Fed Officials Looking Closely At Student Debt

Federal Reserve officials are paying close attention to America’s mounting student debt load.

The upward march of student loan borrowing is “something we are keeping an eye on and thinking quite carefully about,” Fed governor Sarah Bloom Raskin said in response to an audience question Thursday.

The latest household debt and credit survey by the New York Fed found that outstanding student loan balances rose by $20 billion during the first three months of 2013, to $986 billion as of March 31.

“This growing amount of student debt could be coming at a price for other areas of growth in the economy,” Ms. Raskin said.

Growing student debt burdens, she said, could lead parents and families to restrain their own spending because they are guaranteeing or actually helping to pay off this debt. Alternately, she said, some hypothesize that big loan balances are “crowding out” household formation – that is, causing young people with big debt to pay off to delay getting married, buying houses and having children until they pay off their loans.

The borrowing will “clearly affect [the borrower's] behavior in the future,” San Francisco Fed President John Williams said Thursday, also expressing concern about the issue.

Richmond Fed President Jeffrey Lacker said he’s not concerned about every student’s debt; data show education in investment is one that’s likely to pay off, he told an audience of business executives in Baltimore Wednesday. But he does worry that the federal government’s intervention in the market is distorting borrowing decisions and “distorting the choices of some students about education,” Mr. Lacker said. For instance, he is concerned that students are loading up on debt to pay for tuition at certain institutions that might be taking advantage of them, “providing them with training and skills that maybe aren’t worth as much as the student thinks they are and leaving them saddled with debt that cannot be discharged in bankruptcy.”

Speaking to reporters later, Mr. Lacker said the problems in the student debt space stem from the combination of the subsidized rates on student loans and a lack of constraints on how much individuals can borrow. With subsidized loans issued directly by the federal government, the government pays the interest while the student is in school.

“Given the scale of the market the danger isn’t as large as what happened with the subprime crisis, but it’s analogous,” he said. “I worry we’ve deliberately turbo-charged that process with our intervention in credit markets. I understand the rationale for subsidizing access to student loans, to help people get a good college education but I don’t think the program is managed well and I worry about excesses.”


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