The lessons of student debt

Image of Gillian Tett

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Just over a decade ago, while doing research into the anthropology of debt, I stumbled on a little book called The Two-Income Trap. It left me horrified and fascinated: it explained how an addiction to credit cards and other forms of consumer debt was destroying the lives of millions of middle-class Americans. I was so impressed by the book that I tried and failed to meet one of its authors – then a fairly low-profile Harvard Law School professor called Elizabeth Warren.

Earlier this month, my wish finally came to pass: Senator Warren, as she is now, having won a Massachusetts seat in 2012, gave a lecture with the economist Paul Krugman at the City University of New York. Warren has become such a popular figure over the past 10 years that the event was completely sold out.

This frenzy partly reflects the fact that debt and income inequality have become ultra-hot topics among the American chattering classes (a similar event in Manhattan earlier this year with Thomas Piketty, the French economist, was also sold out). But there is another reason too: some progressive figures inside the Democratic Party are urging Warren to run against Hillary Clinton (assuming that she does indeed run) in the 2016 presidential race. And in recent days, figures such as the actor Robert Redford and TV host Bill Moyers have publicly voiced their support.

While Warren has dismissed this, it will be worth watching her closely in the coming months, not least because of the contrast in styles. Whereas Clinton reeks of experience, magisterial gravitas and wealthy patronage, Warren exudes passion, humanity and accessibility – precisely what the highly competent Clinton (sadly) often lacks.

However, perhaps the single most interesting thing about the Warren event in New York lay not with the issue of Democratic politics but with the matter that first intrigued me: debt. A decade ago, one of the biggest problems hanging over American consumers was their addiction to consumer and mortgage debt. But since the 2008 crisis, something striking has happened: the level of overall credit-card loans has slowly drifted down, to a point where it is now hovering near its lowest level for a decade. And mortgage borrowing has also been more subdued, bucking the pre-crisis trend.

In some senses, this might seem welcome. For although some of the decline has been involuntary (due to bankruptcy, for example), some of it also reflects voluntary restraint. But there are two caveats. First, overall debt levels are still quite high by international standards. Second, there is one area where borrowing continues to explode: student debt. Most notably, as Warren observed, the total volume of outstanding student loans in the US has tripled over the past decade towards $1,300bn, to a point where it has now outstripped that credit-card debt, and auto loans.

The reason for this is not hard to find. Not only are student loans widely available, due to government lending programmes, but the cost of education has spiralled upwards at a startling pace (partly, it should be stressed, because of that availability). This has brutal consequences for income inequality, given the degree to which a university education is now considered essential for skilled jobs.

But what really upsets Warren right now is another detail: the loans that have been extended to students via government-backed institutions carry fixed interest rates that cannot be refinanced in line with market rates. That means they create implicit subsidies for the government – a practice that Warren wants to end by cutting the rate from about 7 per cent to nearer 3 per cent. “The 2007-2012 loans are on target to produce $60bn of profit for the US government. I think that is fundamentally wrong,” she thundered, arguing that the rising cost of education is shattering the American dream. “Why can we spend billions of dollars to preserve tax loopholes for billionaires … but not [change] this?”

Now, Warren is not the only person decrying this state of affairs: the spiralling cost of education provokes widespread alarm these days. But what is notable about Warren is that she is one of the few politicians who openly attacks the financial industry, US Treasury and Federal Reserve alike. This, of course, is the key reason she is unlikely to ever become a serious contender for the Democratic Party nomination: Warren’s outspoken comments have created many enemies in Washington and Wall Street. But her willingness to articulate unpleasant facts – such as the shocking explosion in student loans – is also a key reason she commands strong populist support in some quarters. Political giants such as Clinton ignore this at their peril; even (or especially) at a time when America is supposed to be enjoying an economic “recovery”.

gillian.tett@ft.com

Illustration by Shonagh Rae

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