Recovery Threatened by Runaway Student Loan Debt

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Recovery threatened by runaway student loan debtWASHINGTON (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 job.

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 economic crisis.

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 entirely.

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 Attorneys.

"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 market.

"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 industry.

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.

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76 Comments

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easyiiving

How about all these schools!
Why don't all these OWS bums go and make them miserable too? Looks like these places that make all these clowns after filling their heads with mush, are part of that 1%.
Look at all that money they are making!!!
Not only are they getting all that money the students pay up front, but they have rung up another 1 trillion in debt from those kids after they leave!!!
That's more money than all those oil companies could ever dream of making combined!!
But just like anything else liberal, do as I say, not as I do!
Like Al Gores house, and jets, and Limos., and Edwards home......on and on!!

April 03 2012 at 6:38 PM Report abuse +2 rate up rate down Reply
mbalin562

Here is the answer-colleges and schools should be the creditors,and bear the risk, of student loans. If they want "customers" then they should bear the risk of extending credit. There should be no federal program or guarantee, of any type, which extends taxpayer funds for "education" purposes, other than existing veteran's benefits.The eduction industry is grossly overinflated with marginal students, who really do not belong in college.

April 03 2012 at 6:27 PM Report abuse rate up rate down Reply
teltech543

This isn't going to keep the economy down. The government will find a way to erase this debt to make the numbers look good.

April 03 2012 at 5:33 PM Report abuse rate up rate down Reply
mac102751

Odd how an paying for an education and health care keeps ahead of the inflation curve.

April 03 2012 at 5:32 PM Report abuse rate up rate down Reply
firststatemate

In my day if you couldn't afford college, you didn't go. Also, if you were STUPID you didn't go. Nowadays it's ludicrous. They actually have tutoring and basic skills courses in reading and math for college students, many who bearly speak English, and we taxpayers have to pay for their loans.

April 03 2012 at 5:20 PM Report abuse +1 rate up rate down Reply
Aviation Finance

Gasoline / Diesel prices have driven up the cost of EVERYTHING we buy. Not just the Fuel itself.
Store prices are rising steadily for food, clothing, materials, etc..... This is ALL due to intervention of our incompetent government. Now, with the biggest socialist of all time in the White House, the country is out of work and No "HOPE" with this Change of his.......The College loan program is but a tiny fraction of the real problems. Get the Government out of it, and out of everything else. WE THE PEOPLE built this country, not the incompetent government. WE THE PEOPLE can fix our problems if the government does only what it is supposed to do while Representing US for a change. It's time for a REAL Change; lets send the "good ole boys" packing and bring in some Fresh blood.

April 03 2012 at 4:43 PM Report abuse +2 rate up rate down Reply
foxylynx

A lot of money for college comes from the taxpayer - for profit colleges are soaking us dry. If the freaking gov would let the free market work, maybe things wouldn't cost so damn much.

April 03 2012 at 4:29 PM Report abuse rate up rate down Reply
siscosdad

College is overrated. In my city, a batchelor's costs about $40,000 annum, and that doesn't include housing and food. I'm self educated, and can whip any college graduate in any test within my field of knowledge. That includes people with Master's degrees. How many people with degrees are humping ferilizer at Lowes?

April 03 2012 at 4:25 PM Report abuse +2 rate up rate down Reply
siscosdad

Where I live, food has increased 25% in the last year, as has gasoline. The government says that the cost of living does not include these items. Well, they certainly hurt my personal economy. The projected COLA increase is expected yo be 1.7% come October. Why not just send people to slap my face and kick my dog?

April 03 2012 at 4:19 PM Report abuse +1 rate up rate down Reply
1 reply to siscosdad's comment
bggdg

The government does not say the cost of living doesn't include food and energy.

Where do you get such absurd notions?

April 03 2012 at 10:27 PM Report abuse rate up rate down Reply
derealest

Any wonder about the real reason college is so expensive? Maybe it's because easy money to pay for it.....hhhmmmmm just like the housing bubble.......just like rising health insurance rates, Let's see. The government guarantees loans, and coverage. Prices go up. Once again the little guy gets screwed by the sam people that "champion his cause" BS Wake up middle and lower income wage earners. You have been sold out for your vote. How's that hope and change workin' for ya ?

April 03 2012 at 3:39 PM Report abuse +6 rate up rate down Reply