10/1/14 WSJ Student Loan Debt - A Federal Toxic Asset


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Student-Loan Debt: A Federal Toxic Asset
Only about 56% of borrowers are making payments. At the peak of the mortgage crisis, 10% fell behind on payments.
Joel Best And
Eric Best
Oct. 1, 2014 7:03 p.m. ET 101 COMMENTS
Let's call her Alice. One of us has known her for years. She earned her Ph.D. in the mid-1990s when academic jobs were scarce, and she wound up an academic gypsy. She left graduate school to take a one-year full-time academic appointment, but then found herself cobbling together part-time teaching jobs at different community colleges in a large metropolitan area, earning a couple of thousand dollars for each course she teaches. She is a dedicated teacher, but her annual income is between $30,000 and $40,000.

Alice owes $270,000 in student loans. She only borrowed about $70,000 to pay for grad school, but she's never been able to afford much in the way of payments, and after consolidating her loans and accumulating interest charges for years, she's watched her debt roughly quadruple.

If Alice taught students in a low-income high school or was a recent graduate, she would be eligible for various programs that would allow her to discharge at least some of her debt. But since she graduated at a time before income-based repayment and loan-forgiveness programs, there is no federal program to help established part-time community-college faculty discharge their old student-loan debts.

In fact, the federal government is quite content with Alice's situation. The $270,000 she owes is carried on the government's books as an asset. The government reasons that, since it is nearly impossible to discharge student loans through bankruptcy, it will eventually collect all of the more than $1 trillion in federal student loan debt that Alice—and millions of other student borrowers—owe.

Not likely. Because Alice has figured out how to avoid repaying and still stay in the government's good graces. She is able to defer her loans without accruing additional interest by enrolling in two community-college courses per term while she works toward a business degree that she hopes will lead to a new career. Meanwhile, her $270,000 balance remains on the books, growing all the time.

She doesn't think of herself as a deadbeat, but making a $1,200 monthly payment for the next 30 years is daunting. Within a few years, she'll be of an age to collect Social Security, and at that point she expects the government to begin withholding about $30 from each monthly check to pay her student loans. That will hardly offset the hundreds of dollars of interest charges that accrue each month. Meanwhile, Alice has friends with full-time jobs who are appalled by her taking courses to avoid repayment, but she says she has to choose between paying for a place to live and repaying her loans.

But it is Alice's place in the larger picture that is the more important story. The federal government assumes that almost all student-loan debt can be treated as an asset because federal loans are not dischargeable under normal circumstances. So it really is not a problem if the total debt exceeds $1 trillion ($2 trillion around 2020 on current trend), since all that money is sure to be repaid.

But that assumption looks more and more fanciful. Studies by the New York Federal Reserve Bank show that only about 56% of borrowers are making payments. Among those under 30 and in repayment—that is, they have not received permission to postpone payments—more than a third are delinquent. That's a lot: At the peak of the recent housing crisis, only about 10% of borrowers fell behind on their mortgage payments. But Alice is part of the 44% of borrowers who are not repaying student loans for various reasons.

Why isn't this high percentage of borrowers who are excused from making payments alarming federal policy makers and most of the analysts who study student loans? There is really no prospect that Alice is going to be able to cough up more than a quarter-million dollars and pay off what she owes. At some point, the government is going to have to reclassify billions in loans and interest as losses. Meanwhile, as college costs rise and more students pursue higher education, student borrowing grows. According to the Department of Education, students borrow over $100 billion annually, and the figure rises with each new academic year.

This is a big problem. Unexpected write-offs of billions of unpaid student loans will confront Americans with a set of ugly choices: Will we raise taxes to cover the losses—which is impossible to imagine in today's political climate? Do we cut other federal spending—which is nearly as unlikely since we're talking about substantial sums? Or do we significantly increase the national debt. This will be a continuing crisis; each year's increased borrowing will require confronting the same choices in future years.

Washington recently acknowledged that there are a lot of Alices; in mid-September, the GAO issued a report documenting the rapid increase in the student debt among those over 65. But many of the proposed reforms, on tinkering with interest rates and the like, would increase—not reduce—total student-loan debt. A larger issue, so far ignored, is that unless college costs are brought under control, things will only get worse, and the federal government will continue to accumulate Alice-like "assets" in the federal direct-loan portfolio.

Joel Best is a professor of sociology and criminal justice at the University of Delaware. Eric Best is an assistant professor of emergency management at Jacksonville State University. They are the authors of "The Student Loan Mess: How Good Intentions Created a Trillion-Dollar Problem" (University of California, 2014).
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The purpose of student loans is to help more students attend college, NOT for colleges to increase tuition 5% EVERY year as they wish.

People are driven to insanity and fraud by the burden of student loans: http://www.zerohedge.com/news/2014-03-04/what-student-loans-are-really-used-depressing-case-studies


"‘College Conspiracy’ will debunk many myths, including the belief that Americans with college degrees earn $1 million more in lifetime income compared to high school graduates without a college degree [...] With U.S. tuition inflation for private colleges averaging 5.15% over the past half a decade, assuming this same rate of tuition inflation continues, a college with tuition of $30,000 today will have tuition of $38,563 in the sixth year a student attends it. [...]

All parts of the college education industry are saturated with corruption, yet students and their parents still fail to realize that college administrators no longer care about what is in the best interest of their students. One segment of the college education industry that is perhaps the most highly enriched with corruption is the textbook business. In a high tech world of Kindles and iPads, there is no reason for students to be spending $200/each on eight new textbooks each semester. The information should come free with the cost of tuition.
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None of this would have occurred if the federal government had stayed out of student loan business. Care to guess where they invented the constitutional authority to get into that business?

That said, now that they are here, perhaps stripping the amount of aid students at that college may receive if college tuition and fees increase beyond the rate of inflation would be one way to get this nonsense under control.


Do it like the Germans do: http://thinkprogress.org/education/2014/10/01/3574551/germany-free-college-tuition/
“We got rid of tuition fees because we do not want higher education which depends on the wealth of the parents,” Gabrielle Heinen-Kjajic, the minister for science and culture in Lower Saxony, said in a statement. Her words were echoed by many in the German government. “Tuition fees are unjust,” said Hamburg’s senator for science Dorothee Stapelfeldt. “They discourage young people who do not have a traditional academic family background from taking up study. It is a core task of politics to ensure that young women and men can study with a high quality standard free of charge in Germany.”
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