Forefront in the Classroom :: Fall/Winter 2013

The Federal Reserve Bank of Cleveland’s policy publication, Forefront, is a great tool for generating topical class discussions.

The Cost of College: Student Loan Debt on the Rise

  1. Student loan debt that is outstanding has quadrupled since 2003 and now exceeds all other forms of consumer debt. If so, why does the article state that “student debt is growing, but there is no crisis”?
    • Outstanding student loan debt totaling $1.2 trillion is spread among 40 million borrowers for an average of about $30,000 per student, which is comparable to auto loans, a form of debt that borrowers have been managing quite well over time. Many of the graduates with the most debt land high-income professions, such as medicine or law, which put them in a strong position to repay the debt. Also, studies show that college continues to be a good investment, despite the rising cost of tuition. Graduates with bachelor’s degrees earn an average of $1 million more during their lifetimes than those with just a high school diploma and are more likely to be employed.
  2. There is no crisis, but there are some trends that policymakers need to watch. Discuss some of the trends.
    • Student loan debt has doubled since 2007 in the aftermath of the recession. Some students have taken out loans because their parents may not have been able to cover the costs of college education. Another trend to watch is the rise in the delinquency and default rates on student loans. Between 17 and 23 percent of borrowers are delinquent in repaying their debt.
  3. What are some effects of mounting financial debt on student borrowers’ finances and on the country’s economic growth?
    • The burden of student loans is a factor in the significantly lower 401(k) enrollment and contribution rates among those under 30, according to a recent report by the Consumer Financial Protection Bureau.
    • Student loan debt may prevent recent college graduates from starting a new business or expanding an existing one and may limit small business owners’ ability to qualify for a loan.
    • Student borrowers also face financial barriers to reaching the milestones of early adulthood. Statistics indicate that household formation rates are down by wide margins since the onset of the recent recession, making them less likely to move out of their parents’ homes and causing a drag on household formation. Each new household formed creates $145,000 in economic impact. Also, borrowers are less likely to qualify for mortgage loans or be approved for other consumer loans.
  4. What policies did academics and practitioners at the Federal Reserve Bank of Cleveland’s 2013 Policy Summit propose for easing the debt burden on future students, without discouraging them from educational attainment?
    • One policy would educate students about the debt they are taking on, its future costs, and the long-term costs of their education. In addition, informing students about the return on investment of their chosen degree—that is, striking a balance between the degree’s cost and their associated earning potential—could help ease the debt burden in the long run. Experts also recommended creating incentives for schools to encourage timely graduation.
  5. Experts at the policy summit asserted that there isn’t a student loan debt crisis per se as much as a student loan repayment crisis. What repayment alternatives, beyond a 10-year schedule, might alleviate the crisis?
    • Structuring repayment schedules to account for income growth may enable borrowers to shift much of the repayment burden to later in their careers, when they are in a better financial position to make the payments. It would also be helpful to teach borrowers about their alternatives to 10-year repayment schedules and to broaden the types of alternatives, including the discharge of debt through bankruptcy in limited instances.

For other articles from this issue and earlier ones, go to the ClevelandFed/Forefront