If a bad job market wasn’t damaging enough, the cost of paying off student loans does much more harm to the long-term prospects of young people than is commonly realized.
Bill H at Angry Bear has been having a long-running argument over a dubious effort by the CBO to cook the books yet again (we’ve covered past efforts: for a partial list, see here, here, here, and here). He’s been criticizing the CBO (correctly) for changing its valuation method for student loans to something called Fair Market Valuation. Bill H contends the new approach is bunk. Currently, because borrowers can’t escape student loans, servicers collect $1.22 on the $1 when a loan goes into default. But perversely, the “Fair Market Valuation” method anticipates that loans going into default result in losses. That’s awfully convenient, since it justifies charging higher interest rates. As Bill H argues by e-mail: :There is no history of government-backed student loans being risky and the cost is $.94 on each dolar loaned. A student loan is 99% inescapable.”
He continues that discussion in a current post, Ripping Off College Students’ Economic Future, and there is an additional part of his analysis that seldom gets much public attention, which namely is the lifetime cost of student loans. It’s much higher than you’d think, since the need to retire the debt means that young people start saving later, which means they buy house later (if ever) and accumulate less in the way of retirement assets. But the amount lost isn’t just the borrowings plus the interest payments. By not having savings early in their working life, they miss the effect of having them compound those extra years. That has a much bigger effect than you’d imagine.
I’ll start with his conclusion:
Are students being ripped off by government entitlement programs? Yes they are being ripped off; but, not by Social Security or Medicare as Stanley Druckenmiller suggests. Nor are student loans costing the federal government and tax payers as much as the recent analysis of student loans done by the CBO’s Douglas Elmendorf. In reality, the risk to the government and taxpayers comes from these students being less successful in accumulating wealth and increasing income which as Demos has suggested would cost $4 trillion is wealth alone. Unburdening students from a lifetime of student loan debt would benefit the economy.
Yes, folks, $4 trillion.
Read the full report: At What Cost? How Student Debt Reduces Lifetime Wealth
