Student debt has become a global problem

Hey there, time traveller!
This article was published 31/10/2011 (5138 days ago), so information in it may no longer be current.

Student loans are based on a simple idea: that a graduate’s future earnings will more than cover the costs of a degree. But with unemployment rates in parts of the rich world at postwar highs, that may no longer hold true for many people.

All over the world, student indebtedness is causing problems — witness this month’s violent protests in Chile. In Britain, according to a recent parliamentary report, rising university fees mean that student debt is likely to treble to 70 billion pounds by 2015. But, partly because higher education there is so expensive, the scale of the problem is far greater in America. When the next official estimates of outstanding U.S. student debt are published, it is expected to be close to $1 trillion, higher than credit card borrowing.

Many of the anti-Wall Street protesters push the idea of blanket debt forgiveness as a solution. But that is the wrong answer. Higher education is not a guarantee of employment, but it improves the odds immensely. Unemployment rates among university graduates stood at 4.4 per cent on average across Organization for Economic Cooperation and Development countries in 2009. People who did not complete secondary school faced unemployment rates of 11.5 per cent. Much of the debt that students are taking on is provided or guaranteed by the government. Imposing write-offs on all taxpayers to benefit those with the best job prospects is unfair; ripping up contracts between borrowers and lenders is a bad idea.

That said, student loan systems in America and elsewhere are often badly designed for an extended period of high unemployment. In contrast to the housing crash, the risk from student debt is not of a sudden explosion in losses but of gradual financial suffocation.

One option is to change the bankruptcy laws. In America, Britain and elsewhere, these treat student debt as a special case: Unlike other forms of debt, it cannot be wiped out. If student debt is not to shackle existing graduates and put off future ones, the rules could be changed so that it is dischargeable in bankruptcy. Yet the reasoning behind the current bankruptcy provisions is logical enough: Education is an asset that cannot be repossessed and that keeps on benefiting individuals through their lifetimes. Some worry that graduates would rush to declare bankruptcy, handing losses to taxpayers.

So a second option is preferable. Many countries, America included, have designed student debt primarily as a mortgage-like obligation: It is repaid to a fixed schedule. Other places, like Britain and Australia, make student-loan repayments contingent on reaching an income threshold so that the prospect of taking on debt is more palatable to people from poorer backgrounds. That approach makes sense, especially when jobs are scarce. Income-based repayment ought to become the norm.