America is in the midst of a second financial crisis. As reported by the Atlantic, from 1999 to 2011, the percent of student loan debt held by Americans grew 511 percent to $550 billion. As of 2010, student loans have surpassed credit cards debt as the nation’s single largest source of debt, nearing $1 trillion. Since 1978, the price of tuition at U.S. colleges has increased 650 points over inflation, compared with the 50 points over the Consumer Price Index housing prices increased over the same period. This represents a massive debt bubble that threatens to sink the United States into a debt crisis that would eclipse the situations that currently endangers the European Union’s economies.
There are signs that the bubble is preparing to burst.
According to Bloomberg, Yale University, the University of Pennsylvania and George Washington University have sued former students over non-payment of federal Perkins loans. Non-payment of these loans directly affect the ability of current and future students to gain financial aid, as the Perkins Loan Program is a revolving fund program. In such a program, the money paid back to the program is immediately made available as new loans for new students. This loan program has been allocated for students that demonstrate exceptional financial hardship.
As of the year ending June 2011, $964 million has defaulted in Perkins loans, which represents a 20 percent increase from five years prior to that. Perkins loans are administered and distributed by the individual colleges, unlike other federal government-mandated financial aid programs.
A rising tide
According to the credit bureau TransUnion, the average student loan debt per borrower has risen 30 percent to $23,829. More than half of all student loan accounts, which adds up to more than 40 percent of the total dollar value owned, are in deferral. Deferral is a temporary state; it is typically given short-term due to financial hardship due to illness or unemployment or because the borrower is current a full- or half-time student. However, few actually repay their loans after leaving deferral. According to FICO Labs, delinquencies rose 22 percent in five years, with delinquency rates being 15.1 percent — or 4 points over the percentage quoted by the Federal Reserves in November — among the newest group of loans studied.
There is a general fear that if interest loan rates rise — which are artificially low due to the Federal Reserve’s intervention — many borrowers that were barely able to meet their financial obligations will be forced to default. Barry Bosworth, an economist from the Brookings Institution said, “I think a few more years and it’s going to be a general crisis.”
According to The New York Times “degree inflation” has become inescapable in the modern job market. “The wage gap between the typical college graduate and those who have completed no more than high school has been growing for the last few decades. In the late 1970s, the median wage was 40 percent higher for college graduates than for people with more than a high school degree; now the wage premium is about 80 percent … Some of it may have to do with a change in the mix of students who go to college and those who don’t. As college enrollment becomes more expected of high school students — as of October 2011, 68.3 percent of 2011 high school graduates were enrolled in college — the shrinking group of students forgoing college may have other characteristics that are associated with lower wages.”
As more students seek higher education, and as a college education is becoming more and more expensive, the national cost for education is rapidly exceeding the means of the people to pay for it, especially in light of an economic slowdown. According to the College Board, the cost of tuition and fees at public four-year colleges went up 5 percent, despite the fact that student financial aid dropped. “The rapid growth in federal aid — which for a few years actually reduced the average net prices students paid — has ended.”
According to NBC News, half of all new college graduates are jobless or underemployed — forced to take low-paying jobs that do not use their skills and knowledge. Despite the strong demand in science, education and health fields for new graduates, art and humanities majors have floundered in the job market. Technological advancements have eliminated many mid-level jobs, such as bank tellers and system operators, and many new job openings are projected for lower-skilled occupations, such as home health aides.
Unless the job market improves, those that seek “creative” degrees may never be able to repay the loans they took out to get the degree. Even if, however, the job market was to rebound, this will not help the nearly 30 percent of all borrowers who do not finish their college degree. Those that do not finish college are more likely to be beset with low-paying jobs.
The burden of extreme debt
The website for Occupy the Student Debt invites individuals to tell their stories about crippling student loan debts. One submitter shared her story about returning back to school. At age 32 and as a single mother of two school-aged kids, she endeavored to improve her lot by returning to school and earning a bachelor’s degree in social work. Accordingly, she borrowed not only to cover tuition, but also room and board for herself and her family. She ended up owing $65,000 on a loan of $25,000.
She attempted to craft a repayment plan of $200 to be paid each month by her unemployment compensation. The bank, however, wanted $500 — which was difficult to meet based on her controlled budget. As such, she ended up defaulting and having to give up on her dream of homeownership.
Another submitter details his struggles with college debt. A high school high-achiever, he grew up with the perception that education was the key and sole prerequisite to success in life. After his mother was only able to pay for two semesters of college for him, he was forced out on his own at age 19. Working two full-time jobs to support himself, he was forced to turn to federal student loans in order to continue his education dream. He had no alternatives but to switch to private student loans once his federal allotment was exceeded. So, after a false start as an English major, he graduated with a degree in business with more than $40,000 in private student loans and $50,000 in federal loans. This is in light of a salary of less than $30,000 a year.
Stories like these are not uncommon. In the report “The State of Young America: Economic Barriers to the American Dream,” 68 percent of 18- to 34-year-olds in America feel that it is harder to make end meet, compared with four years ago. Almost half of all millennials feel they will be worse off than their parents. Seventy-seven percent feel that the middle class is disappearing and have some concern over this. Only 53 percent are working in their chosen field. Thirteen percent are fully unemployed.
The majority of all interviewed for this study in 2011 made less than $30,000 a year. Since 1978, real wages, or wages adjusted for inflation, have been decreasing at a steady and significant rate.
There are more than 2 million adults aged 60 and older in the U.S. who are still paying down their student loans, according to the Federal Reserve.
As quoted from the study: “Young people prioritize education and training and want to see their access protected and increased. For this generation, it is the primary pathway to get ahead. Yet more than half of the population is worried about affording college or training, and almost 40 percent of young people say they have delayed starting or continuing college or training because of the economy. They strongly believe additional education and training should be made more affordable and accessible: Eighty-four percent of young people think that Congress should prioritize making college affordable, and more than two-thirds (68 percent) think that should be their top priority.”
The profit in debt
Since 1980, the average percentage of total public college cost covered by non-repayable grants has fallen from approximately 69 percent to 34 percent. As of 2011, two-thirds of all college students took out student loans. This is problematic, as evidence of profiteering exists in the student loan industry.
As reported by Common Dreams, some of the most grievous offenses include bribes paid by loan companies to colleges and universities, namely, a $250,000 bribe in 2005 to Drexel University for designating Education Finance Partners as its “preferred lender;” conflicts of interest, which includes a financial aid officer from John Hopkins who received consulting fees and had her graduate school tuition paid for by Student Loan Xpress; and self-dealing by officials of the U.S. Department of Education, as was the case with Matteo Fontana — who held at least $100,000 in stocks of the loan company he was overseeing.
The private student lending industry has grown into a troubling dilemma for the American education system. While — in theory — it offers options for students that would not qualify for federal or state assistance, in practice, it has became a major source of abuse. As student loans are guaranteed through the government, private lenders assume no risk of default or nonpayment. According to U.S. News & World Report, the private loan program costs taxpayers $12.80 per every $100 loaned. This is compared to direct governmental loaning — which typically returns more than what was borrowed. According to the late Edward Kennedy (D-Mass.), who was a critic of private educational lending, more than $30 billion in taxpayers money could have been saved if all reduced-rate private loans since 1994 were made through the direct loan program.
A key problem lies in the fact that the private student lending industry are heavy lobbyists in Washington. Major contributions have been attributed from the industry to Republican leadership — especially Speaker of the House John Boehner (R-Ohio) — who, in turn biased the student aid portfolio toward private lending. Under the Republicans, the Congress reduced funding to the Pell Grant program, struck down limitations to the maximum interest rate private student lenders can charge, and banned the public lending program from marketing itself.
In search of solutions
Fixing this problem may prove to be difficult. In 2007, Rep. George Miller (D-Calif.) introduced the “College Cost Reduction and Access Act,” which had strong bipartisan support. The bill would create an alternative to standard repayment plans in that the borrower’s payment would be fixed and made for up to 10 years. The rate for repayment would be based on the students’ income at graduation and was capped at 15 percent. The bill, however, failed to gain the support needed to pass the Congress.
In March 2012, Rep. Hansen Clarke (D-Mich.) introduced a law that dramatically improved loan forgiveness. The law, which capped the income-based rate to 10 percent and set the maximum repayment period to 10 years — hence, the “10-10” plan would have also capped the maximum student loan interest rate to 3.4 percent.
The bill wasn’t brought up to a vote in the House and died without consideration.
Currently, government-backed educational loans are not dischargeable under bankruptcy. Some legislators feel that a restoration of bankruptcy protection — eliminated under the Bush administration in 2005 — would offer a way out for the most severe of financial situations. Critics of this plan feel that doing so will ultimately raise the cost to issue new loans. As more loans become unpayable, the reserve needed to draft new loans must be greater, at the cost of new borrowers. Critics also argue that private loans are dischargeable today, but the test for a dischargement is rightfully high to protect young lenders from the stigma of bankruptcy. Moody’s Investors Service defends this assessment, “Borrowers who have just left school are struggling to find jobs in the weak economy and are likely less concerned than more mature borrowers about the potential difficulty in obtaining credit after bankruptcy or by associated social stigma.”
Those that favor bankruptcy feel that bills — such as Clarke’s — give students the opportunity to “game the system,” knowing that their obligations will be capped. Jenna Ashley Robinson, in her article for Inside Higher Ed, argues that “if bankruptcy were available, many young graduates — who often have no major assets such as a house or a car — would be tempted to walk away from loan obligations. The federal government lends money to any student who meets minimum standards; it does not evaluate whether the student is likely to pay the money back.”
If the United States is to be competitive in the future, it must educate its populace. The pursuit for higher education cannot be ignored or avoided, but pursued. However, the means by which this country pays for it must be examined and remedied. While the onset of online education options, reductions in professional licensing requirements, and an increase in the number of college credits available at the high school level have helped to limit student debt, controls on the private lending industry and tough choices on policy direction are needed to help prevent the education debt bubble from bursting.
As reported by the Atlantic on the gravity of defaultment and the educational debt bubble, “With mortgage defaults, banks seize and resell the home. But if a degree can’t be sold, that doesn’t deter the banks. They essentially wrote the student loan law, in which the fine-print says they aren’t “dischargable.” So even if you file for bankruptcy, the payments continue to be due. Hence these stern word from Barmak Nassirian of the American Association of College Registrars and Admissions Officers. “You will be hounded for life,” he warns. “They will garnish your wages. They will intercept your tax refunds. You become ineligible for federal employment.” He adds that any professional license can be revoked and Social Security checks docked when you retire. We can’t think of any other statute with such sadistic provisions.
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