In a world where a college degree is more important, and expensive, than ever, America’s student debt continues to balloon. Total U.S. student debt reached an all-time high of $1.31 trillion last year, the 18th consecutive annual increase in a row. Even more troubling, this trend of rising outstanding student loans appears to have accelerated significantly in the last decade. The amount of outstanding student debt has doubled since 2009, making it the fastest-growing household obligation for that time frame by a wide margin.
Unfortunately, there are some foreboding signs that this trend may continue. According to The College Board, the costs of higher education have risen by an annual average of 5% over the last 10 years. At the same time, college degrees have become a driving force of employability in the modern workforce. According to the Center on Education and the Workforce at Georgetown University, about 11.6 million jobs were created between the end of the Great Recession and mid-2016. Of those 11.6 million, 8.4 million went to individuals with a bachelor’s degree or more, while another 3 million were taken by individuals with at least some college education. While this vast majority indicates the increase in demand for education by employers, data on the supply of educated workers raises the bar even further. The same Georgetown study says that college grads now make up 36% of the labor force, as opposed to 34% without higher education. As a result, many young people are now in a position where they have to take out larger and larger student loans in order to remain competitive, a trend that does not bode well for managing rising debt levels.
Another storm cloud lingering over America’s student debt is the credit risk these loans pose. According to the New York Federal Reserve, almost 25% of student borrowers are either late on their payments by 90 days or more or are already in default. Such a high default rate could grow into a serious problem for lenders and could even put some companies out of business in the worst case. Perhaps even more damaging to the economy, however, is the effect these defaults have on the students themselves. High unpaid debt levels can lower individuals’ discretionary spending on goods and services and postpone family formation and home purchases (according to Pew Research Center, “adults ages 18 to 34 were slightly more likely to be living in their parents’ homes than they were to be living with a spouse or partner in their own household” in 2014). A smaller proportion of young Americans pumping money into the economy through these channels has a tremendous ripple effect on everything from macroeconomic output to individual businesses.
Despite these significant issues, however, the rise in student debt may not pose a major threat to the American economy… yet. Over 90% of domestic student debt is either owned or guaranteed by the federal government, which provides a safety net for the vast majority of student loans. Furthermore, while the 6.3% increase in total student debt in 2016 is certainly significant, it was the smallest annual increase in over a decade. And relative to 2016’s total household debt of $12.58 trillion, the $1.31 trillion in student debt may not be very close to a tipping point.
Household mortgage debt prior to the mortgage crisis in 2008, for example, ballooned to $10.5 trillion of the $14.5 trillion in total household debt. While the mortgage bubble and ensuing Great Recession are certainly not a comforting benchmark, the relative size of current student debt speaks to the fact that any ‘student loan bubble’ would be on a significantly smaller scale.
Overall, the consistent rise in outstanding student loans does pose a real problem for the American economy, and if trends such as rising costs, higher demand for college-educated employees, and relatively high default rates persist, the problem will only grow. But remember: it is not time to panic, but simply time to address the growing elephant in the room.