WASHINGTON (AP) — The federal student loan program seemed like a great idea
back in 1965: Borrow to go to college now, pay it back later when you have a
But many borrowers these days are close to flunking out, tripped up by
painful real-life lessons in math and economics.
Surging above $1 trillion, U.S. student loan debt has surpassed credit card
and auto-loan debt. This debt explosion jeopardizes the fragile recovery,
increases the burden on taxpayers and possibly sets the stage for a new
With a still-wobbly jobs market, these loans are increasingly hard to pay
off. Unable to find work, many students have returned to school, further
driving up their indebtedness.
Average student loan debt recently topped $25,000, up 25 percent in 10
years. And the mushrooming debt has direct implications for taxpayers, since
8 in 10 of these loans are government-issued or guaranteed.
President Barack Obama has offered a raft of proposals aimed at fine-tuning
the system and making repayments easier. Yet the predicament of
debt-burdened former students has failed to generate much notice in the GOP
presidential campaign. Instead, the candidates are dismissive of government
student loan programs in general and Obama’s proposals in particular.
Rick Santorum went so far as to label Obama “a snob” for urging all
Americans to try to obtain some form of post-high-school education — even
though some polls show over 90 percent of parents expect their children to
go to college.
Front-runner Mitt Romney denounces what he calls a “government takeover” of
the program. Newt Gingrich calls student loans a “Ponzi scheme” under which
students spend the borrowed money now but will “have to pay off the national
debt” later in life as taxpayers. And Ron Paul wants to abolish the program
Lifting student debt higher and higher is the escalating cost of attending
schools, with tuition increasing far faster than the rate of inflation. And
enrollment has been rising for years, a trend that accelerated through the
recent recession, fueling even more borrowing.
Mark Zandi, chief economist at Moody’s Analytics, argues that government
loans and subsidies are not particularly cost-effective for taxpayers
because “universities and colleges just raise their tuition. It doesn’t
improve affordability and it doesn’t make it easier to go to college.”
“Of course, it’s very hard on the kids who have gone through this, because
they’re on the hook,” Zandi added. “And they’re not going to be able to get
off the hook.”
It’s not just young adults who are saddled.
“Parents and the federal government shoulder a substantial part of the
postsecondary education bill,” said a new report by the Federal Reserve Bank
of New York. And some of the borrowers are baby boomers, near or at
retirement age. The Fed research found that Americans 60 and older still owe
about $36 billion in student loans.
Overall, nearly 3 in 10 of all student loans have past-due balances of 30
days or more, the report said.
Complicating the picture further: Like child support and income taxes,
student loans usually can’t be discharged or reduced in bankruptcy
proceedings, as can most other delinquent debt. This restriction was
extended in 2005 to also include student loans made by banks and other
private financial institutions.
“This could very well be the next debt bomb for the U.S. economy,” said
William Brewer, president of the National Association of Consumer Bankruptcy
“As bankruptcy lawyers, we’re the first to see the cracks in the
foundation,” Brewer said. “We were warning of mortgage problems in 2006 and
2007. The industry was saying we’ve got it under control. Nobody had it
under control. Now we’re seeing the same signs of distress. We’re seeing
huge defaults on student loans and people driven into financial difficulties
because of them.”
A report by his group noted that missing just one student loan payment puts
a borrower in delinquent status. After nine months, the borrower is in
default. Once a default occurs, the full amount of the loan is due
immediately. For those with federal student loans, the government has vast
collection powers, including the ability to garnishee a borrower’s wages and
to seize tax refunds and Social Security and other federal benefit payments.
Nigel Gault, chief U.S. economist at IHS Global Insight, said the student
loan crisis may not torpedo the financial sector as the mortgage meltdown
nearly did in 2008, but it could slam taxpayers and the still-ailing housing
“When student loans don’t get repaid, debts are going to be transferred from
the borrower to the taxpayer,” further raising federal deficits, he said.
And overburdened student-loan borrowers may fail to qualify for mortgages
and “stay much longer in their parents’ homes,” Gault said. Young adults
forming households have historically been the bulk of first-time home buyers
— and their scarcity could dampen any housing recovery.
“When kids do graduate, the most daunting challenge can be the cost of
college,” Obama said in his State of the Union address, asking Congress to
extend a temporary cut — due to expire in July — in federal student-loan
rates. The reduced federal rate is now 3.4 percent. It the cuts aren’t
extended, it will rise to 6.8 percent.
Still, Obama said: “We can’t just keep subsidizing skyrocketing tuition.
We’ll run out of money.”
Obama also asked Congress to extend the current tuition tax credit, double
work-study jobs over five years and let borrowers consolidate multiple
student loans at reduced interest rates.
But in this intensely partisan year, any congressional action seems dubious.
“I wish I could tell you that there’s a place to find really cheap money or
free money and pay for everyone’s education, but that’s just not going to
happen,” Romney says. “Now the government is taking over the student loan
business. I think you’ll get less competition.”
The government has not taken over the student loan business. The private
loan industry is still writing student loans, usually at interest rates far
above the government ones.
What the Republicans are zeroing in on is a section in Obama’s health care
overhaul that eliminated big banks as middlemen in managing federal
school-loan programs. Also, the new federal Consumer Financial Protection
Bureau is clamping down on the lightly regulated private student loan
Santorum, who now says calling Obama a “snob” for promoting higher education
was “probably not the smartest” choice of words, has been seeking to rally
blue-collar support by emphasizing that many jobs do not require college
degrees — and suggesting many colleges are liberal bastions.