The Indebted Ones

In the U.S., the current unemployment rate for the average student graduating from a four-year college is 11.5%. Those students whom completed secondary school look to face an unemployment rate of only 4.4%. Ideally, one's chances of finding a job in this economy are much higher when completing grad school. This then causes an increase in the number of student loans, thus increasing the amount of student debt.

In other countries, like England for instance, higher education is so much more expensive than that of America. As a result, America gives out way more student loans thus causing the student debt to skyrocket. Due to the rapid increase in the number of student loans in America over the last ten years, the delinquency rate has been affected as well. The Delinquency rate is the percentage of loans within a loan portfolio that has overdue or unpaid payments; it is directly proportionate to the number of student loans.

The United States' economy is in an "extended contractionary phase," or the second phase of the business cycle, in which there is an extended period of high unemployment rate. Current labor market weakness can be explained by weak growth, and weak growth is well explained by weak demand. This is when the government takes action using either monetary or fiscal policy, in the attempt to decrease the unemployment rate. When using the monetary policy, the government may decrease discount rate, decrease RRR, or buy bonds. Shifting the rate when using fiscal policy means that the government increases its expenditures or decreases taxes.

In this particular instance, the government can take action two ways. They could intervene by changing the bankruptcy laws. The current bankruptcy laws in the U.S. do not allow student debts to be "wiped out." Bankruptcy rules could be changed so that it is dischargeable to bankruptcy. However, this could potentially create problems elsewhere, mainly effecting current tax-payers. As students declared bankruptcy, the tax-payers would end up having to pay more taxes.

In the U.S., the student loan system is designed in a sense that students are paying off debt as a mortgage-like obligation. Other countries, such as Britain and Australia take into account one's financial background, making adjustments that are more ideal when taking on debt. With that being said, President Obama "proposed to limit loan payments for some struggling American graduates to 10% of discretionary income and forgive outstanding debt after 20 years." Discretionary income is the disposable income, or the income after taxes paid, subtracted by personal necessities, such as food, shelter, and clothing. If proposed, the government would be using fiscal policy to decrease government expenditures, thus decreasing unemployment rate.

Both of these actions would alter and benefit the increasingly high student debt. Essentially, tax payers would receive the short end of both deals; both scenarios result in a tax increase. However, the economy will not come out of this extended contractionary phase unless the government involves itself.

Link:

http://www.economist.com/node/21534781