Student Debt Dogs Millennials for a Lifetime and Drags Down the Economy
The student debt problem is exploding, growing three times as fast as any other kind of debt, yet the Trump administration is making it more difficult for students to seek debt relief. Ellen Brown of the Public Banking Institute outlines the implications
GREG WILPERT: It’s The Real News Network and I’m Greg Wilpert, coming to you from Baltimore.
Student loans are becoming an increasingly large, and in many cases, unsustainable burden to the so-called millennial generation. This is the conclusion of two recent studies, one by the news outlet Bloomberg and the other by the organization, Magnify Money. These studies show that student loans have been by far the fastest growing type of consumer debt since the Great Recession of 2008, growing by 157 percent in the past 11 years.
In comparison, auto loans have grown by 52 percent and credit card and mortgage debt have held steady in that time. At 1.5 trillion dollars, student loans are now the second largest type of consumer debt after mortgages. Millennials who take out student loans end up having a net worth that is a quarter of what millennials without student debt have. Meanwhile, the Trump administration is moving forward with new policies that would make it more difficult for those with student loans to get out of debt. What does all of this mean for those entering the labor force, for the economy, and more generally, what can be done about the student debt problem?
Joining me to discuss these issues is Ellen Brown. Ellen is the founder of the Public Banking Institute and the author of a dozen books and hundreds of articles. Earlier this year, she published a series of articles for Truthdig.com on the student debt problem. Thanks for joining us today, Ellen.
ELLEN BROWN: Thanks for having me.
GREG WILPERT: So, let’s start with the scope of the problem. As I mentioned, student debt now exceeds one 1.5 trillion dollars. But what exactly does this mean for the economy and for the students involved?
ELLEN BROWN: Well, it’s definitely a problem. And it seems to me, at some point, we’ll have to do something in the nature of student loan forgiveness. 1.5 trillion is huge. It’s not as bad as the mortgage crisis that allegedly precipitated the 2008 collapse – you could argue about that, it was really about the repo market. But anyway, having that many students heavily in debt means that they are young people, and it’s not only young people. Actually, I think that the debt burden for older people is actually greater than for young people right now because these are loans that they’ve carried for a long time, sort of interest only loans, or they’ve got compound interest, plus they’ve co-signed for their children or their grandchildren.
So, if you have that many people heavily in debt, they can’t buy houses, they can’t buy cars, they can’t buy furniture, they can’t get married, or they have to delay those things. And they can’t start businesses, they have trouble getting loans. If you’re already heavily in debt, then it’s difficult to get a business loan. So, all of that puts a damper on the economy, which is getting worse and worse, obviously. So, I can think of numerous solutions, but it’s a question of persuading Congress.
GREG WILPERT: Before we get to the solutions, let me ask you, why has the student debt gotten so large and why has it grown so rapidly? As I mentioned earlier, it’s grown three times as fast as auto loans since 2007. Meanwhile, other types of debt have held steady. What is happening here, why is particularly this type of debt growing so fast?
ELLEN BROWN: Well, it started in the 1970s when the government decided that previously, tuition was very cheap, or some schools it was free, and we had the GI bill that put millions of servicemen through school. But in the 1970s, the government decided to make student loans readily available and they made them very readily available. And these were loans that the government would be on the hook for. So, for one thing, these were students that had no collateral, and so they felt that when the students came out of school, they were concerned that they would just file for bankruptcy and get out of these loans and there was no way to follow up on them.
So, the Bankruptcy Reform Act of 1978 said that student debts not be discharged in bankruptcy for five years. So, that meant that for five years, the idea was that you could see in five years whether they really couldn’t get a job, and if they if they were doing pretty well in five years, then they wouldn’t be discharged. But if they weren’t, if they were really struggling, that they could be discharged. And these limitations got more and more onerous. In, I think, 1998, when Sallie Mae was privatized, they took away the five year rule, so student debt just is not dischargeable in bankruptcy. And originally, it was for government loans and now it’s for government and private loans and those can be far more onerous than the government loans because the interest rate is higher and there’s more fraud involved, et cetera.
So, on the one hand, you have credit that’s readily available for students because these loans are government guaranteed but lenders don’t worry about defaults because they know that they can collect from the government if they can’t get it from the students. So, you have massive credit available for students, practically unlimited credit, and it’s all subprime. I mean, there’s no standards – you don’t have to post collateral, you don’t have to show that you have a job, obviously. You’re a student, you don’t have a job yet. So, anyway, now they’ve made it so difficult to escape bankruptcy. There’s a clause in there that says unless you’re suffering undue hardship.
But the way the courts have construed undue hardship, it’s just almost impossible to get out of these debts. So, many people, most people, don’t even try to discharge them in bankruptcy, they just carry them indefinitely. And then, meanwhile, the schools are jacking up the tuition and the fees because, again, because they know they can. They know that students want an education and that they will take out loans no matter what. And the credit is there, they can easily get these loans.
GREG WILPERT: So, you mentioned that the ability to declare bankruptcy has basically been eliminated, but there were still some conditions, I guess, under which debt forgiveness was possible. But it seems that the Trump administration is now reacting to this as well. And a couple of months ago, Education Secretary Betsy DeVos proposed changing the rules for limiting student loan forgiveness. What can you say about what the Trump administration has been doing more generally on the student loan issue?
ELLEN BROWN: Well, it’s interesting that Trump actually ran on a platform that students shouldn’t be saddled with these debts, it’s not right. But yes, it’s true. His current administration is making it more difficult to discharge the loan to bankruptcy and is eliminating things like the ability to renegotiate loans. So, yes. It’s getting more difficult for students.
GREG WILPERT: And so, what can or should be done now to address the problem? What are the possible solutions here?
ELLEN BROWN: Well, ideally – the Federal Reserve bought 2.7 trillion dollars in government debt and a trillion dollars in mortgage-backed securities in quantitative easing. They could do the same thing with student debt. Student debt is packaged up in these – they’re called student loan asset-backed securities. But it’s the same deal, it’s a bundle of student debt which is then sold off to investors. So, they’re available on the market. So, the Fed could just buy those up, put them on its books and either renegotiate them or just forgive them outright, just carry them as a balance sheet debt without doing anything with it. Or, they could make them interest free.
There are numerous ways they could redo it. But they’re going to have to do some sort of debt jubilee because this debt situation is a huge drag on the economy. And it’s not, of course, just student debt. Every sector has burgeoning debts, like business debts are going way up, and not to mention the federal debt. So, that’s one thing. There is a bill in Congress right now to eliminate the non-dischargeability and bankruptcy provision, which would definitely be helpful. Or, you could even just reinstate that five year rule. That was a good rule.
GREG WILPERT: Just for a quick comparison, how does student debt compare to these other kinds of debt that you’re mentioning?
ELLEN BROWN: The 1.5 five trillion in student debt is more than credit card debt and auto loan debt combined. I think the problem with business data, I don’t actually know the numbers on that, but it’s so high that now that the Federal Reserve is raising interest rates, it’s been estimated that something like 25 percent of businesses will go out of business just because of their debt load. But businesses typically run on a credit line. They have to pay workers and materials before they have a product to sell. So, they’re always running on credit. And if their interest rate goes up, that cuts into their ability to be solvent.
GREG WILPERT: Well, we’re going to leave it there for now. I was speaking to Ellen Brown, founder of the Public Banking Institute. Thanks again, Ellen, for having joined us today.
ELLEN BROWN: Thank you.
GREG WILPERT: And thank you for joining The Real News Network.