Federal Reserve Chairman Jerome Powell said Thursday that rising student loan debt could be a drag on economic growth going forward.
Powell, the top U.S. monetary policymaker, also questioned why educational debt can’t be thrown out under current bankruptcy rules.
His remarks in testimony before the Senate came just days after the Department of Education announced it was seeking public comment on modifying the “undue hardship” standard. Currently, the standard offers few borrowers student loan relief in bankruptcy.
Burgeoning education debt could slow growth
While Powell’s overall remarks before the Senate Banking Committee suggested the Fed has a positive economic outlook over the next several years, the chairman warned that ballooning balances on student loan debt could pose problems for economic growth.
“It absolutely could hold back growth,” Powell said in response to a question on student debt. “You do stand to see longer-term negative effects on people who can’t pay off their student loans. It hurts their credit rating. It impacts the entire half of their economic life.”
There are currently 44.2 million Americans with student loan debt who collectively owe $1.48 trillion. Powell acknowledged that there’s no current data to project the effect of student indebtedness. But he cautioned that the effects of so much debt spread among so many borrowers could pose a macroeconomic risk.
Powell stressed the importance of making sure that students understand the obligations they’re taking on. But he also voiced his support for the idea that Americans must be able to borrow to invest in their future.
A hint to Congress to act on bankruptcy rules
Powell touched on the challenges student debtors face in filing for bankruptcy.
Currently, an undue hardship standard applies. And it requires students to prove they have exhausted all options to try to repay student loan debt. Students must also be able to prove they’re unable to make payments while still maintaining a reasonable standard of living.
Almost no students can meet this standard. For those who do, the process of suing the government to get student loans discharged is prohibitively expensive.
Powell questioned the current policy. “Alone among all kinds of debt, we don’t allow student loan debt to be discharged in bankruptcy,” he said. “I’d be at a loss to explain why that should be the case.”
While the Department of Education is considering modifications to the undue hardship standard, only Congress can make binding changes to bankruptcy rules.
What does this mean for you?
While the Federal Reserve influences the economy by setting interest rates and controlling monetary supply, the central bank is unable to directly help struggling student loan debtors.
“This is fiscal policy, this is something for you, not something for the Fed,” Powell told Congress.
Policymakers have struggled to address the student loan debt crisis, with proposals ranging from passing a student loan refinance bill to incentivizing employers to provide student loan repayment assistance.
These initiatives have been unable to garner the bipartisan support necessary to gain traction. Despite broad agreement that change is necessary, continued conflict over the best approach to the student loan debt crisis could be making legislative action difficult.
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