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Student Loans: The Next Financial Crisis? By JOSH MITCHELL
OBJECTIVE
Decide whether college loans should be more restricted
OVERVIEW: Federal lending programs designed to make college education available to everyone are creating a pile of debt so large it is fanning worries that is has become too easy to borrow too much.
As more Americans than ever before attend college, more too are dropping out before they ever don a cap and gown. That means millions of Americans are taking on the debt of college without getting the earnings boost that comes from a degree.
Is the U.S. on the verge of another financial crisis? Federal lending programs designed to make college education available to everyone are creating a pile of debt so large, it is fueling worries that it has become too easy to borrow too much. In the third quarter of last year, U.S. student-loan debt rose by $42 billion, or 4.6%, to $956 billion, according to the Federal Reserve Bank of New York. Overall household borrowing fell during that period.
The statistics also show that the student-loan burden is becoming unbearable for more borrowers. As of the end of September, payments were at least 90 days late on 11% of student-loan balances, up from 8.9% at the end of June. That delinquency rate is now higher than the rate for credit cards; delinquencies in all other categories of loans are declining.
Last year, an economist at a credit-rating service warned of the prospect of a wave of future student-loan defaults that could have a “crippling effect on the ability of many households to access credit in the future.”
Unlike most other types of consumer credit, student debt is extremely difficult to discharge in bankruptcy, meaning such debts stay with a borrower for life. Once borrowers fall behind on payments, they typically find it harder to obtain other types of consumer loans, or can only do so at higher interest rates.
‘WHAT WE’RE REALLY DOING’
President Obama advocated easy-to-get loans during the campaign. A spokesman for his education secretary, Arne Duncan, said the goal is “to make student loans available to as many people as possible,” and that requiring minimum credit scores would block many Americans from going to college. But rising student-debt burdens and stories about students and parents drowning in debt (coming just a few years after a financial crisis caused by housing loans) is focusing attention on risks to the government and borrowers.
“What we’re really doing is piling up debt down the road the same students are going to have to pay off.” Stafford loans account for more than three-fourths of federal student loans. For many borrowers, student debt has only added to existing financial problems. Joanne of Fla. borrowed through the government’s Parent Plus program, which enables parents to borrow for their children’s tuition. This helped cover her son’s education at a local University. He graduated with a degree in engineering physics. Joanne, now owes $184,500 on student loans. Her son owes roughly $45,000.
Student lending grew rapidly in the 2000s, as did other consumer borrowing. The bulk of the loans were made by private lenders and guaranteed by the federal government, providing them an incentive to lend more freely. In 2010, Congress cut out the private middlemen and had the federal government start making loans directly.
Since the end of 2007, just before the financial crisis hit, total student debthas grown by more than 56%, adjusted for inflation, the new Fed data show. During that time, overall household debt—including mortgages, studentloans, auto loans and credit cards—fellby 18%, to $11.31 trillion.
CREDITWORTHINESS
Some believe the federal-loanprograms are over burdening borrowers with debt without regard for their ability to repay it. They believe that students should undergo a comprehensive assessment of credit-worthiness, including how much debt they currently have, their academic history and their expected income upon graduation, given their major, before getting federal student loans. Of course, imposing tougher standards would exclude some potential borrowers.
In an effort to reduce non-payments, the Education Department has tightened standards for loans to parents and graduate students. Loans to students attending for-profit schools have been especially prone to problems with defaults.
ANSWER THE FOLLOWING QUESTIONS IN DETAIL:
- What makes student loan debt different from other types of consumer debt?
- What is the government’s current policy on lending money?
- Why is it difficult for many college students to finish their degrees?
- With rising college costs and a tough job market, is a high school education enough to secure a good-paying job? Why or why not?
- Should lenders consider what you are studying before dispersing money for college?
Why or why not?
- What is your family’s perspective on paying for college? Will they pay any price at any school? Will you start at a community college? Is college something that will have to wait until they, or you, can save enough money?