Student loan debt: the next time bomb?
Today's graduates hit job market with more debt, fewer prospects
While consumers have paid down credit card balances and
other debts in recent years, there's one area where they continue to borrow
heavily: student loans.
People affected by growing student loan debt are sounding
alarms, and no wonder. Look at the numbers. According to data
from the Federal Reserve:
Student loan balances now stand at about $870 billion, an
amount that has surpassed total credit card balances ($693 billion) and total auto loan balances ($730 billion).
The average outstanding student loan balance per borrower is
About 37 million Americans owe money on student loans.
Almost 10 percent of student loans -- $85 billion worth -- are
delinquent, and the Feds fear that number may be understated.
The Occupy Wall Street movement rallied last year around
"immediate across-the-board forgiveness" of student debt. The National
Association of Consumer Bankruptcy Attorneys says student
loans could be "the next debt bomb" for the U.S. economy. Even Federal Reserve
Chairman Ben Bernanke -- whose son expects to graduate from medical school with
$400,000 in debt -- says student lending requires "careful oversight."
The growing interest in student debt comes as delinquency
and default rates are on the rise, and as total debt figures blow past big
milestones. In 2011, student loan debt surpassed credit card debt. In 2012,
total student loan debt is expected to hit $1 trillion for the first time.
Lots of student debt, few jobs
explosion of student debt springs from economic trends: College costs are
rising fast and college enrollment is hitting new highs, but students are graduating
into a tough job market that makes student loan repayment even tougher. A study
by the John J. Heldrich Center for Workforce Development
at Rutgers University in 2011 showed that of college students who
graduated in 2010, only 56 percent had found a job a year later.
"What you have is a whole generation of young people who are
beginning their post-academic lives under a debt burden that Americans have
never experienced in the past," says Alan Nasser, a political economy professor
at Evergreen State College in Washington.
Although the concept of escalating debt that's tough to
repay might sound similar to the subprime mortgage crisis that preceded the 2008
recession, experts say there's little chance that ballooning student loan debt
will lead to a similar financial meltdown. That's because more than 85 percent
of student loans are backed by the federal government, which has more power
than private lenders to force repayment.
Instead, the effects of rising debt are felt individually,
by borrowers overwhelmed with the amounts they're compelled to repay. Experts
say high debt inhibits consumer spending, discourages further education and
creates a disincentive to marry and start families.
"It prevents a lot of people from moving on with their
futures, which is bad for productivity and bad for our economy," says Deanne
Loonin, an attorney with the National Consumer Law Center, an advocacy group
for low-income Americans.
The old trade-off: student debt for skills
Of course, the idea behind student loans is to allow
students to pursue degrees, which typically lead to higher incomes. Because of
that, many students view them as a worthwhile investment.
Elisabeth Podair, 25, says it was "scary" to sign loan
documents when she was an undergraduate at Queens University of Charlotte, N.C., but
that it was the only option after winning scholarships to pay for much of her
expenses at the small liberal arts school. When she graduated
in 2009, she owed $20,000, but felt as though the university prepared her well
for the workforce. She landed a job soon after graduation as an account
executive at an advertising and marketing agency in Charlotte.
Podair has started paying down the balance to a mix of
federal and private lenders. She says she'd prefer to have no debt, but that if
she has to have some, educational debt is better to have compared
with, say, a car loan, since the value of a car declines with age.
"I hope that the value of my education will only increase
over time, and the amount I owe will only decrease over time," she says.
Podair says she owes less than many of her peers.
Nationally, two-thirds of bachelor's degree recipients take
out loans to pay for college, according to the College
Board. Of those who borrow, the median amount owed at graduation is
$20,000. The top 10 percent of borrowers owed $44,500 or more. Graduate
students typically borrow more than undergraduates.
For borrowers who are simply unable to pay, there's a
complicating factor: College debt is difficult to erase -- more so than credit
card debts or even gambling debts. For federally guaranteed loans, which account
for more than 80 percent of all student lending, the balances are almost
impossible to wipe away, even in bankruptcy. In addition, the government has
collection powers unavailable to private lenders, such as intercepting tax refunds and even reducing Social Security benefits.
Students don't always understand loan terms
Experts say consumers need better understanding of the loans
when they take them out, as well as their options if they're unable to repay
Young adults, for instance, might not realize the effects of
carrying tens of thousands of dollars of loan debt.
"Young people, when they're 18 or 19, they're not thinking
straight. They don't have much experience with debt," says Allen Carlson,
president of the Howard Center for Family, Religion and Society, who has
studied the effect of loan debt on families. "They hear what the education
establishment tells them, which is, 'This is your ticket to a rich future.'"
The easy availability of student loans -- which are typically
made irrespective of a borrower's credit or career choice -- result in a
workforce that is "overeducated," Carlson says. So while skilled machinists are
in short supply, "we probably have too many lawyers, too many art historians
and too many sociologists," he says.
When student loans go
If graduates struggle to make payments, they should know that there are many
options available, says Mark Kantrowitz, publisher of FinAid.org,
a leading financial aid website. The key is taking action before you stop
making payments, he says.
If you default on federal education loans, you're not going
to get a credit card or an apartment. It's like a trip through hell.
It ruins your life.
The first step is to contact your lender. Borrowers on
federal loans are eligible for income-based repayment plans, which can align
monthly payments with income. In some cases, employees of government agencies
and certain nonprofits can have the balances on their loans forgiven after 10
years. Going into default is far worse, Kantrowitz says, because there are
fewer options and you'll still owe the money -- and have poor credit to show
"If you default on federal education loans, you're not going
to get a credit card or an apartment," he says. "It's like a trip through hell.
It ruins your life."
There are plenty of policy ideas for reform, too. Some of
the proposals under consideration in Washington would require greater
disclosure and counseling on loans' costs and terms, enhance loan forgiveness
programs and limit interest rate increases. In March 2012, the new Consumer
Financial Protection Bureau started taking complaints about
lenders of private student loans.
Loonin says borrowers should stay informed.
"It's a rapidly changing area," she says. "People get
confused. Little by little, there should be new options for people."
TIPS ON TAKING OUT, REPAYING STUDENT LOANS
WHEN TAKING OUT STUDENT LOANS
- Estimate your total
debt. How much debt will you have at graduation? Are you comfortable with
that amount? How does it compare to a projected starting salary? Look at your
financial aid award letter and use a student debt calculator like those on FinAid.org.
- Comparison shop.
Different lenders can offer different loan terms.
- Take out federal
loans first. Make sure you've exhausted federal loans before turning to
WHEN REPAYING STUDENT LOANS
money. Pay off high interest debt -- such as credit card debt -- and build
up a savings. That could make paying off student loans easier.
consolidation. Consolidating loans can simplify and reduce monthly
payments, but it also stretches out the length of the loan.
pinch? Talk to your lender. You might be eligible for lower monthly
payments tied to your income. In an emergency, you might be able to postpone
money toward principal. Ask your lender the best way to pay down your
principal balance, so that your extra money doesn't go toward interest.
late payments and default. Ignoring problems will make them worse.
See related: Discharging student loan in bankruptcy requires major hardship, Steps to make good on a defaulted student loan
Published: March 15, 2012