Outstanding student loan debt now stands at around $1.2 trillion, and recent data suggests that graduates are increasingly falling behind on their payments. Yields on government-backed student loan bonds are rising relative to the LIBOR benchmark, highlighting rising worries among traditionally risk-averse investors about a sector of the market usually viewed as a safe bet. Moody’s is reevaluating its criteria for assessing the riskiness of securitized student debt, according to the Financial Times. A serious downgrade by Moody’s—which is scheduled to release the new criteria by Labor Day—could send the student debt market further off the cliff.
How did we get into this mess? The Wall Street Journal describes the outsized role played by overpriced graduate degrees, and the generous federal loan programs that prop up their sky-high tuition:
The doubling of student debt since the recession, to $1.19 trillion, has stoked a national discussion over how to rein in college costs and debt and is becoming a major issue in the 2016 presidential race. Little noted in the outcry is the disproportionate role played by postgraduate borrowers, who now account for roughly 40% of all student debt but represent just 14% of students in higher education.
Propelling the surge in grad-school debt is a welter of federal programs that make it easy for students to borrow large amounts, then to have substantial chunks of those debts eventually forgiven. Critics of the system say it makes it easier for graduate schools to raise tuition, and for some high-earning graduates such as doctors to escape debts they can afford to repay.
The data supports, among other things, the lawyer glut narrative we have been following for the last few years; the WSJ reports that debt growth has been most severe among law-school graduates. This is not surprising. Many law students took out massive loans when the JD was still viewed as an automatic ticket to an upper-middle class lifestyle. Thanks to the lawyer surplus and new technological innovations, this is no longer the case, and cash-strapped JDs are struggling to make good on the loans they took out when their degree looked like it would be much more lucrative.
But the problem extends beyond law school. As credential inflation proceeded apace, the number of students earning expensive master’s degrees swelled over the last few decades. Medical school debt has also soared, though doctors are often better-situated to pay it back than other graduate degree-holding professionals.
The student loan crisis obviously poses the most acute problem for graduates, but it could soon become a problem for taxpayers in general. As John Dizard has noted, the federal government guarantees hundreds of billions of dollars of privately funded loans, an amount “on the same order as Greece’s debt to multilateral institutions.” Many of these loans are in income-based repayment programs, where students pay back a percentage of their income for a certain number of years, and the public is on the hook for the remaining balance.
How the U.S. addresses its student loan crisis will be one of the major fiscal questions of the next decade. Reforming overpriced graduate programs has to be part of the answer.