Why ‘Easy’ Student Loans Are a Moral Hazard
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Gary Jason
Minding the Campus
December 5, 2013

Here, in a nutshell, is the human toll of the student-loan mess: It is forcing many recent grads to defer marriage and having children; it is hobbling many prospective entrepreneurs that our economy badly needs; and it may well delay the retirement of new grads by 11 or 12 years.

The total student-loan debt hit $1 trillion dollars two years ago, eclipsing total durable goods debt and credit card debt. It is now one-fifth higher, at about $1.2 trillion. Student loan debt tripled between 2004 and 2012, with more than 40 percent of 25-year-olds now carrying student loan debt, averaging $24,000 per debtor. And remember, it is nearly impossible to discharge student-loan debt in bankruptcy.

Related:  How Government Student Loans Ruined College Education

By "debacle," I mean this sad process: The ramping up of federal government guarantees for banks lending money to more and more students over the last 15 years (culminating in the complete nationalization of Sallie Mae in 2008), which led to an explosion in college tuition and consequently an explosion in total loan debt.

Other Debt Is Down
This debacle seems to be entering a crisis mode. A recent Atlantic piece indicates that while the first half of this year saw a modest decline in the delinquency rate on student loans, by September, nearly 12 percent of student loan balances were delinquent 90 days or more. In this period, please note, 3-month delinquency rates for credit card debt, mortgage debt, home equity revolving loan debt, and auto loan debt all declined.

Of course, it is manifestly clear that easy student loans are a classic case of moral hazard. They seduce students into taking on excessive debt, often to pursue college degrees that may simply be unmarketable. Worse, they seduce incompetent students to pursue degrees they never earn, leaving them worse off than if they had never gone to college.

However, it is important to note that the costs of the student-loan program are not just the explicit costs - the accumulated debt of the students - but the implicit opportunity costs as well. By "opportunity cost" we mean the value of the next best opportunity that they passed up in financing their college educations with debt. And a number of reports are beginning to explore these opportunity costs.

Retirement at Age 73
Start with delayed retirement. A piece by Joseph Egoian shows that students burdened with student-loan debt can look forward to a much later retirement age than the average person.

Related:  One Man's Uncommon Fix for Outrageous Student Debt 

The difference is staggering. Egoian calculates that a college grad with the current average level of student-loan debt will typically only be able to retire at age 73, which is 12 years later than the current average age.

He arrives at this by using the median starting salary for recent grads of roughly $45,000, and figuring that the grad will pay the average yearly payment of about $2,800 for the decade it takes to retire that debt. Paying off the student-loan debt winds up costing the grad $115,000 in lost savings by age 73, assuming a 6 percent rate of return (about what stock funds yield over long periods of time).

That is the age at which that grad will be able to retire with 80 percent of peak earnings (including the Social Security benefits which start at age 67). This means the grad will enjoy only 11 years of retirement, at the current longevity average of 84.

Egoian notes that the news is even worse for students who graduate with heavier debt. A grad with $40,000 in student-loan debt is on average going to have to hold off retiring until he or she is 75. As for those who go into debt but fail to complete college, retirement before death may be a complete chimera.

Parents on the Hook
Moreover, as a piece from the WSJ last year noted, the people who pay the cast of a delayed retirement may not be the recent college grads, but their parents, if those parents co-signed and the grad can't pay. Someone in their 60s who has to start paying off his children's loans may not just see his retirement delayed, he may see them forfeited.