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Student Loans Weigh Down Recovery

Finally, we have some (arguably) good economic news: Americans’ credit levels have returned to their pre-recession peak of $2.58 trillion. This is usually a good sign for the economy. Higher credit means more consumers are shopping, more banks are lending, and confidence in general is up.

But as the Wall Street Journal points out, this news comes with a caveat, and it’s a big one.Sstudent loan debt accounts for nearly one-third of that figure and is now second only to mortgage debt as the leading form of debt held by Americans. This seriously undercuts the otherwise good economic news, as student loan debt provides a considerably smaller boost to the overall economy than other forms:

Shorter term, however, student loans don’t juice the economy in the same way as increases in credit-card debt. Exclude student debt from the Fed’s consumer-credit data and the total is actually down more than 15% from its 2008 peak.

Looked at that way, consumers aren’t really borrowing and spending as much as the headline consumer-credit figure would suggest, says Ken Safian of Safian Investment Research. This dovetails, he adds, with personal-income data showing that while incomes are going up, expenditures are flat.

But the short-term economic impact of student debt pales in comparison to its long-term effects on those who hold it. As we’ve said before, higher ed costs continue to be a major drag on the lives of young people, preventing them from taking important risks and delaying major life decisions. We need to make college more relevant and more affordable.

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  • Anthony

    Related material: “Generation Squeezed” (a major drag on the lives of young people) by Robert Samuelson in Washington Post.

  • Kenny

    I don’t get it, Mr. Mead.

    We’re told over and over that today’s kiddies are so smart, so intelligent. Hey, after all, they know how to use iPads and all the other electronic toys out there.

    So how could the kiddies be so stupid that they take out loans without being able to scope out the obligations they have assumed?

    I’ve spoken to more than a few of the youths over the years, and I get the distinct impression that they don’t actually realize what their debt means — namely that they’ll have to pay the money back with interest.

    Maybe that’s because most of the kiddies in college today never really worked for anything in their lives and subconsciously they believe someone else will pick up their student loans. And why wouldn’t they think that — they’re soooo special.

    IMHO, lowering the voting age to 18 was a huge mistake. Heck, it should have be raised from 21 to 25 instead.

  • Jim.

    Honestly, has the author of this piece learned nothing from the horrific pain of the last few years??

    What this statistic shows is that we have utterly failed to deleverage over the last few years, and that we’re more likely to see another loan / bankruptcy crisis before we see a real, robust recovery.

    This is the worst economic news since ObamaCare was shoved down our throats. This is as bad as the fact that we’ve been running trillion-dollar deficits every year.

    How could anyone mistake this for good news? The increase of credit is, at best, a somewhat necessary evil for growth. Celebrating an increase in debt in the absence of robust growth is stupidity.

  • thibaud

    Bring back vocational ed at the secondary level. The Germans have much to teach us here.

    Two secondary-school tracks would make a lot of sense and solve a lot of problems.

    As opposed to our foolish cultural presumption that college is for everyone, including that majority of US college students who can’t hack the work and have no business being there in the first place.

  • Eurydice

    Why doesn’t spending on higher education juice the economy the same way as spending on a car or a house does? Tuition supports salaries the way purchases do for any other industry.

  • thibaud

    We could start by consolidating the hundreds of second-tier private colleges that can’t manage to graduate more than 80% of their students in 6 years.

    Take the laggards’ facilities and real estate and make them into vocational ed magnet schools for area HS kids.

  • thibaud

    #5 – Eurydice: because of the massive leakage due to a) the huge dropout rate and b) the absurd number of admin personnel.

    Far too many little liberal arts colleges, and far too many poorly-prepared, unmotivated kids attending those colleges.

  • Eurydice

    @thibaud – but that’s apples and oranges. These statistics don’t have anything to do with the health of the higher education industry or whether it’s advisable to take out a student loan.

    The effect of tuition spending on the economy is the same whether the student pays the tuition in cash or by taking out a loan. And whether a university has an absurd amount of administrators is irrelevant to this particular argument, because all those administrators are getting salaries and are consumers just like everyone else. Also, dropout rates only mean there won’t be additional revenue from those particular students, this becomes a choice not to spend – but drop out rates and inefficient management don’t say anything about why the mechanism of tuition spending should have a different effect on the economy than any other kind of consumer spending.

  • Tom Gates

    My thinking is that because Dr. Mead and his academic peers aided in perpetuating the myth that an undergraduate/graduate degree was the road to Nirvana, and therefore the escalating costs and loans, then they should be willing to give up from between 10% and 45% of their salaries to fund a program to reduce student loan principal. Each according to his/her means and all of that. I am sure the faculties from the Ivies would understand that logic, heck they have been teaching it for decades. Non-tenured faculty, 10%, all the way up to those such as Elizabeth w
    Warren making $450,000 a year at 45%. I mean , how much does one need to live? These academicians think they earned their positions on the merits? Not true, Government, a teacher, a student loan racket designed to take advantage of major price fixing between universities did. Those that benefited from the labor (Re: student loans) of others should have to pay to make it right. After all those faculty members are no smarter than anyone else, just more privileged. We can call it the Student Loan Eminent Domain Program, you know like the mortgage thing.

  • Richard Treitel

    Eurydice@5: it does, but the car is also useful to the purchaser and so helps the economy twice over. Spending on universities is like spending on prisons: the people who get the plump incomes have skills that could be better used elsewhere. Well, I dunno if prison guards’ skills could be used elsewhere … or college administrators’ skills, for that matter. But shoveling out college loans over the past few years has been almost pure Keynesian stimulus. (Let’s not debate Keynes here, OK?)

  • Walter Sobchak

    Eurydice : Because Keynesian aggregate demand theory is just plain wrong. The colleges are sucking the life out of the economy like demented lampreys. And it is not just the second string ones. Harvard is a bigger deadweight loss to the economy than Slippery Rock. And it is not just the explicit student loans, there is also the shadow student debt such as HELOCs taken out by doting parents. Try this:

  • Eurydice

    @thibaud – just one more thing. The statistics as cited in the WSJ don’t at all show that student loans are weighing down the economy (nor does the article claim this). Even if there is something especially different about the way tuition spending goes through the economy (for which the WSJ gives no basis, but maybe someone else here knows), the only logical conclusion one can draw is that statistics-watchers have been wrong in the way they use consumer spending data to predict economic recovery.

    I know this sounds like nitpicking, but there’s a general tendency throughout our Opinionverse to cherrypick information in order to fit a preconceived conclusion – VM has often commented on this with regard to the environment and “blue model” issues. In this case, we might have a feeling that student loans are weighing down the economy because student loans are a problem and problems can’t be good good for the economy, but I think this blog is capable of more rigorous thinking than that.

  • Eurydice

    Ooops, in the first and last sentences, I mean “weighing down the recovery” not “economy.”

  • thibaud

    “The effect of tuition spending on the economy is the same whether the student pays the tuition in cash or by taking out a loan.”

    No disagreement, but that’s beside the point. The individual, and the college population in aggregate, are investing money now in expectation of a return that will accumulate over decades.

    The ca. 40% of students who fail to graduate from real colleges (and 70% who fail to graduate from dubious “for-profit” colleges) will not get a positive return on their five- or even six-figure investment. That’s a huge amount of capital that could have been used to generate returns for them and for the economy overall.

    I propose that we shift that sum from funding half-hearted forays into college toward full-bore, carefully-structured, well-led vocational training on the German model. Far better ROI for them and for all of us.

  • thibaud

    Re. Harvard, their graduation rate is IIRC about 97%. The other top 100 research institutions and the top 30 or so liberal arts colleges likewise graduate 85% or more of their students, who are overwhelmingly well-trained and highly motivated. An investment in a good degree from one of those schools is almost certainly going to generate an attractive ROI for the student and for society.

    But when a terribly expensive little second-tier private college – even if it’s “highly selective” – can’t manage to graduate more than 70-75% of its students in 6 years, it’s a fair bet that this school is wasting resources on an underachieving, privileged upper middle-class population.

    We have a couple hundred of these glorified post-adolescent country clubs, and they suck up tens of billions each year that could be diverted to a secondary vocational-ed model that would train millions of young Americans in useful skills each year.

    These country clubs will die eventually as their rich-kid populations come to realize what a terrible investment they represent, but if we can hasten this transformation, we should. Lots of very valuable real estate and other facilities there.

  • Richard Treitel

    I remind you of and propose that employers offer to pay back (out of pre-tax income) a portion of the loans of employees who have graduate from programs they deem relevant to the job. This would give both students and colleges an incentive in the right direction; and I don’t think the US is ready for anything better yet.

  • Tom Holsinger

    Consider how much of the higher education bubble is the consequence of other factors, notably the legal system’s emphasis on equality of results. Here I refer to the term, “disparate impact” in the context of civil rights actions under 42 United State Code section 1983.

    Misuse of the disparte impact doctrince through excessive legalism by the judicial system, as abetted by the Democratic Party for partisan purposes, resulted in de facto termination of employment aptitude testing (outside the Defense Department and related national security agencies). Ability to show up and at least average intelligence, based on the nominally objective criteria of obtaining a Bachelor’s degree, was substituted instead.

    Unless the “disparate impact” doctrine in civil right law is pretty much eliminated, the original driving force behind the higher education bubble will remain, and the pressure to reinflate the bubble will remain.

  • Eurydice

    @thibaud – it’s not beside the point, it’s directly addressing the point of the article. What’s beside the point is the discussion about the cost and merits of a university education. It’s a valid and important discussion but has nothing to do with the WSJ article.

    @Richard and Walter – all this talk about tuition payments being Keynesian is just plain nonsense. And the purchases underlying the increase in consumer debt that the WSJ is talking about aren’t spelled out according to usefulness to the purchaser or to society. People could be buying cars or jewelry or video games, distressed jeans or dog-grooming services, movie tickets and over-sized bottles of soft drinks, or they could be sitting at home downloading porn. Purchases like these don’t travel through the system any differently than the purchase of a class at the local community college.

  • Kris

    thibaud@6: “We could start by consolidating the hundreds of second-tier private colleges … Take the laggards’ facilities and real estate”

    I see, just take all this private property, presto! I’m starting to wonder whether you’re an undercover Tea Partier trying to make “Big Gummint” look bad.

  • Joe

    Stop forcing kids right from high school and into college. High school is free, college is expensive; but there’s scant little time to realize this fact between May and August of one’s 18th year. I joined the Marines the week after high school, now I’m debt free through college. (And they said I was the reckless one).

    Not everyone can get a free ride from joining the Marines, but spending a few years earning a living wage is a great way to learn the value of money, and a good way to learn to apply oneself. We’d see a lot less student debt in this country if a college degree as ‘The Next Thing’ wasn’t so institutionalized.

  • Jim.


    The reason that going into debt to pay university administrators’ salaries doesn’t spur the economy is that Keynesianism just doesn’t work.

  • thibaud

    #19 Kris – it will happen naturally as soon as we stop subsidizing the second-tier private college brats’ loans. Helping this along will be a revolt by upper middle-class parents who will refuse to help close the gap.

  • Swami


    Permit me to add another layer of explanation to why some spending adds to the economy, and some doesn’t.

    1) Money is just an instrument of trade. Without things to trade it has no intrinsic value of its own. Perhaps as collector’s items.

    2) Because of point 1, the total wealth within an economy isn’t based on how much money it’s got. More money only allows more frequent trades, “increases liquidity” as they say, but only when there are trades that would take place, given more liquidity.

    3) Because of point 2, increasing the money supply without also increasing the overall production and/or production capability will devalue the currency.

    4) It should now be evident that for spending to stimulate the economy, it must be spent on activities which increase production, and/or capacity of the goods and services we call “wealth”. For example, giving me a million dollars and saying “retire” does nothing for the economy. I will add nothing, retired. Giving me a million dollars and saying “Build me a new house” does- I will produce a house for you. The house becomes part of the overall “wealth pool” of the nation.

    5) Here is the “Eureka” moment. You have paid me to build a house, I built it. Not only do I now have the money to spend (some of having already been spent on labor and supplies, now THEY spend it, and so on) BUT… big BUT… You have given away 1 million dollars, but you now have a house with equity you can borrow against. New money is in effect created by this addition of wealth! And since it is created along with the new wealth, it does not deflate the currency!

    Note that you cannot borrow- create money- on any equity if you just given me a million dollars to retire, or “administer” or do anything else with no market value.

    Aha! House building, then, has a “Multiplier” effect that merely passing money around does not.

    6. Education, like a house, is a product. It has value. But how much? University budgets and tuition costs have skyrocketed. The economic value of the return for those costs has not. Understanding points 4 and 5, you can see that an increase in administration spending can only be of overall value to the economy if that increased cost creates a corresponding increase in the efficiency of teaching- which is the real “wealth” produced by the university. It does not, since we know that not only have overall costs risen, but per student costs have risen. The student, therefore, is paying more, getting less- a net drag on the total wealth of the economy. No multiplier comes into play.

    Got it?

  • Jim.


    So… it’s not about the money. It’s about everything you can buy with the money. Right?

  • thibaud

    Well put, Swami.

    More money for cutting-edge hard science and engineering research at our major universities – good. Multiplier >1.0

    More money for college administrators and kids who shouldn’t be in college to begin with – bad. Multiplier <1.0.

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