Student Loan Debt. Can You Hear That Train A’Coming?

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 back then, my tuition at Cal was $230 a year, so even with my first job offer as a junior copywriter at Hoefer, Dietrich and Brown, at that time the largest independent ad agency west of the Mississippi (John Hoefer, brilliant Creative Director third from left), I had income of $12,400 a year, of which I could have easily made that 2.36% payment and had that $920. paid off in like 4 years.

I didn’t need to though, because I didn’t borrow a student loan to pay for school, and didn’t know anyone who did. This was not due to some stupid pride thing, but the program wasn’t put in place until I was almost out of Berkeley.

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.

It isn’t surprising that 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. Yet, the primary driver for the problem, dramatically increasing public college tuition remains unchecked. For some reason, there are now more administrators and fewer teachers, and the gap ratio seems to be expanding. Public universities in the United States are suffering from administrative bloat, according to the Goldwater Institute. From 1993 to 2011, four-year public institutions of higher learning expanded their ratio of administrative staff per 100 students by 39%, while teaching and research staff levels grew by less than 10%. The same disparity did not apply to private universities, where the ratio growth of administrators and instructors was roughly the same (40%).

At some public universities, the disparity was particularly dramatic. Arizona State University increased the number of administrators per 100 students by 94% while reducing the number of faculty, research and service personnel by 2%. While this obviously drives up costs, it appears to do nothing to increase the quality of education, but that is the topic for another post.

In an attempt to address the growing problem with student loans, President 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.”

The Democratic minority on the House Education Committee and Workforce Committee released new figures showing that more than seven million students will incur an additional $6.3 billion in repayment costs for the 2012-2013 school year if student loan interest rates double on July 1. 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. None of which goes anywhere toward solving our next financial crises. That would be $1Trillion, with a capital T. Can you hear the train a’coming? 

Advertisements

About Steve King

iPeopleFINANCE™ Chief Operating Officer. Former CEO of Endymion Systems, Inc. a $36m Information Systems Services company. Co-founder of the Cambridge Systems Group, the creator of ACF2, the leading IBM Mainframe Data Center Security product; acquired by Computer Associates. IBM, seeCommerce, marchFIRST, Connectandsell alumni. UC Berkeley alumni. View all posts by Steve King

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

%d bloggers like this: