Is Massive Student Loan Debt the Next Obstacle to Our Recovery?

Posted on May 21, 2012


Real Estate collapse, U.S. economic recession, global banking crisis, European sovereign debt debacle. What’s next? Is massive student loan debt the next obstacle to our recovery?

This last week, and for several weeks to come, tens of thousands of students will be graduating from colleges and universities. The quest begins to pay off their student loans. Many will be taking jobs as waiters and waitresses. Scores of graduates will be accepting positions in department stores, gas stations, and supermarkets at minimum wages. There is nothing wrong with honest work, but it’s close to impossible to pat independent living expenses and repay school loans averaging $25,000 to $150,000+ all while earning just $8.00 an hour. The current balance of federal student loans outstanding nationwide is over one trillion dollars. The latest data from the Department of Education shows that 94 percent of students who earn a bachelor’s degree borrow for higher education-up from 45 percent in 1993. “If one is not thinking about where this is headed over the next two or three years, you are just completely missing the warning signs,” said Rajeev Date, deputy director of the Consumer Financial Protection Bureau, the federal watchdog created after the enormous financial crisis. Mr. Date goes on to compare excessive student borrowing to risky mortgages. The unanticipated growth in student loans, as with the housing bubble before the economic collapse, has unveiled an unexpected economic exposure.

As easy to obtain as home mortgages were, through federal agencies and banks encouraged by the federal government, student loans have been just as undemanding and easy to secure. The origin and the need of the borrowing spree dates back to the 1980s when tuition for four year colleges began to rise faster than family incomes. As in the recent years when mortgage brokers promised pain free borrowing to homeowners, many of the higher education institutions did not, and do not, offer warnings to students concerning the levels of debt they are about to incur. In fact, many colleges advise prospective students not to worry about the costs. The Obama administration has provided more grants and loans than ever to more college students with the objective of making the U.S. first among developed countries in college completion. The amount of federal student loans has grown by more than 60 percent in the last five years. In 2007 Congress passed a law guaranteeing low interest rate of 3.4 percent for many of these loans. As we speak, or should I say write, Congress is in the middle of a fracas regarding the doubling of these rates. Thousands of graduated students are facing incredible difficulty just making monthly loan payments at the present rates. Education Department statistics show that payments are being made on just 38 percent of the balance of federal student loans, down from 46 percent five years ago. Even though student loans are considered to be “good debt”, an increasing number of borrowers, entangled in a financial quagmire, are struggling to pay them off. The student loan obligation is larger than credit card and consumer purchasing debt. Nearly one in ten borrowers that initiated repayment in 2009 defaulted within two years. While the student loan system is not envisioned to fail or end, the impact of these liabilities weighs heavily, for a generation of college graduates and indebted dropouts, on the recovery of the U.S. economy. According to a study conducted by Rutgers University, of recent college graduates, 40 percent of the participants had postponed making a major purchase, like a home or car due to college debt. Numerous graduates are moving in with their parents to save money. Approximately only half of the surveyed graduates had a full time position. And that’s the crux of the problem. JOBS, or lack of them. While thousands upon thousands continued their education, incurred considerable debt in the pursuit of higher paying positions, many are rewarded with median wages and diminishing opportunities. Dwindling employment openings have damaged the housing industry, stalled consumer spending, slowed the economic recovery, and spoiled the celebration party for many of our graduates.

For questions /information, contact Joel Borshof

 joel@imexfx.com

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