rose from $7,280 in the 2007-08 school year to $9,970 in 2017-18 -- an increase of 37 percent. These trends together don’t come close to explaining the dramatic increase in student debt.
So what does account for the change? One possibility is that the collapse of housing prices forced students to take out more loans to fund their educations. Preliminary results by economists Gene Amromin, Janice Eberly and John Mondragon, presented at this year’s American Economic Association meeting in Philadelphia, suggest that this was a factor. They looked at how changes in home prices affected borrowing and found that people tend to borrow money against their houses to fund their kids’ educations -- on average, a household with a kid in college will extract $3,000 more in home equity. Naturally, when this spigot gets shut off, either the kids have to drop out or they have to find another way to pay.
That, naturally, means student loans. Amromin and his colleagues estimate that every $1 drop in home equity loans due to a drop in a house’s price leads to 40 to 60 cents more in student borrowing. Housing prices, they found, are a much more important predictor of student borrowing than other economic conditions such as the state of the local labor market.
This is a double whammy for young people who went to school during and just after the recession. Not only were they forced to borrow more because their parents lost the ability to support them, but they also were less able to pay their loans back after graduation due to the weak labor market that persisted for years after the crisis.
A sensible and compassionate policy would be to bail out borrowers who were hit, directly or indirectly, by the housing collapse and recession of a decade ago. That would involve some combination of loan forgiveness, interest rate reduction and making student loans dischargeable in bankruptcy.
Unfortunately, that is unlikely to happen. The government owns most student loans, a fact that has become even more true since the crisis. And unlike private creditors, if the government wants its money, it usually is going to get it, even if that means ruining the lives of borrowers. You can default on a mortgage or get rid of credit card debt by declaring bankruptcy, but the government will have its due.
Worse, professionals -- teachers, pharmacists, dentists and many others -- can lose their licenses if they don’t make timely loan payments. And it probably doesn’t even help the government make its money back, since people who lose their licenses often can’t get work, let alone make their loan payments.
Other examples abound. Education Secretary Betsy DeVos recently issued a policy statement threatening to pre-empt state laws intended to rein in loan originators, servicers and debt collectors. A bill in the House would limit federal oversight of these companies.
When it comes to student loans, the government is increasingly acting like a loan shark. This is depressing, but perhaps not surprising, since student loan payments are now a source of revenue for the government.
Higher education is an increasingly critical step on the ladder to a middle-class lifestyle. Achieving that lifestyle should not require people to mortgage themselves to the government for the rest of their lives.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Noah Smith is a Bloomberg View columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.
To contact the editor responsible for this story: Brooke Sample at bsample1@bloomberg.net.
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