8/18/2022: Student Loan Payments are Set to Restart on 9/1
The student loan payments were suspended during the pandemic. Without further extension of the suspension, student loan payments are set to start on 9/1/2022. America has a huge student debt problem. According to this Bloomberg article, currently there’s $1.75 trillion of student loans outstanding. About 92% or 1.6 trillion is in the hands of the federal government, which is about 6.5% of US GDP and exceeds credit card loan balances of $890B and auto loan loan balances of $1.5T. This debt problem is very America specific. Around the world in a lot of countries, the college cost is usually quite affordable because educated citizens are the foundation of a great country and most countries would invest in education. I went to National Taiwan University, the top university in Taiwan. As shown below, their tuition currently is about $2000 per year for international students and half of that for local students. In contrast, Yale University’s tuition is $62,250 and it appears that $25K of college tuition per year is considered affordable in the USA. It’s really no surprise why America has a student loan problem.
There has been a lot of talk about loan forgiveness. According to an NPR poll, the general public (55%) supports forgiving up to $10,000 of a person's federal student loan debt. But only 47% of all respondents said they support forgiving up to $50,000 in debt, while 41% expressed support for wiping the slate completely clean for all borrowers. I believe people acknowledge that the student loans are going out of control and something needs to be done. But what does loan forgiveness really mean? At the end of the day, someone has to pay the bill. Loan forgiveness just means that US taxpayers, basically all of us, are footing the bill.
Loan forgiveness is unfair to financially responsible people who chose not to go to college due to the potentially poor ROI. On the other hand, we make it so easy for 18-year olds to borrow large amounts of money without any payment for years. Should students be fully responsible for this predatory lending? Probably not. I believe colleges need to be more accountable for the student loan mess if any loan forgiveness program is implemented. They charge outrageous tuition and push the students to take out the loans they couldn’t afford all in the name of the good education. This WSJ article told some tragic stories of students getting fancy degrees from top universities like Columbia and NYU with hundreds of thousands dollars in student debt, but their film or publishing degrees didn’t help them get high paying jobs to pay down the debt. I believe the federal student loan program has to raise the underwriting standards and make universities keep a portion of the debt on their balance sheet so when students default, they are also financially affected. Otherwise, they don’t have skin in the game and they would just push their students to take out the loans they couldn’t afford to pay back.
I believe the loan payment restart might impact consumer spending a little bit. If the interest rate of the $1.75T student debt is 5%, we are talking about $87.5B a year on interest payments. During the loan suspension period, people could spend the $87.5B into the economy and it would have a multiplier effect to generate tens of billions of GDP. If the loan payment restarts, it’s similar to pulling $87.5B of capital out of the economy a year, or $7B+ a month. The current quantitative tightening program is $45B a month so $7B is not insignificant, especially since the money is coming out of student loan borrowers’ pockets.