Government Gives Students Lifelong Lesson— In Debt

Jodi Romine is just your typical 26 year-old. Like most students, Jodi took out a student loan so that she could afford university in hopes of securing a better future. Definitely a good investment, right?

Jodi, profiled last year in the Wall Street Journal, has a degree in business-management, but owes $74,000 in student loans. Sixty percent of her bank teller’s monthly income goes towards her loans. She also works a second job in a daily struggle to keep up with her payments.

Jodi’s partner, Dean, is a 31 year-old full-time masters student. He also teaches, coaches high school sports, and works weekends at a restaurant. Forty percent of his paycheck goes towards his own share of student loans.

Jodi and Dean cannot buy a house and decided to delay marriage and family since they cannot afford it. And they’re not the only ones.

Approximately 37 million other graduates are in similarly overwhelming straits. Outstanding student loan debt now totals close to $1 trillion nationally, surpassing credit card debt for the first time. This number is triple what it was in 2004 and the number of borrowers has increased by 70 percent.

Like millions of other Americans, Jodi and Dean didn’t realize that getting a college degree would not guarantee a decent paying job, or any job. Instead, young people are facing a terrible job market, making it even more challenging to pay back their mounting debt.

The student loan business has a long history of being subsided by the government—when Jodi and Dean were in school the US Department of Education subsidized banks and private lenders in addition to directly financing 1/3 of all student loans. In 2010, however, a provision in Obamacare restructured the student loan industry, removing banks and other private “middlemen” from the equation. Instead, the government gained almost complete power to directly issue and guarantee student loans. Today, 93 percent of all student loans are backed by the federal government.

The average balance of student loan debt is around $25,000. Meanwhile, a shocking 53 percent of recent college graduates under the age of 25 are either unemployed or underemployed. In order to make ends meet and pay off some of their debt, just like Jodi and Dean, many bachelor degree-holders resort to working multiple jobs that very often do not even require any degree at all. An estimated 37.8 percent of recent graduates have taken jobs that only ask for high school education, pushing non college-educated youth out of the job market.

Whether employed, underemployed or unemployed, one thing is certain: college grads in debt are having a tough time. Of course, a debt load has a negative effect on a person’s borrowing power; however, coupled with a tough labor market, young people are facing even more restricting conditions than they did in the past. About 17 percent of student borrowers are delinquent on their payments by at least 3 months, making it hard to do all the normal things people in their 20’s need to do in order to establish themselves. For example, student loan debt makes it extremely difficult for recent grads to qualify for a credit card—bank standards have tightened dramatically since 2008.

Additionally, recent grads are finding it increasingly difficult to buy a home. In 2005, about 9 percent of people aged 25-30 with student loan debt were able to get a mortgage. Last year, this number fell to about 4 percent. Whereas the housing market used to depend on first-time homebuyers between the ages 25-34 to make up half of the total property purchases, this age group now makes up the smallest share of the housing market than it has in more than a decade. In an attempt to lure this huge portion of buyers back, property owners are forced to lower prices, depressing an already depressed housing market.

Without home ownership or sufficient income that can help pay off the loans (that will forever follow them; student loans cannot be discharged in bankruptcy), recent graduates face a future secure in only one thing: debt.

We can only speculate how much worse it will get as more and more people graduate under the new Obama loan regime, given that now almost anyone qualifies for a student loan and the amount granted does not depend upon whether the candidate’s degree is in a highly employable field or not.

But we do know one thing: the student loan industry’s distortionary powers are likely to continue hurting job, loan and housing markets in a variety of ways. For example, since young people in debt are obstructed from taking out other types of loans, it will be difficult for future businessmen to finance startup companies, destroying potential jobs for untold numbers of other workers.

Similarly, as young people are less likely to buy homes, the housing market will continue to suffer—as demand for homes decreases, there will be fewer opportunities for workers in industries such as construction, engineering, architecture, etc.

Finally, young people with student loan debt will likely continue to delay marriage, postpone having children or decide to have smaller families. The fertility rate in America has already declined; a smaller fertility rate means fewer workers for the future labor market. Ghosts of workers who never were can’t support the elderly who are.

Were these issues not brought up during the debates about Obamacare? If so, I didn’t hear it. Perhaps, it was inconvenient for our government officials to bring them up because the underlying incentive of restructuring of the student loan system was not actually to enhance students’ ability to afford college or build a stable future. Is it too much to speculate that this “education” provision was incorporated into Obamacare to increase the government’s revenue through the collection of interest, helping indirectly to finance the new health system?

The college market automatically affects the job market. Government interference in the former, then, will necessarily distort the latter. Just ask Jodi and Dean.