Clinton’s (and previously Bernie Sander’s) main sell to young voters is her promise to allow any citizen from a household earning less than $85,000 today – and $125,000 in 2021 – to attend state colleges without paying tuition. Clinton’s words have resonated with most of her targeted audience – every student should have the option to graduate from a public college or university in their state without taking on any student debt, and in a country where college debt has skyrocketed past $1.4tr, her plan does seem like deliverance from the crippling burden of student loan debt.
But the reality is much grimmer. Clinton’s plan could potentially saddle college students who fall outside those income brackets in more debt, rather than liberating them from it. Indeed, a July 2015 research study by the New York Federal Reserve suggests that there is a correlation between student loan availability and tuition increases, which is a view that many academics and economists have rallied around in recent years.
Given the growing accessibility of federal and private student loans for students, colleges have been able to increase their tuition fees, cushioned by those loans in addition to government subsidies like the one Clinton intends to give. Clinton’s free college plan, which is estimated to cost the federal government approximately $350bn over 10 years, could likely see tuition fees rising once again. This also means that the students who don’t qualify for the subsidies – or those who end up attending private colleges – will be burdened by even heavier shackles of student loan debt.
Here is where the toxic spill over into the ABS markets happens. What happens when these students begin to make repayments on their loans? Student loan ABS trends from the last 18 months have shown that when borrowers have loans that they cannot repay, they defer or decrease their monthly repayments. And when the stream of money slows to a trickle, ABS investors worry about whether they can be paid. If investors feel that they cannot predict the cash flow, that’s when the problems begin. A similar situation happened last year when Federal Family Education Loan Program (FFELP) ABS became the worst performing asset class of 2015, sparked by market fears of ratings downgrades after it became likely that borrowers may not pay off their loans before bond maturity. The problem still lingers today, with some analysts cautioning people against buying FFELP backed bonds due to lingering uncertainty with the asset class.
Obviously, Clinton’s free college plan would not be the sole cause of such repayment problems, but it could very well help catalyse a similar situation. In the case of a Clinton win, the new administration should focus instead on creating tuition fee ceilings, especially for for-profit institutions, and fix the system that allows young Americans to freely borrow large amounts of money without understanding the consequences of debt repayment.