NY Fed President Says It May Be Time To Talk About Free College Tuition

Student loan debt is suppressing home ownership and making it problematic for the Federal Reserve to decide on the optimal interest rate.

UPDATE: 6:20 p.m. EDT — Sens. Bernie Sanders, I-Vt., and Elizabeth Warren, D-Mass., and several members of the U.S. House Monday introduced legislation to eliminate tuition at public four-year colleges and universities. The College For All Act would eliminate tuition for students from families making as much as $125,000 a year. Community college tuition would be free for all income levels.

The bill is unlikely to go anywhere in the Republican-controlled Congress.

Original story

New York Federal Reserve Bank President William Dudley said Monday it may be time to consider making college tuition free because of the impact of student debt on the economy. Dudley said during a press briefing the burden of student loan debt has a negative impact on household spending power.

The comments followed the Federal Open Markets Committee decision last month to hike short-term interest rates by 0.75 percent to 1 percent, pushing rates to their highest level since 2008, with expectations for at least two more hikes this year.

Read: Former FDIC Head, Now College President Has Plan For Reducing Burden Of Tuition Costs

The Fed is trying to determine the best interest rate for the times, with an aging population, low productivity growth and reduced consumer spending weighing on the calculations.

Dudley said free college tuition would be a political decision, but it would be a “reasonable conversation” to have. Americans owe more than $1.3 trillion in student loans, with the average student owing $37,172, Student Loan Hero estimates. The Fed said that’s an increase of 170 percent from 2006, and it’s taking borrowers longer to pay back the principles.

“To the extent that student-loan growth inhibits homeownership, this could obviously have significant consequences for the economy, because when someone buys a home, that can lead to more home construction, which has a pretty high multiplier,” Dudley said.

Read: Low Interest Rates May Be The New Normal

The Fed notes a college education still is valuable given the decline in real average earnings for those who have no degree. But as state funding for higher education has slipped in the last 20 years, tuition has skyrocketed, increasing reliance on loans by students and their families. The result has been students leaving school with higher levels of debt.

Studies have indicated student debt holders are less likely to buy homes even though college graduates have a higher probability of buying a home than those without a college degree.

Americans had been reducing their debt since the 2008 recession when it stood at $12.7 trillion, but the trend reversed last year, with household indebtedness growing to $12.6 trillion by the end of the year. But instead of the debt being attributable to mortgages and lines of credit as was likely before the recession, it has shifted to auto loans and student loan debt, the Fed said.

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