The high economic and social costs of student loan debt

The numbers are staggering: more than $1.2 trillion in outstanding student loan debt, 40 million borrowers, an average balance of $29,000.

It's not hard to find indications that student debt is a large (and growing) problem. But unless you or someone you love holds student loans, it can be hard to feel the problem's immediacy.

That may not be the case for long. Mounting student loan debt is ricocheting through the United States, now affecting institutions and economic patterns that have been at the core of America's very might.

Men and women laboring under student debt "are postponing marriage, childbearing and home purchases, and...pretty evidently limiting the percentage of young people who start a business or try to do something entrepreneurial," said Mitch Daniels, president of Purdue University and the former Republican governor of Indiana. "Every citizen and taxpayer should be concerned about it."

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The high levels of student debt are also serving to perpetuate and even worsen economic inequality, undercutting the opportunity and social mobility that higher education has long promised. Americans almost universally believe that a college degree is the key to success and getting ahead—and the data shows that, generally speaking, college graduates still fare far better financially than those with just a high school diploma.

But for those who are saddled with massive student debt, even getting by can be a challenge, much less getting ahead.

"You wind up disadvantaged just as you begin. It has reduced the ability of our educational system to be a force for upward mobility, and for an equitable chance at upward mobility," said Melinda Lewis, associate professor of the practice at the University of Kansas School of Social Welfare. "It is still true that you are better positioned if you go to college, but you are not as much better positioned if you have to go to college with debt."

Median college earnings vs. high school grads

There are several causes for the rapid increase in levels of student debt.

For one, despite the growing costs, Americans believe deeply in the importance of higher education. A survey of parents released this month by Discover Student Loans found that 95 percent believe college is somewhat or very important to their child's future. They have reason: In 2012, full-time workers with bachelor's degrees earned 60 percent more than workers with just a high school diploma.

Policymakers also encourage college attendance. In a speech earlier this year, President Obama called higher education "one of the crown jewels of this country" and said it was "the single most important way to get ahead."

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There is also the matter of "credentialism," the trend in many professions to screen for ever higher qualifications for jobs that may not require them. A 2014 study by Burning Glass, a labor analytics firm, found that 42 percent of management job holders had bachelor's degrees, but 68 percent of job postings required them. In computer and mathematical jobs, 39 percent of employees had bachelor's degrees, but 60 percent of job listings called for them.

"Many middle-skill career pathways are becoming closed off to those without a bachelor's degree," the report concluded.

The confluence of those trends has led to a nearly unbroken increase in college attendance for almost 30 years. At the same time, though, the cost of college has risen for decades, far outstripping inflation.

As a 2012 economic analysis by The Hamilton Project, a policy research group, concluded: "The cost of college is growing, but the benefits of college—and, by extension, the cost of not going to college—are growing even faster."

There is much debate over the reasons for the steep increase in college tuition. Purdue's Daniels has pointed to "inelastic demand" for higher education, which has given colleges room to raise prices, while others cite the decline in state funding for public education and the shrinking subsidies at private schools.

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Whatever the reason, there's no denying the cost of both a private and a public college degree has skyrocketed. Average tuition, fees, and room and board at a private, non-profit, four-year college were $42,419 for 2014-2015, up from $30,664 in real dollars in 2000-01 (Tweet this). At public, four-year schools, costs for the 2014-15 school year, at $18,943, were up sharply from the $11,635 price tag in 2000-01, according to the College Board.

The federal government has stepped up its lending accordingly, and so have private student lenders. The total of private student loans outstanding grew rapidly from $55.9 billion in 2005 to $140.2 billion in 2011, fueled in part, perhaps, by the growing market for asset-backed securities backed by student loans, known as SLABS.

While the expansion has provided more options for student borrowers—and the opportunity for those with high credit scores to refinance at lower rates—regulators have expressed concerns.

In a 2012 report, the Consumer Financial Protection Bureau found that many student borrowers may not have understood the difference between private student loans and government loans, and default rates on private student loans "have spiked significantly since the financial crisis of 2008."

Lower birthrates, fewer small businesses

UCLA campus on May 14, 2015 as California students at the University of California are getting a two-year reprieve from threatened tuition increases as a result of a large infusion of new state funds to the 10-campus university system in Gov. Jerry Brown's proposed spending plan.
Al Seib | The Los Angeles Times | Getty Images
UCLA campus on May 14, 2015 as California students at the University of California are getting a two-year reprieve from threatened tuition increases as a result of a large infusion of new state funds to the 10-campus university system in Gov. Jerry Brown's proposed spending plan.

Rising student debt levels are changing how millions of people approach major milestones and core financial decisions, affecting longstanding social and economic patterns.

Consider homeownership. Owning a home used to be a key marker of adulthood and maturity. But homeownership has plummeted among Americans under age 35, from 43.3 percent in the first quarter of 2005 to 34.6 percent in first quarter of 2015, according to the Census Bureau.

Mortgage lenders "look at all debt obligations, and student debt would count toward that, which means the person...has to downgrade their housing expectations, and take out a loan lower than what they intended. Or in some cases, they say, 'Well, I'm going to hold back,'" said Lawrence Yun, chief economist of the National Association of Realtors.

The association found in a recent survey that 23 percent of first-time buyers said it was hard for them to save for a down payment, and within that group, 57 percent said student debt was impeding their saving, up from 54 percent a year earlier.

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While a college education generally leads to higher income, "growing student loan burdens can have direct impacts in terms of lost sales due to higher debt levels for builders focusing on the entry level market space," said Robert Dietz, an economist with the National Association of Home Builders.

Twenty-somethings are also putting off starting a family. The median age for a first birth has been increasing for years, standing most recently at age 26. And the birth rate among women aged 20 to 29 is now at a record low, and has been declining since at least 2008, according to data from the Centers for Disease Control.

Students laboring under the burden of student debt are also following different career paths, with important social implications. The need to repay loans is steering some away from professions like social work and health care and toward higher-paying jobs in tech and financial services.

In a working paper for the National Bureau of Economic Research, the writers examined the effect of a move by a selective college to replace loans with grants. "We find that debt causes graduates to choose substantially higher-salary jobs and reduces the probability that students choose relatively low-paying 'public interest' jobs," the researchers observed.

While choosing a higher-paying field may help them repay their loans faster, it could also result in fewer graduates moving into low-paying but critical jobs like early childhood education.

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Research has also found that the burden of student debt hinders innovation and entrepreneurship, a core component of the economic prowess of the United States. Researchers at the Federal Reserve Bank of Philadelphia and Pennsylvania State studied the relationship between student debt and small business formation and found "a significant and economically meaningful" link: more student debt led to fewer small businesses being formed.

Student loan defaults are another burden on society. The three-year default rate stands at roughly 13.7, and the average amount in default per borrower was just over $14,000 in the third quarter of 2014. Debt like that impedes the ability of borrowers to save for retirement at a time when millions of Americans are short on retirement savings. And it can have a ripple effect on the economy, in part because the federal government typically does not recoup the full amount in default (though it does get most, eventually).

"We're not going to see this create systemic risk," said Rohit Chopra, student loan ombudsman and assistant director at the Consumer Financial Protection Bureau, since the government either guarantees or owns most of the student loans and has the power to sue and to garnish wages, tax refunds, and federal benefits like Social Security when borrowers default. "But it will create economic drag if it's unaddressed,"he added.

While some, like Mark Kantrowitz, a student financial aid policy expert and publisher of Edvisors.com, argue that student loans have not reached the level of "crisis," most policymakers and experts agree that the trends are worrisome at the least and more should be done to ease the burden on borrowers.

Kantrowitz advocates for more programs to improve the financial literacy and budgeting skills of students and their parents, as well as better disclosures for student loans. "We need to bring some sanity back to the system," he said.

Policymakers and academics are trying to develop solutions to the burgeoning student debt burden. Obama has proposed having the government cover the average cost of community college for students who maintain good grades, which could help ease the debt burden if it's adopted (though students would still be responsible for the cost of continuing their studies beyond community college).

The Obama administration has also expanded the Income-Based Repayment program, which enables students to make loan payments that are no more than a reasonable share of their discretionary income— generally 10 percent—over a longer period of time.

Qualifying borrowers who work full-time in public service jobs may also get some of the balance of their loans forgiven through the Public Service Loan Forgiveness Program.

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Some states offer Children's Savings Accounts, which enable families and donors to put away money for children's college education. Research by Lewis and her colleague William Elliott, as well as other studies, indicate that these accounts encourage college attendance, particularly among lower-income Americans.

Several schools have been expanding student aid. Stanford university, for example, announced this spring that tuition will be free for students whose families earn less than $125,000 a year, and several Ivy League schools have similar programs in place. It's worth noting, though, that universities with those kinds of plans in place have also typically increased their tuition for the last several years and have substantial endowments.

Some of the worst abuses in student lending have also been washed out of the system. Many student borrowers take out loans to attend for-profit colleges like the former Corinthian College, which abruptly ceased to exist in April, and the Department of Education in June announced it would forgive the debt of students who attended that school.

These efforts should certainly help to alleviate the burden on borrowers. But absent dramatic changes in the financing of higher education, student loan debt is expected to keep climbing, and that could have implications for us all.

This is the first article in our weeklong series "Debt by Degree," which examines the growing student loan debt burden.