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Wednesday October 22nd 2014

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Are Student Loans Next Big Bubble?
by Jeremy Morrison

It’s the kind of mathematical nightmare that keeps economic wizards awake at night. The merciless equation soaks their pillows in a cold sweat and fills their dreams with shrieks and yelps.

The numbers refuse to blink or bend. They do not feel empathy or pity. An ever-present shadow looming on the horizon, they simply wait.

Financial forecasters have preached of the nation’s mounting student loan debt for years. But now the prophets are in a panic. The great, growing monster has devoured their calculators, leaving broken abacuses in its wake as they wait helplessly for the inevitable crushing eventuality.

Last month, the Federal Reserve Bank of New York released a report on the nation’s student-loan landscape. It painted a chilling portrait. As of the third quarter of 2011, the nationwide total student loan debt was around $870 billion. A report coming out of the National Association of Consumer Bankruptcy Attorneys ratchets up the fear, pegging that debt total beyond a trillion dollars.

Brice Harris tries not to think about this stuff too often. What’s the point, anyway? This kind of math—student-loan debt math—is disorienting and depressing on his microcosmic personal level, much less on a collective, national level.

Instead, the Ph.D. graduate stares at the diploma on his wall. It was worth it—whatever that means, these days.

“When you actually look at the numbers it can be pretty daunting,” said Harris. “But you kind of push that aside and say, ‘at least they can’t come take this piece of paper off my wall—or the experience, or the education.”

Quest for Knowledge

In 1965, President Lyndon B. Johnson signed the Vocational Student Loan Insurance Act. He wanted to make it possible for more of the nation’s population to attain higher education.

“Economists tell us that improvement of education has been responsible for one-fourth to one-half of the growth in our nation’s economy over the past half century,” President Johnson said upon signing the act.

The act provided just over $1.8 million to the states that would take the money and turn it into nearly $19 million in loans. The goal was to get people into the classrooms, educated, and then into the job pool. There was available work for people with the right know-how.

“We must be sure that there will be no gap between the number of jobs available and the ability of our people to perform those jobs,” Johnson continued. “This act will help young people enter business, trade, and technical schools—institutions which play a vital role in providing the skills our citizens must have to compete and contribute in our society.”

America bought the dream. A college education became a middle-class goalpost and opened the doors toward upward mobility for anyone who managed their way onto a campus.

The equation was simple: borrow money now, get an education, use education to get a good-paying job, pay back loan.

This was good clean math—almost wholesome—and it worked for a while. But tuitions and costs of living rose while students’ and their families’ incomes did not. When enough government financial aid wasn’t available, students covered the shortfalls with much riskier, harsher private loans. When jobs dried up, the college graduates began to default on those loans.

According to a study released in November by the Institute for College Access and Success, an organization based in Oakland, Calif. and Washington D.C., the average amount of student debt among graduating seniors in 2010 was $25,250.

“In recent years the average rate has gone up five or six percent,” said Matthew Reed, the report’s author.

The report’s release followed dismal news from the Department of Education a month earlier that 8.8 percent of borrowers were defaulting on their student loans, up from 7 percent in 2009. A DOE official blamed the bad economy.

“Borrowers are struggling in this economy,” Deputy Under Secretary of Education James Kvaal commented at the time. “We see a strong relationship between student default rates and unemployment rates.”

The math, it’s becoming obvious, is falling apart.

Penny for Your Thoughts

People don’t tend to want to discuss their finances. They especially shy away from discussing their debt.

Unlike their diploma, students usually aren’t as proud of the debt they incurred pursing that certificate. There aren’t a lot of loan statements hanging proudly in frames.

“I think I was just really young and didn’t fully understand what I was signing,” said a college graduate, age 34, who reluctantly provided her first name and last initial.

Let’s just call her Mary A., as in average, because she’s looking at the average amount of $25,000 in student loans. She started taking out loans as a sophomore, and is still diligently paying them off.

After graduating from school, Mary had trouble finding a job. It was September 2001 and much like now, the job market was tough as everyone reassessed following the 9/11 attacks.

“Obviously, 9/11 had just happened,” Mary said. “It was a horrible time to be looking for a job.”

After moving west to San Francisco, Mary found work in her field—“the original plan, which was good”—but the pay didn’t suffice. She moved in with a college friend and toughed out the high-cost Bay Area.

“So, yeah, that was a struggle,” she said.

Like many people, Mary decided to continue her education—this time with a for-profit institution. This doubled the amount of student loans she had.

“I was pretty naive,” Mary said.

The for-profit institution was able to steer her toward more loans, but these were not the federal Stafford loans. They were from private lenders.

“The trick is they kind of lure you back into taking student loans, but really they’re not student loans,” she said. “Really it’s just a private bank, masquerading as a student loan.”

According the Institute for College Access and Success study, for-profit colleges had a higher percentage of students taking out loans—96 percent of graduates—and the students were borrowing 45 percent more than graduates from other types of four-year colleges.

Reed did not officially include for-profit institutions in the study because the available data is so scant. The institutions are not required to report the relevant debt data.

Following her return to school, Mary landed a job with an advertising agency. It was an internship, but it allowed her to pay the bills, including her student loan debt.

“Had a good three-year run where I was able to make my payment and everything was honky-dory,” she said.

But the debt is ever present. Unlike other financial commitments, such as credit card debt, a person cannot shed student loans via bankruptcy. And the creditors are persistent, ever present and always hounding.

“I always joke, if I drop dead people would show up for my kidney,” said Mary. “It’s horrible. It’s like this black cloud that’s hanging over you.”

If $25,000 is a black cloud, then Harris must be muscling his way through a thunderstorm. The Ph.D. graduate was fortunate enough to have his first few years of school—his Bachelor’s degree—paid for by his family, but needed loans to go any further.

“To keep going on for the master and the Ph.D., I had to do that,” Harris said. “I had to do private loans to bankroll the Ph.D. I’m probably north of 100-K to pay for the second and third degrees.”

The degrees from the University of Florida, University of Missouri and the University of Reading in the United Kingdom are impressive. They’ve gotten him a list of sweet jobs, but he’ll be paying them off for the foreseeable future.

“I recognize it’s there,” Harris said of his debt. “It kind of almost becomes routine.”

In paying off his debt, Harris finds himself juggling between his federal and private loans. He volleys between the loans, paying off one while deferring the other, or consolidates for better terms.

“It really is a balancing act,” he said. “I guess the bottom line is, like a lot of folks, the balancing act, so far, has been successful.”

It’s been that way with Mary, too.

“It’s been sort of a game of Russian roulette with my checking account,” she laughed.

A Frustrating Equation

While some students have been able to find employment and paychecks that allow them to chip away at their student loan debt, many have not. Some go into default on their loans. Others lag forever behind on their payments and watch helplessly as the interest piles on.

The report from the Institute for College Access and Success fingers poor job prospects as the major reason so many graduates are struggling—and plan to struggle as a matter of routine—with their student loan payments. It points to a 9.1 percent unemployment rate for college grads, but does mention that it’s still better than the 20 percent rate endured by those with only a high school diploma.

The Institute’s report takes a state-by-state look at the country’s student debt scene. It identifies the states in the Northeast and Midwest as “high debt” states and those in the West as “low debt.” Multiple factors influence debt levels at various colleges. Endowment resources available for financial aid, student demographics, state policies and the cost of living in a given area all play into it.

The more recent Federal Reserve Bank of New York report has caught a lot of people’s attention. Debt totals hovering around the trillion-dollar mark make folks nervous.
To put it in perspective, Americans have less than $700 billion in credit card debt. The country carries about $730 billion in auto loan debt.

Politics of Learning

Like everything else in the U.S., the county’s student loan issues are strained through political filters, especially in an election year.

Earlier this month, U.S. Rep. Peter Welch (D-Vt.) urged his fellow congressmen to vote to keep Federal Direct Stafford loans at 3.4 percent, rather than let them double to 6.8 percent in July. He made the public request in Burlington, Vt., joined by a college student and their parents.

“This question of student loans and access to higher education is fundamentally important. It’s ground zero for the middle class,” Welch said. “Are children of middle class families going to have a shot at an education they can afford or are they going to graduate with a financial albatross around their neck?”

While Democratic lawmakers seem sympathetic to people struggling under the weight of student loans, Republicans have taken a tougher stance. Rep. Virginia Foxx (R-N.C.) took to the G. Gordon Liddy Radio Show recently to relay how she worked her way through school and expressed her lack of tolerance for students graduating with loans.

“We live in an opportunity society and people are forgetting that,” she said. “I remind folks all the time that the Declaration of Independence says ‘life, liberty, and the pursuit of happiness.’ You don’t sit on your butt and have it dumped in your lap.”

Rep. Hansen Clarke (D-Mich.) is sponsoring the Student Loan Forgiveness Act. The act seeks to enact a 10-10 plan, in which a student pays a loan back in installments equal to 10 percent of their income over 10 years. At the end of the 10 years, any unpaid portion of the loan is forgiven.

Hansen’s legislative assistant, Lindsay Schubiner, calls the plan “a really exciting vision that offers people hope.” She said by reducing students’ debt burden, society is freeing them up to participate more fully in a recovering economy.

“What this bill tries to do is make student loan repayment simple and fair,” Schubiner said, adding, “so far we don’t have any Republicans co-sponsoring it.”

Sen. Dick Durbin (D-Ill.) is also making a push on the student loan front. The senator is trying to sell the Fairness and Struggling Students Act, which is an attempt to have private loans re-categorized so that the debt could be shed like other obligations during standard bankruptcy scenarios.

Up until 2005, private education loans were treated the same as credit card debt or auto loans. Then Congress changed the bankruptcy code to correct the situation—in the eyes of the lender, at least. It is now extremely difficult to walk away from student loans.

President Barack Obama has made it clear he plans to lobby hard throughout the spring for legislators to reaffirm the current 3.4 percent and avoid a rate hike in July. He’s spending the last part of this month touring college campuses and making his case.

The Republican presidential field has taken a stance at the other end of the political spectrum. Former GOP candidate Rick Santorum called the President a “snob” for thinking everyone should shoot for higher education and Newt Gingrich refers to Obama’s student loan plan as a “Ponzi scheme.”

Republican presidential frontrunner Mitt Romney laid out his position at a town hall meeting in Ohio in February. The candidate said there should be increased private involvement in the student loan system, derided a “government takeover” and said he simply couldn’t find “free money” to “pay for everyone’s education.”

“I know there will be some who get up in a setting like this and give you a bunch of government money, free stuff,” Romney told the crowd in Ohio. “That’s not who I am.”

Debt Bomb

The report from the National Association of Bankruptcy Attorneys has labeled the growing national student loan debt as a “debt bomb.” The organization’s president reports seeing “the cracks in the foundation” as the group did with the mortgage crises a few years ago.

Missing one student loan payment, the report notes, puts a borrower in delinquent status. Another nine months and they are in default. It’s all downhill from there—in a bad way.

That kind of drag on a generation’s finances—the Fed report shows those under 39 shoulder a bulk of the debt—can affect life patterns. If it can impact when people choose to marry, have kids or retire, it obviously has an impact on how and when they contribute to the economy.

Mary A. is slowly slogging away at her average amount of $25,000. She’s able to do so because her husband draws a decent paycheck.

“If I didn’t have that I wouldn’t see how you could ever get out from under that,” Mary said.

Harris is confident he’ll get his whopping debt settled up as well. But for now, he’s got that diploma—three degrees—and a job he likes.

Was it worth it?

“Wow, I actually had to go in debt a $100,000 just for the privilege to work in the public sector,” Harris said. “It’s hard for me to square that circle sometimes.”

But he’s also not sure he’d feel right about being forgiven of his debt. There have been “philosophical debates with myself on that.”

“That may work for me personally, from a personal financial standpoint,” the self described “policy wonk” said. “But I don’t know if it jives with me morally.”

Harris describes himself as a “conservative Republican.” He doesn’t think Obama and the Democrats will be able to win him over with their student-debt talk.

“I will not be voting for him in November despite the fact that he’s kind of hanging this carrot in front of me,” Harris said. “Now, if Mitt Romney—if he starts talking about student loans, or forgiveness, great, yeah.”