Outstanding student debt has ballooned to $1.3 trillion and is now, aside from mortgages, most American households’ largest liability, according to the Federal Reserve. Last year alone student debt increased by almost $83.2 billion, or 6.7%. The price of tuition has risen an average 3.4% each year for a decade, markedly outpacing inflation.
Meanwhile, the U.S. faces a daunting skills gap in science, technology, engineering and math. Each year there are 1.3 million new openings in STEM fields but fewer than 600,000 new graduates. Is there a way to solve both these problems at once?
Doug Criscitello, Executive Director of MIT’s Center for Finance and Policy
From The Hill
Let’s consider student loans for a moment. Many of the candidates for president have promised relief of some sort from the high cost of college tuition. That’s not surprising considering that 40 million Americans currently hold student loans and that debt incurred for education now lags only mortgage debt as a source of consumer indebtedness—logging in at the astonishing total $1.2 trillion. And, here is the rub, most of that debt has been loaned directly by the government and, as the current policy debate illustrates, students who borrow from the government don’t necessarily have the same expectations and sense of repayment obligation to their lender – as those receiving loans from a private financial institution.
Decisions made in the 1990s to transform the US government’s role in providing student loans, from that of a guarantor to a direct lender, were driven primarily by budgetary rather than policy considerations. Direct lending had a clear advantage because it had a dramatically lower price tag than the guaranty program at the time. And when private lenders became reticent to assist students during the darkest days of the 2008 financial crisis, direct loans from the government became the primary source of student loans in the US and the guaranteed student loan program was abolished.