Post-Budget student loan crisis? New data on the US Experience

In this post I make no comment on the positives or negatives of the proposed Australian budget on higher education.  Suffice to say, it will have a significant impact (for non-Australians see here for the Australian government’s description, though see here for a story from the Guardian on the impact of the Budget).

Rather, this post simply alerts readers to a new study from the Brookings Institution in the US that focuses on the US student loan crisis, providing some data and analysis that may be helpful.

The report is relevant for there will be a lot of discussion about student debt if the proposed budget goes into effect (as seems likely).   Inevitably eyes will turn to the US and some will specifically point to its putative student loan crisis as a warning.  But, this new report from the Brookings Institution, a reliable and largely centrist think tank, makes for thoughtful reading.  

Despite acknowledging that “[c]ollege tuition and student debt levels have been increasing at a fast pace for at least two decades” and that there are now “serious questions about whether the market for student debt is headed for a crisis, with many borrowers unable to repay their loans and taxpayers being forced to foot the bill”  the Report’s analysis of the data actually concludes that “typical borrowers are no worse off now than they were a generation ago, and also suggest that the borrowers struggling with high debt loads frequently featured in media coverage may not be part of a new or growing phenomenon.”  The full report can be found here.

Colin Picker

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One thought on “Post-Budget student loan crisis? New data on the US Experience

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  1. I note one aspect of student loans that the Brookings report doesn’t seem to mention is the securitization process that inevitably engages when such debt streams become marketable. It was the securitization of subprime mortgages that led to the great recession we’ve just gone through. Rises in interest rates pushed mortgagors into default and the resulting drying up of payments was felt throughout the financial system.

    The problem here is the bundling of risky assets with more secure ones. The composition of these derivatives can be achieved in such a way that credit rating agencies award them triple A ratings even when they are really junk. To what extent student debtors will continue to pay off loans if interest rates go up, is an open question. The report essentially uses a period of stable interest rates for its analysis. Moreover, students from less well-off backgrounds might have more difficulty repaying and greater incentives to default, maybe through bankruptcy.

    Governments are looking hard to sell off student debt. The UK government has just pulled back from one such sale, but it will be tempted again. Will their actions create the next bubble for twenty years time?

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