TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, January 28, 2015

How Student Debt Harms the Economy

Student LoansWall Street Journal op-ed:  How Student Debt Harms the Economy, by Mitch Daniels (President, Purdue University):

To the growing catalog of damage caused by the decades-long run-up in the cost of higher education, we may have to add another casualty. On top of the harm high tuition and other charges are inflicting on young people, and the way their struggles are holding back today’s economy, we must add the worry that tomorrow’s economy will suffer, too.

Ever-escalating tuitions, especially in the past dozen years, have produced an explosion of associated debt, as students and their families resorted to borrowing to cover college prices that are the only major expense item in the economy that is growing faster than health care. According to the Federal Reserve, educational debt has shot past every other category—credit cards, auto loans, refinancings—except home mortgages, reaching some $1.3 trillion this year. Analyses in The Wall Street Journal and by Experian in 2014 show that 40 million people, roughly 70% of recent graduates, are now borrowers. In the class of 2014, the average borrower left with an average load of $33,000.

Even though the debt balloon is a fairly young phenomenon, several damaging results are already evident. Research from the Pew Research Center and Rutgers shows that today’s 20- and 30-year-olds are delaying marriage and delaying childbearing, both unhelpful trends from an economic and social standpoint. Between 25% and 40% of borrowers report postponing homes, cars and other major purchases. Half say that their student loans are increasing their risk of defaulting on other bills. Strikingly, 45% of graduates age 24 and under are living back at home or with a family member of some kind.

Now comes evidence that it’s not just consumer spending that these debts are denting, but also economic dynamism. A variety of indicators suggest that the debt burden is weighing on the engine that has always characterized American economic leadership—and the factor that many have assumed will overcome many structural and self-imposed challenges: our propensity to innovate and to invent new vehicles of wealth creation. ...

For future generations to enjoy the higher living standards America has always promised, nothing matters more than that the U.S. remains a land where miracles of innovation and entrepreneurship happen consistently. As a matter of generational fairness, and as an essential element of national economic success, the burden of high tuitions and student debt must be alleviated, and soon.

(Hat Tip: Derek Muller.)

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