Obama Administration Says Student Loan Debt Boosts Economy

Education expert refutes claim, says unemployed students or those in loan default leave taxpayers on the hook

college grads
AP

Student loan debt, which has ballooned during Obama’s time in office, is a "boost" to the economy, according to a report produced by the White House Council of Economic Advisers.

When President Obama took office in 2009, overall student loan debt totaled $664 billion. Since then, the amount of outstanding student loan debt has nearly doubled, hitting $1.3 trillion in 2015. The White House report found that the average undergraduate borrower currently owes $17,900 in debt. Other studies found that number ranging from $28,950 to as high as $37,172.

According to a Government Accountability Office report, as of September 2014 there was approximately $103 billion of student loan debt in default and about one in seven borrowers had defaulted on their loans within three years of beginning repayment.

While the report noted that student loan debt has created challenges for some borrowers, it said that the debt represents a boost to the economy.

"The main macroeconomic impact of student loans, particularly over the long run, is via the boost to output and productivity from a more educated workforce," the report stated. "While it is still important to monitor in overall leverage, on net, student loan debt is still likely to be a boost to the economy over the longer run by increasing educational levels and workers skills."

Additionally, the report said that students with loan debt are in a better position to buy homes or start businesses because they are associated with additional income.

"Higher education, even paid for by debt, raises the likelihood of owning a home because of its impact on future earnings," the report said. "By age 26, households with student debt are more likely to buy a house than those that did not attend college."

Mary Clare Reim, a research associate in education policy at the Heritage Foundation, refuted the White House’s claim. She said that just because students who attend college typically have higher earnings, it doesn’t mean that the current sticker price of education is necessarily worth the economic benefits down the line.

"The argument that student loans won’t harm the economy because it’s an investment in our future falls apart when you look at student loan default rates and factor in loan forgiveness and grants," Reim said. "Around 14 percent of student loans are currently in default, half of recent graduates are unemployed or under employed, and loan forgiveness programs are only growing, leaving taxpayers on the hook. Not to mention that all students who receive Pell Grants don’t need to pay taxpayers back."

Reim said students get a loan regardless of what the student is interested in studying, where they want to go, and what their work ethic is like. Federal lending programs don’t do any sort of economic analysis to determine future earnings potential as a condition of the loan, she said.

"I think it would be very tough to argue that a Bachelor of Arts in dance is actually worth $200,000, but that’s what we’re subsidizing," Reim said. "The feds now control 93 percent of all student loans and as a result we are subsidizing students and degrees of questionable value, a phenomenon that would not occur in a free market."

The White House report also refuted the claim that ballooning student loan debt can be compared to the housing bubble that led to a recession from December 2007 to June 2009.

Student loan debt is less likely to make a recession more severe or an expansion more slow than the housing crisis did, according to the Obama administration. They based the claim on the fact that student loan debt remains low relative to household income and because student loan debt is an investment in human capital that pays off through higher earnings and productivity.

"Private lending could put some downwards pressure on the ever increasing price of college tuition and make college more affordable," Reim said.