Students are borrowing dramatically more to pay for college, accelerating a trend that has wide-ranging implications for a generation of young people…
The ripple effects for today’s heavily indebted young people are becoming palpable. A growing body of research suggests that tough loan payments are affecting major life decisions by recent graduates, forcing them to put off traditional milestones—from buying a first home to even marriage and having children.
This may sound insane, but I tend to see student debt among young people as a sign of progress, rather than a sign of dire social calamity. I know, I know, outraged politicians trot out statistics about how 22 year olds today have an average of £25,000 of debt, when their parents had no debt at all, so ‘proving’ that we’re treating the next generation terribly [etc. etc.].
Are they right? Isn’t it obvious that someone with £25,000 of debt is worse off than someone with no debt at all?
It may be obvious, but in this case it’s also wrong. In 1965 only 9% of British young people went to university. There were very few places, and only upper classes could afford it. By 2001 more than 35% of young people were in higher education, and it keeps climbing.
What does this have to do with debt? Well back in 1965 it was also almost impossible for a young person to ‘borrow’ against their expected future earnings. Either your parents supported you at Uni, in which case you went, or they couldn’t afford to, in which case you didn’t. Banks wouldn’t touch you, because you had nothing to act as ’security’ on a loan (on a mortgage they can repossess your house, but on a university loan? You can’t offer to become an indentured slave to the bank if you failed to meet repayments).
In other words, the vast majority of potential university students were massively ‘credit constrained’. There was a profitable trade to be made between you and the bank – ‘You lend me money to study, I’ll earn more in future and pay back the loan’ – but the risk was too high.
That made it easier to start saving for a house – because you had no debts, and started in the labour market at a younger age. But it made it a damn sight harder to finish saving for a house – because you were earning peanuts.
Today, in contrast, we have a generous system of student loans, accompanying the massive rise in participation. You only repay your loan after you graduate, and only when you start earning above £15,000 (so if you don’t get that higher paying job right away, that’s OK). All remaining debt is forgiven after 25 years (so if you never get that higher paying job, that’s OK too).
The upshot of all this is that young people are in much more debt than they used to be. But that’s overwhelmingly a good thing. Because more of them are going to be graduates, they’re going to land (and create) higher paying jobs, in higher value industries, boosting GDP and taxes.
So when politicians (or outraged journalists) tell you that our kids are in more debt than we were, remember: that may well be their gain, and our loss…