In a still-incomplete provocative piece whose conclusions were presented at this year’s American Economic Association (“AEA”) meeting in Philadelphia in January 2018 and highlighted by the American Bankruptcy Institute on March 29, 2018, three economists—Gene Amromin, Vice President and Director of Financial Research at the Federal Reserve Bank of Chicago; Janice C. Eberly, Professor of Finance at Northwestern University’s Kellogg School of Management; and John Mondragon, Assistant Professor of Finance at Kellogg—pinpoint a new potential culprit behind the nation’s student loan crisis.
As reported by the Federal Reserve Bank of New York, since the recession began in 2008, federally-owned student debt has grown from around 5% of all household debt to around 11.2%, and from $619.32 billion to $1.49 trillion. The report to the AEA discounts two commonly-cited factors for this increase: a growing number of students and soaring tuition costs. Simply put, with undergraduate enrollment only increasing by 4% from 2008 to 2015, the average growth in net tuition and fees from the 2007-08 to the 2017-18 school year cannot explain the dramatic increase in student debt seen over the last decade.
The numbers as to this latter area are debatable. According to some sources, the increase was 3.2%, 2.8%, and 2.4% at public four-year, public two-year, and private non-profit four-year universities, respectively. According to others, however, it was 37%. Importantly, not even the latter and larger figure would account for the explosion in student debt.
Instead, these scholars posit another possibility: the collapse of housing prices. They reason that many people tend to borrow money against their houses to fund their children’s educations (on average, a household with a child in college will extract $3,000 more in home equity than those without). Thus, when housing values collapsed from 2006 through 2012, thereby causing a credit crisis which greatly contributed to America’s Great Recession, the spigot for these funds closed. As home equity financing thusly dried up, many students faced two options: either dropping out of school or relying on education loans to meet their bills. Naturally enough in a nation in which higher education remains the surest apparent path to long-term prosperity, many students opted to incur greater debt. Ultimately, at least according to Amromin, Eberly, and Mondragon, a $1 drop in home equity loans due to a drop in a house’s value corresponded with 40 to 60 cents more in student borrowing.
Fittingly, the problem of student debt potentially linked to declining home values may be coming full circle. The National Association of Realtors reports that 83% of adults aged 22 to 35 with student debt who have yet to buy a house blame their lack of homeownership on student loans. Lending credence to these survey results, the Federal Reserve Board has found that for every 10% in student loan debt a person holds, their chance of home ownership drops 1-2% during their first five years after school.
For hard data regarding America’s consumer debt, one can consult the website of the Federal Reserve Bank of New York.