U.S. Secretary of Education Arne Duncan on Tuesday expressed concern at record student debt levels, signaling growing worry within the Obama administration and perhaps adding momentum to efforts meant to alleviate debt burdens.
At an estimated $1.1 trillion, according to the Consumer Financial Protection Bureau, student debt has surpassed auto loans and credit cards as the largest source of household debt behind home mortgages. Officials in Washington and some analysts on Wall Street are worried that the amount of borrowings and the relatively high interest rates the loans carry may inhibit economic growth as a growing share of household budgets are devoted to servicing college debt.
"The fact that that debt surpasses a trillion dollars, there's no upside there,” Duncan said during testimony before the House education committee.
It appears to be one of the first times Duncan has so explicitly signaled concern about student debt levels. His warning comes as policymakers at agencies ranging from the Federal Reserve to the Treasury Department and the CFPB have been warning for months about the economic risk associated with spiraling student debt and the negative consequences for household spending, car buying and home purchases.
The collection of regulators entrusted with guarding the financial system known as the Financial Stability Oversight Council warned last month about the possible economic danger of growing student debt levels in its latest annual threat report.
A small contingent of Washington lawmakers in recent years including Sens. Sherrod Brown (D-Ohio) and Jack Reed (D-R.I.) have introduced proposals designed to ease debt burdens, whether by stimulating refinancings of high-rate loans or increasing the amount of loan modifications for distressed borrowers.
“Students shouldn't have to mortgage away their futures when enrolling in college,” Brown said Tuesday. “More debt means that graduates have less career choices and less ability to buy a home, start a business, and contribute to their communities.”
Sen. Kirsten Gillibrand (D-N.Y.) this week will propose legislation that would force Duncan (or a possible successor) to automatically refinance most government loans carrying interest rates above 4 percent into fixed, 4-percent loans. Roughly nine of 10 federally backed loans would be affected, saving nearly 37 million borrowers billions of dollars in annual interest payments.
"I deeply share Secretary Duncan's concerns about the trillion dollars in student loan debt,” Gillibrand said. “Considering that almost $900 billion of this debt is owned by the federal government, we can do something about it. And I believe we should not wait any longer to take action.”
The proposal targets loans funded and owned by the Education Department through the Direct Loan program, as well as government-guaranteed debt owned by the government and the private sector under the Federal Family Education Loan program. The bill calls on the Education Secretary to devise a process that would refinance FFEL loans owned by private lenders and investors.
The Center for American Progress, a policy and advocacy group with deep ties to the Obama administration, estimates that Gillibrand’s proposal in its first year would save borrowers about $14.5 billion off their student loan payments, boosting U.S. economic activity by $21.7 billion.
Gillibrand said her proposal would be a “big step in the right direction.”
“We should all be able to agree that this massive debt is a significant drag on the rest of our economy and it's time that Congress stand up for these graduates and let them refinance these loans,” she added.
Sen Elizabeth Warren (D-Mass.) has introduced a separate proposal to allow some undergraduates the opportunity to borrow from the federal government for the next year at less than 1 percent interest on some of their loans.
“As Secretary Duncan pointed out today, student loan debt is crushing America's young people who are already struggling to make ends meet in a difficult economy. We shouldn't add to the burden students face,” said Lacey Rose, a spokeswoman for Warren.
Washington’s interest in student loan issues has increased as the Education Department is forecast to generate a $51 billion profit this year from lending to college students and their families, a figure higher than the 2012 earnings of Exxon Mobil, the nation’s most profitable company, and roughly equal to the combined net income of the four largest U.S. banks by assets.
The department is estimated to have recorded roughly $120 billion in profits off lending to students and their families over the last five years, budget documents show.
The Obama administration’s profits are due to the historically high gap between what it costs the U.S. government to borrow and what students and their families pay to borrow from the Education Department. Interest rates are set by Congress. About three-fourths of all federal student loan dollars disbursed this year carry interest rates of either 6.8 or 7.9 percent.
The rates were set in 2007 by a Democratic-controlled Congress and signed into law by then-President George W. Bush, a Republican. Though the rates on a subset of loans have decreased in recent years, overall they have not moved in tandem with borrowing costs across the economy.
During the Tuesday House education committee hearing, Rep. John Tierney (D-Mass.) lamented the economic effects of growing student debt burdens. After asking Tierney whether he was worried about student debtors being able to purchase homes or similar big-ticket items, Duncan appeared to validate his concerns.
“Trying to buy a home, trying to buy a car, you know, trying to start a life -- we always joke but it’s not really that funny for most families -- trying to get them out of their parents’ house," Tierney said.
Duncan, acknowledging the worries that have been growing in Washington over the last few months, quickly responded: “That’s real, that’s real.”
Also on HuffPost:
The U.S. incarcerates its citizens at a rate roughly <a href="http://www.parade.com/news/2009/03/why-we-must-fix-our-prisons.html" target="_hplink">five times higher than the global average</a>. We have about 5 percent of the world's population, but 25 percent of its prisoners, according to The Economist,. This status quo costs our local, state and federal governments a combined $68 billion a year -- all of which becomes a federal problem during recessions, when states look to Washington for fiscal relief. Over the standard 10-year budget window used in Congress, that's a $680 billion hit to the deficit. Solving longstanding prison problems -- releasing elderly convicts unlikely to commit crimes, offering treatment or counseling as an alternative to prison for non-violent offenders, slightly shortening the sentences of well-behaved inmates, and substituting probation for more jail-time -- would do wonders for government spending.
End Of The Drug War
The federal government spends more than <a href="http://www.cbsnews.com/8301-18563_162-20072096.html" target="_hplink">$15 billion a year</a> investigating and prosecuting the War on Drugs. That's $150 billion in Washington budget-speak, and it doesn't include the far higher costs of incarcerating millions of people for doing drugs. This money isn't getting the government the results it wants. As drug war budgets balloon, drug use escalates. Ending the Drug War offers the government two separate budget boons. In addition to saving all the money spending investigating, prosecuting and incarcerating drug offenders, Uncle Sam could actually regulate and tax drugs like marijuana, generating new revenue. Studies by pot legalization advocates indicate that fully legalizing weed in California would yield <a href="http://canorml.org/background/CA_legalization2.html" target="_hplink">up to $18 billion annually</a> for that state's government alone. For the feds, the benefits are even sweeter.
Let Medicare Negotiate With Big Pharma
The U.S. has <a href="http://www.reuters.com/article/2009/06/01/us-healthcare-costs-sb-idUSTRE5504Z320090601" target="_hplink">higher health care costs than any other country</a>. We spend over 15 percent of our total economic output each year on health care -- roughly 50 percent more than Canada, and double what the U.K. spends. Why? The American private health care system is inefficient, and the intellectual property rules involving medication in the U.S. can make prescription drugs much more expensive than in other countries. Medicare currently spends about $50 billion a year on prescription drugs. According to economist Dean Baker, <a href="http://www.cepr.net/documents/publications/intellectual_property_2004_09.pdf" target="_hplink">Americans spend roughly 10 times more than they need to</a> on prescription drugs as a result of our unique intellectual property standards. These savings for the government, of course, would come from the pockets of major pharmaceutical companies, currently among the most profitable corporations the world has ever known. They also exercise tremendous clout inside the Beltway. President Barack Obama even <a href="http://www.huffingtonpost.com/2012/09/02/barack-obama-politics_n_1847947.html" target="_hplink">guaranteed drug companies more restrictive -- and lucrative -- intellectual property standards</a> in order to garner their support for the Affordable Care Act.
Offshore Tax Havens
The U.S. Treasury Department estimates that it loses about <a href="http://www.ctj.org/pdf/stopact.pdf" target="_hplink">$100 billion a year</a> in revenue due to offshore tax haven abuses. Sen. Carl Levin (D-Mich.) has been pushing legislation for years to rein in this absurd tax maneuvering, but corporate lobbying on Capitol Hill has prevented the bill from becoming law.
Deprivatize Government Contract Work
In recent years, the federal government has privatized an enormous portion of public projects to government contractors. Over the past decade, the federal government's staffing has held steady, while the number of federal contractors has <a href="http://pogoarchives.org/m/co/igf/bad-business-report-only-2011.pdf" target="_hplink">increased by millions</a>. This outsourcing has resulted in much higher costs for the government than would be incurred by simply doing the work in-house. On average, contractors are paid <a href="http://pogoarchives.org/m/co/igf/bad-business-report-only-2011.pdf" target="_hplink">nearly double</a> what a comparable federal employee would receive for the same job, according to the Project On Government Oversight.
Print More Money
There's an old saying in economics: You have to print money to make money. <a href="http://www.huffingtonpost.com/2012/10/09/underwear-sales-growth-economy_n_1952214.html" target="_hplink">Okay, there's no such saying</a>. Nevertheless, the great boogeyman of many conservative economic doctrines -- inflation -- isn't such a bad idea during periods where much of the citizenry is drowning in debt. Inflation is by no means a perfect remedy: it's a stealth cut to workers' wages. But it also has many benefits that are often unacknowledged by the Washington intelligentsia. Inflation makes housing debt, student loan debt and any other private-sector debt more manageable. Today, when <a href="http://www.corelogic.com/about-us/researchtrends/asset_upload_file448_16434.pdf" target="_hplink">10.8 million</a> homes are underwater -- meaning borrowers owe banks than their houses are worth, moderate inflation could ease that debt burden. By effectively reducing monthly bills, moderate inflation could actually put more money in the pockets of these homeowners to spend elsewhere, thus stimulating the economy. Moderate inflation -- 5 percent or so -- could also help alleviate the <a href="http://www.cbsnews.com/8301-505145_162-57555780/student-loan-debt-nears-$1-trillion-is-it-the-new-subprime/" target="_hplink">$1 trillion</a> in student debt currently plaguing America's graduates. Make no mistake -- hyperinflation of 20 percent, 30 percent or more -- is bad. But the U.S. has ways to crush inflation when it gets out of hand, as proven by the Federal Reserve under then-Chairman Paul Volcker in the early-1980s.
Print Less Money
The government prints a <em>lot</em> of $1 bills. But it turns out that minting $1 coins is much, much cheaper. Over the course of 30 years, the government could save $4.4 billion by switching from dollar bills to dollar coins. Here's looking at you, <a href="http://www.usmint.gov/mint_programs/nativeamerican/" target="_hplink">Sacagawea</a>.
Immigration: Less Detention, More Ankle Bracelets
The government spends <a href="http://newamericamedia.org/2012/04/ice-slow-to-embrace-alternatives-to-immigrant-detention.php" target="_hplink"> $122 per person, per day</a> detaining immigrants who are considered safe and unlikely to commit crimes. The government has plenty of other options available to monitor such people, at a cost of as little as $15 per person. For the first 205 years of America's existence, there was no federal system for detaining immigrants. The process began in 1981.
Financial Speculation Tax
Wall Street loves to gamble. In good times, financial speculation is the source of tremendous profits in America's banking system, but when the bets go bad, the government picks up the tab, as evidenced by the epic bank bailouts of 2008 and 2009. Unfortunately, this speculation is difficult to define in legalistic terminology and even more difficult to police. One solution? By taxing every financial trade at the ultra-low rate of 0.25 percent, the U.S. government can impose a modest incentive against gambling for the sheer sake of gambling. If there's an immediate cost to placing a bet, a lot of traders will choose not to bet. What's more, this tax could raise about <a href="http://www.ips-dc.org/media/why_a_financial_transaction_tax" target="_hplink">$150 billion a year</a> for the federal government.
Taxing greenhouse gases would generate $80 billion a year right now, and up to $310 billion a year by 2050, <a href="http://www.brookings.edu/research/papers/2012/07/carbon-tax-mckibbin-morris-wilcoxen" target="_hplink">according to an analysis by the Brookings Institution</a>. It would also help avert catastrophic ecological and economic damage from climate change.