Editor's pick: Originally published Dec. 22.
Student debt may be a graduate's responsibility, but it's everyone's problem.
One of the most urgent economic debates Washington isn't seriously having is how to address the student loan crisis. Raised periodically by advocates, students and parents, politicians make noises on this subject from the campaign trail but actual solutions are generally few and far between. What proposals candidates do make, they never seem to write up into actual bills.
Why would they? The generation most burdened by student loans is also the one least likely to vote.
Student debt lingers as an unaddressed problem, in part, because of its many moving parts. Like health care, this is a crisis tied into almost every part of the economy. Tugging on one string makes them all move, so to speak, so solving the problem would require a basket of complex, interlocking policy solutions.
It's just not easy to write that bill. It's nearly impossible to do so without making somebody unhappy.
It's got to be done, though, because student debt is a problem that's dragging down the entire economy.
A Trillion Dollar Crisis
Student debt has been referred to as the next housing bubble, but if anything that understates the scale of the problem. America's under-35 generation is leveraged at a rate that has not been seen since the 1920s.
And the problem is growing.
Americans owe over $1.4 trillion in student loans, particularly concentrated among Millennials, and it's growing at about $3,000 every second. Interest on these notes ranges from 3.76% to 6.31%, rates that can stretch even a relatively modest loan into decades of repayment.
By contrast, the average interest rate for a 30-year fixed mortgage is 4.75 %, and housing is asset-backed debt dischargeable in bankruptcy.
Almost three-quarters of students today have to take out student loans, forcing them to enter adulthood an average $35,000 in debt. This is more than twice the burden Generation X assumed in the mid-90's and dwarfs anything even on the radar for Baby Boomers. College students today take their loans and classes from a generation that got to wait until much later in life before acquiring major liabilities in the form of mortgages and auto loans, and which had the luxury of scaling that spending based on personal income.
No such luck anymore.
Debt regardless of income
Today's "youth tax" makes debt a requirement to enter the professional world, forcing 18- to 22-year-olds to sign up for burdens they're ill-equipped to understand and must repay during the lowest-earning phase of their careers. What's more, the debt has little if any relationship to future earnings. While an undergraduate degree correlates with higher incomes, and a graduate degree still more, that's where the sophisticated relationship ends.
The price of an education is set long before a student knows whether she'll be able to pay it. A lawyer who makes partner (average income $349,000) can far better afford his law school loans than one who writes wills for the local community (average income $49,130), but both pay the same tuition (average debt $112,000 before interest).
And tuition increases keep outpacing salaries.
This has created a means-blind system of obligatory debt, targeted at a population uniquely ill-equipped to repay it. The results have been predictable. The 11.3% default rate is comparable only to that on mortgages during the height of the housing collapse. Graduates default at five times the rate of credit card holders and pre-crisis mortgages.
Some few graduates escape this burden through programs targeted towards public service, and a handful of others advance into high-paying jobs that make the notes easy to pay off. For everyone in the middle, there's just a hangover that will last for their entire young adult life.
A consumer class with no money
The result has dragged down the entire economy.
A mystery of missing growth has dogged U.S. economists and politicians for years. Despite an official recovery from the Great Recession, incomes remain sluggish, and the average American still reports struggling to keep up with bills, retirement and debt. The consumer economy remains slower than it should be in the face of stock market gains, reflected in a persistently low rate of inflation (which ultimately measures consumer demand for goods and services relative to the economy's ability to supply them).
In part, at least, this is due to the fact that there is an entire generation that can't fully participate in the consumer economy.
Student debt has reshaped the spending power of a supermajority of young Americans. Millennial homeownership has collapsed, as has the market for selling them new cars. The lost consumer base has cut into big-ticket industries, which often respond with expensive market research and gee-whiz solutions, but the reality is more elemental than social media marketing and Bluetooth headsets.
Twenty-somethings can't afford downpayments in the tens of thousands of dollars. They can often barely afford daily expenses, as most send an average $4,200 per year to the Department of Education instead of spending it in the consumer marketplace.
This is a staggering amount of lost consumer spending power. By means of comparison, the Bush tax cuts attempted to stimulate the entire economy by sending out one-time rebate checks an eighth of that size.
Tina Hay, founder and CEO of Napkin Finance, a company that deals in personal finance issues, says that fielding questions from users trying to make sense of their own needs has given her a broad perspective on the impact of student loans on personal spending, and what she's seen is far from good.
"It basically affects every other decision people are making within their personal finances and life decisions," she said. "That includes everything from whether or not to invest to whether to buy a home, have a family, whether to start a new business. Everything is impacted by the debt and the implications of having it."
"I think the most interesting way it effects people's finances, and the way that they plan on building their financial career, is that there's a certain lack of trust of financial institutions that comes with having to carry so much debt," she adds
Call them gun-shy graduates, those so overwhelmed by the magnitude of their financial burden that the prospect of banking and traditional credit become less an opportunity to plan for the future than the symbol of their burden. Finances become an emotional relationship as much as an actuarial one.
"It's fascinating for us because we see a lot of millennials are shying away from credit cards, and a lot of them are moving toward debit and prepaid," Hay said. "Again, it's a lack of trust: 'What are they selling me now that I'm going to be paying for later?'"
It's a development eerily similar to the relationships that bankers have with the public in nations like Brazil and Cambodia, economies which suffered crises like hyperinflation, currency collapse and bank nationalization.
The new normal: too young to take risks
With the present unaffordable the future gets put on hold. In the face of their debt burden Millennials increasingly delay life milestones and major goals such as homeownership, travel and continuing education. One in seven people with student debt report even putting off marriage because of their financial uncertainty.
And among a generation too indebted to take risks, entrepreneurship has collapsed, falling to its lowest rate in over 25 years. Despite the glossy image of tech billionaires just over their acne, the share of businesses owned by Americans under 30 has fallen by 65% since the 1980's.
According to a report by the Economic Innovation Group, the only demographic with growing entrepreneurship is the 55-65 cohort: Boomers with secure bank accounts and comfortable retirement options.
In fact, Baby Boomers, the last generation before America launched its experiment with student debt, were also the last true generation of youthful entrepreneurs. By 1996 young people (someone in his 20s or 30s) launched only 35% of all startups. By 2014 that number was 18%, and it's still falling.
It's not because young Americans lack ambition. Huge numbers of Millennials say that they'd like to launch their own businesses or at least work for themselves, leading many firms to brand them "the most entrepreneurial generation ever." But they lack the opportunity, and a lot of that has to do with student loans.
It's one thing to roll the dice on potential failure when you're young and have nothing to lose. It's another thing entirely when you have to make a loan payment at the end of every month.
Debt changes things
"Our most popular topic is starting a startup. Everyone wants to be an entrepreneur, but one of the things that really scares people is making it without an income," said Hay. "It makes it harder not necessarily right after school but down the line when people are paying off their student loan debt and they have stable jobs."
"It's just much harder unless you have someone paying for it," Hay added.
This is not a problem that affects only individual debtors, but that impression has allowed policymakers to kick the can on possible solutions. To hear politicians and even voters talk about it, student loans are a problem for the people who carry them, and although that gets varying degrees of sympathy it also has the effect of pushing this to a special interest category.
That's a belief that misses the big picture. Millennials are no longer a fragment of society. They are the largest generation in the workforce, a cohort that stretches into their 30s and which should be playing an enormous role in the consumer marketplace. They should be America's entrepreneurs, it's risk takers and big dreamers.
They should be having young families and buying starter homes, making up a vibrant part of the spending, investing and savings community as they begin to prepare for the next stage of their lives.
As spenders and investors this generation should be an immense market force, and the American economy has been built over decades to anticipate that demographic sector.
Instead Millennials increasingly represent the missing middle. Unable to afford big-ticket items and prone to hemorrhaging thousands of dollars in spending power per year, this is a generation just barely keeping its head above water. They'll be lucky to avoid a retirement crisis later on. And given that a third of student debtors prioritize their loans over saving for retirement, policymakers shouldn't count on it.
For business owners trying to figure out where their customers have gone, bankers looking to drum up investors in the latest fund, and frankly absolutely everybody else this is not a private problem. The economy is interconnected and, like it or not, everyone is in it together.
This black hole may be consuming a generation, but it's sucking everyone down with it.