Summary:
– The total amount of US student loans has increased since 2008 and now stands at nearly $1 trillion, or approximately €750 billion.
– The average debt per university student in the United States is $25,000.
– An average debt of $25,000 represents between 60% and 75% of the average annual salary of a young college graduate in the United States, depending on the state.
Recent economic news in the United States has been largely dominated by considerations of economic recovery, monetary policy developments, and the risks of political disagreement over the budget. All of these issues have overshadowed the worrying trend in student loans. While this trend is not comparable to the one that led to the global crisis with mortgage loans, the threats to the economy are nonetheless real.
The evolution of student loans in the United States…
The total amount of US student loans has risen sharply. Since 2008, outstanding student loans (current debt stock) have increased by 50% and now stand at nearly $1 trillion, or around €750 billion. The average debt per university student in the United States is $25,000. While the total amount of student loans is certainly lower than mortgage loans, it is now higher than other types of loans such as car loans and consumer loans.
There are two reasons for this surge in student loans:
– First, this trend reflects a rise in the cost of education, with university tuition fees increasing by between 30% in private institutions and 40% in public institutions.
– The rise in student debt also reflects a parallel 20% drop in student grants.
Interest rates on these loans have recently increased. Whereas previously the federal government-guaranteed credit rate for students meeting certain income requirements was 3.4%, this rate has doubled since July 1, 2013, and now stands at 6.8%. The increase in the credit rate for these students results in an average additional cost of $4,600 per student.
The default rate has reached worrying levels. The number of loans taken out to finance studies has been increasing gradually year after year, reaching 11% in 2012. In other words, one in ten student loans cannot currently be repaid properly.
… raises a number of problems and concerns
American graduates have to move back in with their parents. As in many developed countries, young people coming out of the university system are finding it difficult to enter the job market. In the United States, this phenomenon has been amplified by an unfavorable economic climate, with a lackluster economic recovery that has struggled to take hold and remains largely dependent on exceptional monetary policy. Unlike other developed countries, where student loans are still marginal, this method of financing education is widely used in the United States. The uniqueness of the American situation therefore lies in the combination of a difficult economic context with a very high debt burden. In this context, more and more young graduates are having to move back in with their parents because they cannot afford to pay rent.
The burden of debt limits the economic independence of younger generations. Indeed, with the financial burden of repaying their loans, young graduates have to postpone their various projects, whether economic (buying a car or a home, etc.) or personal (getting married, starting a family, etc.). Personal opportunities for social advancement are automatically curtailed, as is consumption potential. While a country’s youth and dynamism contribute to its economic growth, the latter is affected by this situation. In practical terms, instead of spending money on capital goods or a house, young graduates devote most of their income to repaying their loans. Thus, an average debt of $25,000 represents 60% of the average annual salary of a young college graduate in the United States, and this can rise to over 75% depending on the state.
The situation has a broader impact on society as a whole. In addition to student debt, families sometimes bear the burden of debt related to financing their children’s education. In this context, nearly one in five households in the United States faces this problem. In addition, it should be noted that nearly 40 million individuals continue to repay student loans after the age of 30. For example, US President Barack Obama and his wife, Michelle Obama, did not finish repaying their student loans until 2012. Finally, it should be noted that the doubling of interest rates on student loans will automatically continue to make it more difficult for the most disadvantaged populations to access higher education.
In the long term, the impacts could be very negative. Indeed, it should be noted that the increase in the burden of debt may discourage people from investing in their education and encourage some to terminate their studies, especially in an economic context where employment prospects are low. Around 30% of 20- to 24-year-olds are currently unemployed, meaning they do not have a job and are not engaged in education. In this context, and beyond the immediate economic implications, the medium- and long-term risk of human capital degradation is very real. This phenomenon could therefore lead to a decline in the average skill level of the American population, with potentially significant implications for its future economic growth.
The specter of a new financial bubble
Some fear the formation of a bubble similar to the one that preceded the global crisis. Indeed, the dynamics of student loans resemble in some respects those of mortgage loans (real estate), which had led to the formation of a financial bubble. It eventually burst in 2007, triggering the current global crisis. The acceleration in the volume of student loans and the rise in defaults on these loans may lend credence to this idea.
However, the two situations are not entirely comparable. Three factors temper these fears:
1) First, although the amount of student loans is high (around $1 trillion), it remains lower than the amount of real estate loans, and above all, it remains ten times lower than the level of real estate loans before the crisis.
2) Secondly, while real estate debt is held by banks, student loans are mainly held by the government. In fact, 80% of student loans are guaranteed by the government. In this context, even in the event of default, it would not be likely to bankrupt a banking institution as was the case in 2008, with the knock-on effects that followed.
3) Finally, in the event of non-repayment of loans, the « price » of education and the value of degrees will not fall, unlike in the real estate sector. In other words, even if there were a wave of defaults on student loans, this would not cause degrees to lose their value in the job market. Students will therefore still be able to find a job, which will then enable them to repay the loan they have taken out. The situation is different in the real estate market. A widespread wave of defaults automatically leads to a fall in property values and, consequently, a parallel decrease in the wealth and repayment capacity of the people who own these properties.
