Policy Forum: Understanding America’s sea of debt

Being in debt generally doesn’t seem like a good position to be in.

Yet, the United States has a rising, trillion-dollar budget deficit. And there’s $1.5 trillion outstanding in student loans. Does that mean we are in a crisis, or at the edge of one?

Economic experts speaking at the annual spring Policy Forum hosted by the Stanford Institute for Economic Policy Research (SIEPR) addressed these issues of debt from varied standpoints and outlined strategies toward solutions. The May 29 event, co-sponsored by Stanford in Government and the Stanford Economics Association, featured two panels — one on government debt and the other on student debt.

Panel highlights are below. Watch the videos to learn more.

Stuck on debt

Bill Gale, a senior fellow at the Brookings Institution, said interpreting the national debt is akin to a fiscal policy Rorschach test — treatment will depend on whether one blames the deficit on too much spending or on not enough revenue. The problems, nonetheless, are intertwined.

If there is any consensus on this issue, it is that U.S. debt will remain for the foreseeable future, Gale said. Under current policy, the nation’s high debt-to-G.D.P. ratio — a way of gauging a country’s economic strength and ability to borrow — is projected to double in 30 years.

That’s a somewhat disconcerting outlook, he explained. Even while the U.S. government enjoys the luxury of borrowing at low interest rates, there is risk of unknown events that can trigger a real fiscal crisis, such as a war.

For now, however, “even with no crisis, there is still a problem; it’s just a gradual one,” Gale said.

John Cochrane, a senior fellow at SIEPR and the Hoover Institution, joined Gale on the panel and framed his remarks by asking: “Why should we worry about deficits?”

Interest rates are low, and “it’s a great time to borrow,” but Cochrane made the case that the U.S. is vulnerable to a “sudden” crisis — contrary to perspectives that America is immune to economic collapses like those of Argentina or Greece.

“Debt crises do not come slowly,” Cochrane said. “They come swiftly and unexpectedly in the middle of the night.”

By way of insurance, increasing innovation and productivity is America’s “most hopeful answer” to whittling down debt, Cochrane said.

It isn’t enough to use taxes, and raising taxes for the wealthy — while a seemingly attractive option — produces only short-term returns but will hurt revenue in the long run, he contended.

Cutting spending for social programs are not going to pass muster either. That would be heartless, Cochrane said, adding a bit of dramatic flair. “Throw grandma from the train — ‘Oh, the debt crisis is coming!’”

Will student loans pay off?

Never before has a previous generation borrowed as much as college students of the past decade, Lesley Turner said, as the associate professor from Vanderbilt opened the panel discussion on student debt. Not only are more students borrowing, their loan amounts are larger, too.

Concerns of delinquency, default and other domino effects are thus running high as student loans have more than doubled to $1.5 trillion since 2008. Headlines are screaming “crisis,” while predictions are tying student debt burdens to housing market issues.

But here’s a trillion-dollar question: Will the student loans ever be recouped? It’s also a matter of tradeoffs because the education attained may make the student loans worthwhile.

The good thing is studies have shown that higher education can lead to higher incomes. As a result, student loans could ultimately pay off for students who graduated or even for those who dropped out but might still realize benefits from their college experience, she said.

There is, however, a troubling sign: For some reason, the rate of repayments is decreasing.

Less than half of student borrowers since 2012 have made any progress in paying down their principals, Turner said. And many of those borrowers are failing to keep up with interest payments as well.

This extent of delinquency doesn’t have to be happening when there are numerous repayment programs and income-sharing options out there, said panelist Kristin Blagg, a researcher at The Urban Institute and a public policy doctoral student at George Washington University. Students need to know that there are public loan forgiveness programs as well.

Some possible solutions are endeavors to better inform students of repayment options and to simplify the repayment process — perhaps including automatic enrollment for borrowers to avoid defaults, Blagg said.

Making educational institutions accountable in some way for loan repayments — and getting “their skin in the game” — might also be worth exploring, she said.