October 18, 2011

Student Loan Debt to Hit $1 TRILLION

It’s time to return to thinking about what will best serve students not the lending industry

From USAToday:

Students and workers seeking retraining are borrowing extraordinary amounts of money through federal loan programs, potentially putting a huge burden on the backs of young people looking for jobs and trying to start careers.

The amount of student loans taken out last year crossed the $100 billion mark for the first time and total loans outstanding will exceed $1 trillion for the first time this year. Americans now owe more on student loans than on credit cards, reports the Federal Reserve Bank of New York.

With each passing day the student loan debt total creeps closer and closer to exceeding the $1 trillion dollar mark. Last year we saw student loan debt totals exceed all forms of consumer debt, even consumer credit card debt. At a rate of $90 billion a year the student loan debt bubble is growing into a serious crisis for our economy and a discernable threat to the livelihoods of millions of individuals.

Even though student loans are much riskier than they are advertised, students just don’t see many other options to financing their education. Average college tuition and fees have doubled in the last 25 years making it very difficult to finance a college education with part-time jobs and working throughout the summer.

This is made apparent by recent studies, which show that students are borrowing twice what they did a decade ago. Most alarming is that even as consumers find ways to reduce the debt of their home loans and credit cars, the total outstanding student loan debt has doubled just in the last five years.

There once was a time when grants and low-interest federal loans helped many students make it through college. My how things have changed, now federal loans are grossly underused and direct aid like the Pell Grant, which is the most common direct aid for low-income students, isn’t keeping up with inflation or the cost of college tuition. Another change to the education landscape since that time is the rise of the “For-profit model” of education.

For instance, The University of Phoenix Online has littered the country in the past two decades and made large profits by baiting students with easy enrollment and strapping them with loans. The quality of the education students receive here is far from top notch and graduates are often stuck making far less money than needed to pay off their loans. Students are now put in a very tough spot & essentially made to risk their financial futures by taking on large loans that can potentially leave them with life crushing debt.

Given the growing necessity of a college degree, one would expect student loans to be heavily draped in consumer protections. Much to the chagrin of students this sadly is not the case, in fact, during the 1990s Congress made a point to strip standard consumer protections like bankruptcy protection, statutes of limitations and truth in lending requirements.

At the same time Congress issued extremely powerful means of collection to the student loan industry, including the garnishment of wages, social security and tax returns. All in all these changes made student loans virtually impossible to escape through bankruptcy and ensured that in one way or another the loan is repaid, regardless of the impact it has on the borrower.

It is the lack of protections and favor given to the student loan industry that is driving default rates. Instead of having a system that helps the borrower pay off debts, the system sets out to punish those who have trouble curing their debts.The result is a default rate that rose from 6.7% to 8.8% in 2009 and will continue to climb even higher. Leading our nation’s most skilled talent into a debt burden before they’ve even become established as adults & professionals will only yield poor results. Students with large debt delay things like getting married, having children, buying a car, buying a home, starting a business.

Debt delays the occurrence of these life-cycle events that generate consumption and drive the economy. Entire generations of students are being led down a path that will leave them as slaves to their debt. Instead of quick fixes like adjusting interest rates, which only alleviate the impacts of monthly payments, collection powers should be curtailed significantly & student loan debts need to be given the same common protections that other forms of debt receive.

It’s time to return to thinking about what will best serve students not the lending industry, protecting the borrowing student is the likely key to avoiding a massive economic downturn.

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