Also, since the onset of the recession, the majority of student debt is now owned by the Federal Government — not held by private investment banks or individuals, the way mortgage debt and property assets are distributed. This means, if a student debt crisis ever happens, private banks and individual investments will be relatively shielded, unlike the mortgage crises that caused our recent recession.
Why does this matter?
Because there are people that claim that student debt is the next big bubble. Bubble, they warn! And while there is a well-reasoned argument for this position, the majority of people issuing these tyes of warnings are advocating for policies that will only make the problem worse. Their solutions: more restrictions on issuing student debt, higher interest rates for existing student debt to recoup the cost of delinquency, and less federal and state spending on higher education, which they believe has fueled the increasing cost of higher education. These people are missing the point.
We should be focused on mitigating the factors that caused the dramatic increase in student debt over the past five years, rather than making debt more costly and harder to attain. The question of why college costs have increased over the past three and half decades is complicated, but most of the recent changes in public university costs can be explained by this graph:
Since the beginning of the recession, states have defunded public universities, shifting the cost from the taxpayers to low and middle income students in the form of student debt. Not surprisingly, the amount of debt issued by Sallie Mae since the beginning of the recession has more than quadrupled. The recent increase in student debt is not a symptom of the long-term increases in college costs as much as it is an effect of the recent defunding of public universities by the states.
Joseph Stiglitz said it best in a recent post:
With costs soaring, incomes stagnating and little help from government, it was not surprising that total student debt, around $1 trillion, surpassed total credit-card debt last year.
Some wonder how the American ideal of equality of opportunity has eroded so much. The way we finance higher education provides part of the answer. Student debt has become an integral part of the story of American inequality. Robust higher education, with healthy public support, was once the linchpin in a system that promised opportunity for dedicated students of any means. We now have a pay-to-play, winner-take-all game where the wealthiest are assured a spot, and the rest are compelled to take a gamble on huge debts, with no guarantee of a payoff.The answer to the student debt crises should include: restoring state and federal funding to public intuitions so tuition becomes affordable again, implementing easier refinancing measures allowing students to benefit from today's ultra-low borrowing rates, at the same time working on long-term solutions to curb the cost of higher education.
As I wrote earlier, the overall cost at some public institutions has remained constant over the past twenty years. The only thing that has changed is the amount the state contributes and the tab that is picked up by individual students. It's time to reverse these changes.