Young adults are fast becoming a political force to be reckoned with. If you had questions about our growing clout just watch the presidential candidates trip over themselves to try and solve the student loan conundrum.
There is no doubt that we’re appreciative of the attention. After all, the average student now graduates with more than $28,000 in student loan debt. That comes at the same time that youth unemployment remains stubbornly high and employee wages are frustratingly low, a situation that has pushed up student loan default rates to historic levels. New data from the Federal Reserve shows that of borrowers who began repaying their debts in 2009, 26 percent have already defaulted. By comparison, only 18 percent of home loans that were issued in 2006, just before the bottom fell out of the housing market, fell into serious delinquency.
“We are fairly confident in the aggregate statistics–over a trillion dollars in loan balances outstanding, 43 million borrowers and the highest delinquency rates of any form of household debt,” Federal Reserve Bank of New York President William Dudley said recently. “But we know a lot less about the precise causes and consequences of the heterogeneity in the net returns of educational investments. . .”
It’s an increasingly serious situation for many young people. And it’s clear that candidates view it as an increasingly attractive opportunity to garner votes.
“A part of the reason student debt is so important for Democrats is that it’s a crucial motivator to get younger people to vote,” Democratic pollster Geoff Garin told the Washington Post. “Student debt is often the defining economic fact of their lives.”
Some would go even further, arguing it’s not just a great incentive to woo young voters, it’s an absolutely crucial ingredient to winning in 2016.
“[The candidates’ plans are] all aimed at helping young people afford to go to college and pay off the debts that come due later,” Paula Dwyer writes for Bloomberg View. “For anyone running for president in 2016 — and hoping to win the millennial vote — promising to fix the student-loan mess seems essential.”
The problem is that one of the worst things you can do to clean up the student loan mess is to arbitrarily reduce student loan balances. On first read that sentence likely makes no sense, so let’s unpack it a bit.
Since 2007, Congress has passed several iterations of income-based repayment plans in an effort to make student loan burdens more bearable for students. The main changes have been limiting payments to 10 percent of disposable income and forgiving student loan balances after 20 years. These changes have made loans more affordable, but they’ve done nothing to make college more affordable. In fact, if anything, they’ve made it worse.
A recent report from the Federal Reserve Bank of New York found that between 2001 and 2012 student loan originations rose from $53 billion to $120 billion. Over that time span the average tuition price at a four-year public college rose 46 percent in inflation-adjusted dollars, from $6,950 to $10,200. Those numbers aren’t just correlated. The Fed also found that 55 and 65 cents of every dollar spent on Pell Grants and Subsidized Loans, respectively, were captured by colleges through tuition increases. In other words, by divorcing the cost of college from free market forces the government has unintentionally driven up the cost of a college education under the guise of increasing access to higher education.
Loan refinancing schemes are also poorly targeted, creating the most benefit for well off households. As the left-leaning Brookings Institute found:
“Refinancing loans provides the greatest benefit to borrowers with large outstanding debts.[i] This doesn’t seem like such a bad thing until you realize that households with large outstanding debts tend, on average, to be high-income households. Many borrowers who take on large debts do so in order to pursue degrees that lead to high incomes, in fields such as law and medicine. These are not the same households who are struggling financially and are perhaps in need of a bailout.”
Taken together, that means that pure loan subsidization schemes, such as those introduced by Hillary Clinton, Bernie Sanders and Elizabeth Warren, will not only dramatically increase tuition costs, they won’t do much to help their targeted audience.
Fortunately, many Republican candidates are thinking of the problem more holistically. For instance, Sen. Marco Rubio has not only addressed loan repayment, he’s got a plan to keep college costs down. The first part is dealt with through the Dynamic Student Loan Repayment Act, which ensures that student loan payments are automatically adjusted based on income while also instituting a graduated a timetable for loan forgiveness depending on loan size. As to the underlying issue–tuition costs–Rubio’s plans allow for competition, innovation and accountability by breaking up the accreditation cartel to encourage alternative educational models and expanding the information colleges have to provide to prospective students in order to encourage more market-like behavior.
If candidates really want to win the youth vote, they need to care less about buying us off and more about investing in our future. Republicans are the only party who seem capable of that kind of thinking.