The cost and size of today’s student loans are the subject of dinner table discussions across our nation because without congressional action, interest rates on federally subsidized student loans will increase on July 1. As is often the case with bread-and-butter issues such as the cost of college education, the size of education debt and the potential for higher debt payments warrant the increased public attention.
The most recent data on outstanding education loans during the Great Recession of 2007-2009 reveal that in both good and bad economic times the cost of a college education only increases, as does the debt burden of borrowers. The number of borrowers and the typical loan amount grew amid the most recent economic and financial crisis. This is especially stunning since the expansion of education debt occurred at the same time that other credit markets, especially mortgages and credit cards, contracted. Households went deeper into education debt during the crisis as other forms of credit became less prevalent.
The result is even less economic security today for those who went deeper into debt to pay for their education in those years. The numbers tell the tale.
The Federal Reserve conducted a survey of the same group of households in 2007 and 2009 to paint a comprehensive picture of household assets and debt during the financial and economic crisis. This data set contains information on education debt—all private and publicly subsidized installment loans that the household has taken out to pay for education—in addition to other crucial variables, such as the household’s age, income, total wealth, total other debt, and race and ethnicity, among others. The underlying household data was released in April 2012 and are thus the most recent data with this level of detailed household information.
The financial and economic crisis of those years marked a period of widespread declines in household debt levels. Mortgages and credit cards declined as households repaid their debt and banks foreclosed on bad debt. But the same was not the case for education loans. Education loans typically cannot be discharged in bankruptcy, which may explain why education debt didn't fall like other forms of debt did. But there are other factors at work, too. The summary data illustrate that education loan borrowers became economically less secure during the crisis because they had more debt—education and noneducation—after the crisis than before. There were also generally more households with education loans and the amount owed on education loans went up during the crisis.
Education loan borrowers in 2009 were less wealthy after the crisis than in 2007. The inflation-adjusted wealth amount of the median borrower went from $45,280 (in 2009 dollars) in 2007 to $28,160 in 2009. And the share of education loan borrowers with no wealth—defined as either debt equal to total assets or, more likely, no assets and no debt—or negative wealth went from 28.7 percent in 2007 to 35.6 percent in 2009.
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