Debt From Student Loans Will Eclipse $1 Trillion Before the End of the Year
The student loan landscape is looking grim, with a record-high horizon that must seem pretty far off and not all that comforting for a lot of borrowers.
Last year, the amount of student loans borrowed crossed the $100 billion mark for the first time. This year, the total amount of outstanding debt from student loans will eclipse $1 trillion, the highest figure in history. And, according to the Federal Reserve Bank of New York, Americans now owe more on student loans than on credit cards.
As the stagnant economy continues to falter and sources of state and federal education funding continues to be cut, colleges and universities seek to make up the difference through tuition hikes. The increases, which far outpace inflation, are driving students to borrow more student loans to pay for college. In essence, higher education revenue is becoming less subsidized by taxpayer grants and more subsidized by taxpayer loans to student borrowers.
Some critics of higher education financing argue that public, private, and for-profit institutions are unrestrained by a federal financial aid system that, when faced with rising tuition costs, simply makes more money available to borrowers. Institutions, some critics say, are free to raise costs as much as they want, provided students are able to borrow enough education loans to pay the bill. For-profit colleges, for example, are allowed to take in up to 90 percent of their revenue from federal financial aid sources and some are alleged to have set their tuition prices based on maximum federal financial aid awards, which include federal grants and federal student loans, regardless of the program or the value of the certificate or degree.
Student Loan Debt and Student Loan Defaults are Climbing Together
As a result of the shift in higher education financing, students are borrowing twice the amount of student loans they did a decade ago, after adjusting for inflation, according to the College Board. Additionally, total outstanding student loan debt has doubled in the past five years, a notable contrast to falling consumer debt from home loans and credit cards during the same period.
Meanwhile, taxpayers and lenders face little risk of losing money on federal student loans, unlike mortgages made during the real estate bubble. In the case of student loans, the risk falls squarely on the shoulders of young borrowers, who face significant debt and high unemployment prospects upon graduation. In fact, the default rate of borrowers has climbed sharply in recent years, from 6.7 percent in 2007 to 8.8 percent in 2009, according to federal data. However, Congress has made sure that federal student loans can’t be discharged in bankruptcy, a protection stripped under the Bush administration in 2005 — student loans are now the only consumer loan without this vital consumer protection — and lenders, including the government, have broad collection powers that exceed those of mortgage and credit card lenders (“Student Loans Outstanding Will Exceed $1 Trillion This Year,” USA Today, Oct. 18, 2011).
“Federal student loans are like no other loans,” Alisa Cunningham, research chief at the Institute for Higher Education Policy, said in an interview. “The consequences are so high for making a mistake.”
Mark Kantrowitz, financial aid expert and publisher of FinAid.org and FastWeb.com, said that students who get caught in the student loan trap and borrow too much money for college “end up delaying life-cycle events such as buying a car, buying a home, getting married (and) having children.”
Nick Pardini, a graduate student in finance at Villanova University, warned that student loans will be the next credit bubble. But unlike the mortgage bubble, borrowers, not lenders, will be the losers. “It’s going to create a generation of wage slavery,” Pardini said.
By Delaying he means not having them at all.
Because your life will be financially destroyed to the point that you will NEVER be able to do those.
It’s all going into the pocket of the for-profit collleges, their lobbysists, and the politians that support them.
Great article. This is an important issue because it seems like student loans are increasingly operating according to a different set of rules than other loans. More consumers need to be aware of this and demand better from the government.