Is the run-up in student loans a parallel to the housing crisis or a response by consumers to the recession?
U.S. student debt has been on a historic run. Americans now owe nearly $1 trillion on their student loans, an amount that's nearly tripled since 2004 and is now higher than credit card or auto debt.
Some have labeled the student loan market a bubble or a looming crisis. In May, representatives of the banking industry serving on the Federal Reserve's Federal Advisory Council, warned that the student loan market has "parallels to the housing crisis."
But there are reasons to believe that the run-up in student debt is less a bubble than a response by consumers to the economic downturn.
Americans drastically curtailed mortgage borrowing when the housing market collapsed. As the financial crisis became a broad recession, consumers began aggressively de-leveraging to weather out the storm. Five years after the initial crash, Americans are still reluctant to tap lines of credit to make purchases: Mortgage, credit card and auto loan credit are all still below their pre-recession highs.
The growth of student debt, however, appears to be countercyclical. When times get tough, consumers are more likely to avoid large purchases with credit cards and to pay down their balances. Choosing to defer education, however, is not as easy. Attending college or graduate school is a life-cycle decision, not a business-cycle one. Students graduating during a downturn cannot easily postpone their college plans until the market recovers.
There are several reasons why consumers may be more likely to take on student debt during a downturn than at other times. One is that people try to wait out problems in the labor market by spending more time in school or going back to attain new skills. According to the Law School Admission Council, the organization that administers the LSAT, the number of people taking test for admission to law school spiked in 2008. The Educational Testing Service reports similar growth in the number of people taking the GRE, the test used in graduate school admissions.
Dennis Carlson, chief economist for the consumer credit reporting agency Equifax, noted that the biggest increase in student loans has been among borrowers in their 30s. Carlson suggested that the "tough economic market" might make "seeking another degree desirous."
In a February presentation for the Federal Reserve Bank of New York, staff economist Donghoon Lee identified a few reasons why the number of borrowers and the amount of student debt per borrower have risen. In addition to more people attending college and grad school and spending more years there, Lee noted that borrowers are more likely now to delay repayments.
Another factor might be that parents, facing the strain of an underwater mortgage or other recession-related financial losses, aren't able to contribute as much to their children's educations as did in the past. The result: a "shift in costs borne from parents to children," according to Rohit Chopra, a student loan ombudsman for the Consumer Financial Protection Bureau. The boom in student loans might have "more to do with the housing market than we think," Chopra told the Washington Examiner.
In other words, at the same time that people across America are tightening other areas of their budgets, they're stretching to afford as much or even more education than before.