Education Debt in the Ownership Society
Education and housing are inextricably intertwined in both the American imagination and our economy -- yet there has been very little talk about how the student debt crisis and the housing crisis relate to each other in terms of both long-term economic cycles and our changing American identity. As evidenced by the overblown debate over interest rates taking place in Congress, we remain focused on minor details, and have yet to examine the big picture of what these twin crises portend.
With over $1 trillion amassed in student debt, and 41% of the class of 2005 delinquent or in default, our attention has remained stubbornly fixed on interest rate changes that would only amount to $9 a month in savings, for a handful of borrowers, while a crisis of inequality and poverty develops unchecked by public outrage and resistance. If we look at the cyclical and generational relationship between education debt and the housing market, however, we can see how the failure to treat the real crisis now will produce enormous inequality as millions of Americans continue to fall out of the middle class.
Spiraling Downward Mobility
At least historically, college graduates have earned nearly $1 million more over their lifetime than high school graduates, and have suffered from significantly lower unemployment rates, as well. The idea of aspiring to a better life is deeply engrained in the American psyche, with education touted as the path to, among other things, better housing opportunities. By increasing our knowledge-base, and improving our value as workers and entrepreneurs, we have traditionally gained the economic means to live in middle-class communities that offer benefits like good schools and low crime.
These middle-class communities – those we’ve come to think of as “America” -- were generated largely by government policies put into place during the Great Depression that made mortgages more accessible to certain segments of the (white) population as part of the New Deal. They were also communities with the property taxes to fund good public schools--which again opened a path to expanded educational opportunities. Access to education led to access to housing, which in turn led to access to improved education – in short, creating the spiral of upward mobility we associate with the American dream.
Although this dream has been an illusion for some time, until recently we hardly noticed that it disappeared. Why? Because we lived as if nothing had changed by going into debt. For the last 30 years we have seen wage stagnation for all but those at the very top of the income heap; thanks to that stagnation, the vast majority of Americans have only stayed afloat by taking on debt. Much of the debt that has been taken on has been educational debt, as aspirational American families have been unable to meet daily needs and save for their children’s college education at the same time.
Over the last 30 years, total college tuition rates have increased by around 500%; over the last 40 years, the estimated increase runs as high as a 900%. As a result, a full two-thirds of recent graduates carry an average of $27,000 dollars in student debt upon completion of college. And with 50% unemployment rates, new graduates often must choose between taking on predatory internships that rarely lead to employment, predatory student loans (as they attempt to sit out the recession in graduate school), and predatory low-wage employment that tends to lead to permanent underemployment.
We have also accumulated housing debt. The rule of thumb used to be that 25% of income should go to housing; today, 55% debt-to-income ratios are common. The majority of homes in the United States were purchased after 2000, which means that at present they have appreciated very little, if at all, given the housing meltdown of 2007. (In California, for example, 65% of homes were purchased after 2000, with 47% purchased after 2005.)
As a result, many of these owners are stuck paying for underwater properties that they will only be able to get out of if the market increases beyond the bubble years. The only alternative to hanging on is for a seller to pay a bank for the difference in property value at closing or walk away. But hanging on is a long-term proposition that, in most cases, relies on enormous job stability, as well as the cultivation of a pool of new buyers that would cause property values to rise again. Unfortunately, we are already seeing that there have been significant reductions in the numbers of first-time buyers: between 2009 and 2011 only 9% of 29- to 34-year-olds were approved for a first mortgage. And in 2011 we saw the lowest level of mortgage originations since 2000, well before the Great Recession.
Part of the issue here is that home prices are higher in urban areas, where jobs tend to be concentrated. The influx into cities is so pronounced that some rural areas have started offering incentives of thousands of dollars toward student loan payments to generate population growth and attract needed skills. Not only are younger Americans unable to buy homes, but with over $1 trillion in underwater mortgages nationally, they have seen the downside of ownership first-hand, and question the wisdom of getting into mortgage debt at all.
As a result, the housing market may be frozen for the long-term, with owners continuing to walk away due to changing circumstances and lack of property appreciation, and with younger generations either locked out due to student debt or forgoing ownership because it just doesn’t seem like the deal it used to be.
Responsibility for Debt
The harsh realities facing homeowners and student loan debtors have led to calls for mortgage and student loan write-downs. These calls have been met with a simple but powerful logic that asserts the importance of keeping one’s word. But this logic of personal responsibility fails to take into account the way the economic system works at its most fundamental levels. Most Americans view the morality of repaying debt so rigidly because they believe that someone is lending money that was previously in existence somewhere. In spite of the language of lending, the reality is that money is created through debt. Going into debt is not most accurately described as borrowing, because the acquisition of a debt is also simultaneously the creation of money. The relationship is reciprocal, and not one-sided. This realization changes the morality of owing; there is no kind person out there doing you a favor by giving you a loan; rather, a bank was generating money through its interaction with you.
Though it went largely unnoticed, one sign that the era of expanding opportunity through government programs (like Fannie Mae and the GI Bill) was over came in 1970, when the government created Freddie Mac for the purpose of generating mortgage-backed securities. Under a stated logic of expanding homeownership, this entity was created as a quasi-private corporation with implicit government guarantees. The birth of Sallie Mae in 1972 came out of this same era of shifting responsibilities from the public to the private.
But, unlike housing, the student loan industry came with an explicit guarantee that the government would back defaulted loans. In both cases these guarantees created a secondary market for debts, allowing them to move through the system as securities, generating wealth for the investor class. In the case of student loans, the combination of deregulatory practices, loss of consumer protections and government guarantees led to tuition increases, in the same way that presumed government guarantees for certain types of mortgages helped inflate the housing bubble.
The irony of these twin crises is that ultimately too much debt on the education side leads to the inability to acquire enough debt on the housing side, while too much debt on the housing side leads to too much debt on the education side for the next generation. In this sense, these are not separate crises -- rather they are indicators of the large-scale consumer debt crisis we are facing, and the levels of inequality this crisis will surely produce as things continue to unravel.
If we lock ourselves into an inaccurate logic of personal responsibility, we will be unable to see the interconnectedness of these problems and the impact they will have on the whole. But by taking a bird’s-eye view, we can see the ways in which banks and our government have comingled public and private spheres, and developed a predatory economic model that shifts resources upward by forcing the 99% into debt.
A New Dream
We are faced with a broken American social contract, and have reached a critical moment for the 99%. Under these circumstances, it seems obvious that a political movement to build a new dream should take debt as its focus. Debt connects the 99%, as multiple forms of debt are interwoven: Homeowners and student loan borrowers are forced to use credit cards to make ends meet and often must forego health coverage, ultimately generating medical debt in an emergency. Often, those who have been historically excluded from property ownership and educational opportunities are forced into pay-day loans and rent-a-center schemes, some of the most predatory forms of debt. Undocumented students often must pay high international rates on student loans even though they have spent their lives here in the United States.
Just as housing and education are united by the loss of collective ideals, all forms of consumer debt are connected under the neoliberal logic of extreme privatization and excessive individuality. In this context, a demand to strike debt seems morally necessary and coherent. Occupy Wall Street inspired us to hit the streets and take back our public spaces. Now, we need to re-conceive of ourselves as fundamentally interconnected, recall our history of resistance to economic injustice, and reclaim our dreams from those who would rob us of them through a tyranny of debt.