Rising Student Debt Could Be An Economic Drag
In Missouri, the average student loan debt for people between 25 and 34-years-old has increased by about 120 percent over the past eight years. In Illinois, that number has jumped more than 140 percent, according to a report from the Federal Reserve Bank of St. Louis.
Nationally, student loan debt has topped the $1 trillion mark, surpassing credit card debt and auto loans.
Experts from across the country are gathering in St. Louis today to talk about what can be done to rein in the nation’s soaring student debt, which could become a drag on the larger economy.
St. Louis Public Radio’s Tim Lloyd recently spoke to the event’s keynote speaker, Consumer Financial Protection Bureau Assistant Director and Student Loan Ombudsman, Rohit Chopra. Below is an extended version of the interview as well as some as some of the highlights.
What is the current state of the student loan debt in the United States?
“Around 40 million Americans owe about $1.2 trillion in student loan debt. This number continues to increase, year after year after year. What we’re finding is that this may have a broader impact on the economy. Whether it’s buying a first home or starting a small business, many young Americans are finding their student debt is holding them back.”
In terms of total student debt, how does this separate out between federal loans which have interest rates that are set by Congress and private loans, which have unregulated interest rates?
“There’s about $1 trillion in federal student loans and the remaining is private student loans, and like you said, there are different features with the different loan types. Just like borrowers with subprime mortgages, private student loan borrowers are finding a lot of difficulty refinancing and getting alterative repayment options on their loans. Before the financial crisis, there was an active non-bank market for consumers to take on subprime mortgages and private student loans. Many of those lenders gave out loans that but didn’t really know if those borrowers would pay those loans back, because they were able to bundle them into packages of loans and securitize them and sell them to Wall Street. So, some of the same issues we see in subprime mortgages are also popping up.”
How is this rippling out into the larger economy? You have made mention that it can be felt in terms of perhaps purchasing homes or housing, but how else is this rippling out into the larger economy?
“For people in rural America, student debt has some unique impacts. For example, teachers and doctors with heavy debt loads may be unable to move to a rural area where rental housing may be quite limited since they many not qualify for a mortgage. We find that many young Americans may not be able to contribute to their employer’s retirement plan because student debt is eating up so much of their paychecks.”
How does student debt rate in terms of difficulty for a borrower to pay back?
“Delinquencies statistics on student loans suggest that many borrowers are having a tough time. In some cases they have options, like income based repayment on their federal loans, which allows them to pay their loans as a percentage of their income. There’s certainly more delinquency in student loans than other asset classes. And that’s something that should be a worry. If young people are not able to keep up on their obligations that could mean that they’re less able to make big ticket purchases or save for the future. ”
With regards to servicers of student loans, what can be done to help borrowers pay down their student debt?
“We need to be able to have a marketplace that works. So many student loan borrowers are finding that they’re just not able to take advantage of today’s historically low interest rates. There are few refinance options and the low interest rate environment that’s been created by monetary policy has not always been helpful to student loan borrowers. That’s an issue that really needs to be addressed. So many borrowers were responsible, they completed their college education, they found a job, but their student loan is priced with the risk they may not graduate or find a job. And they wonder why they’re stuck in such high rates.”
Do you think this rising student debt that we’re seeing now has the potential to reshape the way we think about education and job training as a whole?
“Many families are particularly concerned about their children taking on large levels of student debt. So, I think people are becoming more aware of the impacts of it. It may cause families to shop, and compare, much more aggressively and find schools and programs that are not just providing a good education, but a good value.”
Follow Tim Lloyd on Twitter: @TimSLloyd
Discussion: St. Louis on the Air
Monday on St. Louis on the Air, host Don Marsh continued the conversation about student debt with:
- Matthew Newlin, Assistant Director of Financial Aid at the Brown School of Social Work, Washington University in St. Louis
- Bryan Noeth, Policy Analyst at the Center for Household Financial Stability, St. Louis Fed
- Joey Kouri, Student at Saint Louis University with a double-major in economics and mathematics