Outstanding student loan debt surpassed $1 trillion in 2011, an amount that now exceeds what the entire nation owes in credit card debt. The amount of money owed on student loans has continued to rise, even as recession-minded consumers pay down debt elsewhere.
According to Larry White, the John H. Poteat Chair of Banking and a professor of finance at East Tennessee State University, there’s a “definite possibility” those loans could be the next economic bubble to pop.
“One of the problems that I observe — since I don’t have children in college anymore, I’m less concerned — but I know that student debt has continued to rise, as the cost of everything is going up, including education, tuition, books, etc.,” White said.
“Students now are graduating after four years with a degree, but they have this enormous amount of debt. I had a fellow tell me the other day he had finally paid off his last student loan, and he is a middle-aged guy. He’s been paying it for years. He pointed out he’s in education, a public school teacher.”
With debt mushrooming and job prospects weak, student loans have come to the forefront as more students default on their payments.
Average in-state tuition and fees at four-year public colleges rose about 8 percent in 2011, compared with 2010, according to the College Board. In addition, more than half the students graduating with bachelor’s degrees from public schools have an average debt of $22,000.
Nationwide, according to the U.S. Department of Education, 8.8 percent of students defaulted on loans in 2009. That figure represents students whose first loan repayments came due between Oct. 1, 2008, and Sept. 30, 2009, and who defaulted before Sept. 30, 2010. More than 3.6 million borrowers from 5,900 schools entered repayment during this window of time, and more than 320,000 defaulted. Those who went into default after that time period have not been counted in statistics yet, according to department data.
White said all the students graduating with thousands in debt, into an economy where job prospects are not great, could potentially have bad results on the overall economy, and even those without debt.
“Those who don’t have debt and do have a job, even though they have income and no debt, the overall general level of the economy being depressed has an impact on mobility and job opportunities,” he said. “Things like that have a far-reaching effect.”
To stave off some of the defaults and help students pay off loans faster, President Barack Obama in an executive order has moved up the start date of some programs, from 2014 to this year, that are aimed at helping borrowers pay down student federal loans.
The “Pay as You Earn” program would allow recent graduates to limit payments to 10 percent of their earnings, instead of the previous 15 percent; also, loans would be forgiven after 20 years, not 25. The changes also feature a plan to let borrowers consolidate their loans into one monthly payment, and they would also receive a slight rate reduction.
However, borrowers who have already entered default won’t qualify for Obama’s new plan. The Education Department says the plan will only apply to students who take out a loan in 2012 or later, or did so between 2008 and 2012. Consolidation of loans can only be used by borrowers who have both a direct loan from the government and a loan from the Federal Family Education Loan Program.
White said he is not sure these programs will alleviate the problem, and some measures mentioned may make it worse.
“I don’t see how you can fix the situation easily,” he said. “This works the same way as mortgages. A lending institution lends money to a student to go to school and they underwrite the student loan. Even with a government-backed student loan, they can go into the secondary market and sell to investors just like investors hold mortgages. To say, now forgive this debt, well, someone’s assets are going to decline as a result of that, plus a loss of revenue and loss of return on investment.”
When that debt starts to be forgiven, there will emerge a reluctance to supply funds to those markets, he said.
“If the secondary market dries up, then nobody wants to make loans,” White said. “Then we get into a situation where the government says it will provide the loans, and if that’s the case, the government increases federal debt or must cut from somewhere else.”