in Debate

Why Student Loan Fiasco Dragging The U.S. Economy Down

Student loans have been a fact of life for most college students for as far as anyone can remember. Still, no one is prepared for the student loan fiasco that threatens to become a major drag on the U.S. economy. After more than tripling for the past decade, student loans now stand at $904 Billion as of the first quarter of 2012, and is expected to hit the $1 Trillion mark by the end of the year, surpassing credit card debt as a major source of indebtedness.

The student loan failure already has observers wondering whether this segment will become the next big bailout, similar to the 2008 mortgage bailout.

Some troubling statistics: the Project on Student Debt conducted by the Department of Education shows 62% of college graduates from public universities being in debt, while the number is 72% for nonprofit universities and a frightening 96% at for profit universities, and the average debt amount for 2010 graduates was $21,184. The average consumer with this level of credit card debt would be considered to be heavily indebted, and the interest rate on student loans typically range in the high teens to the low twenties.

The U.S. Bureau of Labor Statistics is estimating that in early 2012, 100,000 U.S. janitors have college degrees, 5,000 of whom hold doctorate degrees.

This means that college graduates are pushing labor participants of all stripes out of their traditional occupations. These jobs can likely cover living expenses, but not student loan obligations.

Bankruptcy attorneys have witnessed a growth rate of 50% to 100% in their workload, with an increasing number of cases involving student loans. Sadly and mostly unknown to former students with large student debt loads is the fact that student loans cannot be discharged through bankruptcy, unless undue hardship can be proven, a hurdle that even credit counselors and bankruptcy lawyers tend to shy away from. Student loans are treated the same way as alimony, child support, fines, or overdue taxes that cannot be erased under existing bankruptcy laws.

Fed economist Wilbert Van Der Klaauw also suggests that the reported 8.69% delinquency rate in student debt is most likely vastly understated as probably half of loans are being deferred or are still within grace periods. Even at this level, this delinquency rate surpasses the delinquency rate for credit cards, autos, or home equity loans.

Census data also shows that, adjusted for inflation, average student debt grew by 11% in the last five years, whereas college graduate income has fallen by 3% during the same period.

Adding insult to injury, more and more higher education institutions are inking secretive deals with financial companies that push paying cards with hefty costs that must be borne by students, even to access their student loan proceeds. While colleges and universities pocket millions of dollars annually, students go further into debt. One big player in this field is Higher One, with agreements covering 520 Campuses and 4.3 Million students.

Although not as affluent as their parents, younger people tend to spend more freely, and as long as they saddled by this huge overhang, they probably are not in a position to contribute much to the U.S. economy.

As troublesome as the current fiasco can be, hard times generally lead to higher college enrollments, meaning the tip of the iceberg can still be years into the future, and the drag on the U.S. economy will be felt for an undermined period of time, unless current laws are revised to lighten the burden.

Defensive stocks, anyone?

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