Student loan debt: the next time bomb?

Today's graduates hit job market with more debt, fewer prospects

By Tony Mecia

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 $23,300.
• 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
That 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 them.

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 bad
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.

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 for it.

"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."

See related: Discharging student loan in bankruptcy requires major hardship, Steps to make good on a defaulted student loan

Published: March 15, 2012

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