French economist Thomas Piketty has joined the chorus of experts who think that student debt in the United States, if gone unchecked, could undermine economic growth in this country.
"If we really want to promote more equal opportunity and redistribute chances in access to education we should do something about student debt," Piketty said in an interview posted Sunday on Big Think. "This is really the key for higher growth in the future and also for a more equitable growth."
The meteoric rise of student debt in the United States has led economists and policymakers to question whether it could erode economic gains and exacerbate inequality.
There are roughly 43 million Americans with outstanding student debt,and many are having a hard time paying itoff. The number of late payments on student loans has crept up in the last few months. And it's happening at a time when Americans are doing a good job of paying down other types of consumer credit, like mortgages and credit cards, according to the Federal Reserve Bank of New York.
Many economists think that hefty student debt is unlikely to topple the economy and lead to another recession, but it could affect consumer behavior in a way that is ultimately detrimental to sustainable economic growth.
"How we finance post-secondary education has significant effects on a variety of critical economic outcomes, including economic growth and inequality," New York Fed President William Dudley said at a recent event on student loan data. "Higher student debt and delinquencies reduce household formation and depress home ownership."
What's concerning is the amount of time people are taking to repay their student loans. Economists Meta Brown and Andrew Haughwout at the New York Fed found that only 17 percent of the debt owed by 2009 graduates had only paid down after five years. Graduates who left school 10 years ago had barely paid down a third of the money they owed.
It's not completely clear how having large amounts of debt for an extended period affects borrowers' decisions. But the economists say Fed research has shown that student debt is contributing to millennials delaying homeownership and camping out at mom and dad's for longer than prior generations. And that is holding back consumer spending.
Beth Akers and Matthew Chingos of the Brookings Institute have argued, however, that the pace with which people repay student debt and their monthly payments are not that different compared to20 years ago. They think that student debt, therefore, may not hold the economy back in the long run, especially as borrowers get jobs that make it easier for them to buy a home or a car. Having a college degree, after all, generally increases a person's lifetime earnings.
The trouble is that there are a growing number of people who are not graduating, but are leaving school with mounds of debt. The chances of them finding jobs to pay off what they owe are slim as more employers require college degrees for even entry-level positions.
People quit school for all sorts of reasons, but cost often plays a huge factor in the decision. Cost prohibits access to education and drives inequality in opportunities and outcomes, argues Piketty.
"You have the official discourse about meritocracy, equal opportunity and mobility, and then you have the reality," he said. "And the gap between the two can be quite troublesome."
There are many reasons why the country is bogged down with more than $1 trillion in student debt, including an increase in the number of people going to college, the amount of time they take to graduate and the skyrocketing cost to attend. But there have also been systemic cuts in state funding for higher education.
Just look at the budget proposals coming out of Arizona, Louisiana and Wisconsin, where governors are calling for tens of millions of dollars of in reductions to already anemic higher education budgets. That kind of financial pressure, among other things, leads public universities to raise tuition.
"In other countries in the developed world you don't have such massive student debt because you have more public support to higher education," Piketty said. "And I think the plan that was proposed earlier this year in 2015 by President Obama to increase public funding to public universities and community college is exactly justified."
Pikettty says tackling high student debt "should rank very highly in the policy agenda in the future in the U.S.," but there's no signs that Washington will come to an agreement anytime soon on the issue. Obama's call for two years of free community college is unlikely to be passed because of GOP opposition. And Congressional Republicans have proposed cuts to a federal program that gives grants to low-income college students, while Democrats want to expand those very programs.