2013 News

As student loan debt passes $1 trillion, seeing decline in return on investment

​​Forty percent of households headed by an American under age 35 are on the hook for student loans. This statistic, reported by Rohit Chopra of the Consumer Financial Protection Bureau, set the stage for an afternoon of discussion on student loans, household balance sheets and college savings. 

More than 160 people attended “Generation Debt: the Promise, Perils and Future of Student Loans” at the Federal Reserve Bank of St. Louis on Monday, Nov. 18. The conference was co-sponsored by the St. Louis Fed and the Center for Social Development in the Brown School at Washington University in St. Louis.

Chopra gave the keynote address, which was followed by information on resources for managing student loans, a research panel on the topic, and a roundtable on the future of financing higher education.

“It is more important than ever to go to college,” Chopra said, “but the return on investment is declining.” We’re seeing higher rates of borrowing and default, while graduation rates are decreasing.

Two factors causing this decline are the deterioration of household balance sheets and the lack of refinance options on student loans. Chopra drew a comparison between the mortgage problems that caused the recession and the student debt crisis. He said he doesn’t believe the nation is on the brink of an immediate financial crisis because of student loans, but he doesn’t want to take away from the urgency of the situation.

Researchers discussed statistics and trends regarding borrowers, debt amounts, and repayment and default rates.

Caroline Ratcliffe of the Urban Institute said the younger generation is falling behind in terms of their wealth building, and student loan debt is a big piece of that puzzle. She reported that one of every five Americans age 20 and older has student loan debt. The proportion rises to one of every three for those in their 20s and 30s.

Ratcliffe also reported that 57 percent of adults who have student loans are worried that they won’t be able to repay the debt. The level of worry is particularly high among people who did not graduate from college, those with postgraduate degrees, women and those who have dependent children.

Kelly Edmiston from the Kansas City Fed and Wenhua Di from the Dallas Fed spoke on factors that might explain student debt accumulation, such as the rising cost of higher education, enrollment patterns, family characteristics, economic environment and state policy. They said similar factors may also explain student debt delinquency.

Bryan Noeth of the St. Louis Fed focused on student debt growth in the Eighth Federal District, which includes St. Louis and the surrounding area. Student debt is increasing in two ways, he said – the number of people with debt and the amount of debt per borrower.

The conference ended with a roundtable discussion, primarily centered on public policy regarding student debt. The roundtable included William Elliott III, associate professor in the School of Social Welfare at University of Kansas; Sandy Baum, research professor of education policy at George Washington University and senior fellow at the Urban Institute; Jen Mishory, deputy director of the Young Invincibles; and Gary A. Ransdell, president of Western Kentucky University.

Elliott discussed the effect of adding savings into strategies for financing higher education. He told the story of a childhood friend whose father was saving for him to attend college. That child did not necessarily have more money than other children, but he had a different mindset when thinking about his future. The expectation that he would go to college empowered him to achieve that goal, while most neighborhood children did not.

Elliott said he believes student loans are valuable, but they are just one piece of the strategy. For instance, one of his policy recommendations is to put a portion of a Pell grant into a college savings account when qualifying children are 5 years old. That money would accumulate, plus the children would be more likely to develop a college bound identity.

Baum said policies must be designed with the understanding that while higher education has a high payoff, this is not the case for everyone. Ransdell recommended creating an incentive for students to graduate college. For example, graduates could receive a lower interest rate on their student loans.

CSD has a body of work on college savings and state college savings (529) plans. SEED for Oklahoma Kids, an experimental test of universal college savings accounts, has opened 529 accounts with $1,000 for 1,362 randomly selected children in Oklahoma. CSD is studying these children compared to those in a control group. CSD also partners with Elliott and others on College Success, researching effects of savings earmarked for higher education.