Federally-guaranteed student loans, instituted in the heady days of the Great Society as a social program to provide the benefits of higher education to people lower on the income scale, have become a monster riding the backs of younger Americans. They have created a massive amount of debt, to the tune of a trillion dollars, owed by individuals to private lenders whose investment, including accrued interest and penalties, was guaranteed by the Federal Government. The assumption that increased earnings due to college education would easily cover repayment amounts on the loans was not true for all borrowers even in 1965, and has become increasingly less true with time.
To give an idea of the scope of the problem, of 8.7 million borrowers who entered repayment on student loans in 2005, only 37% were able to make amortizing payments over the entire five-year period. 21% avoided default by deferment or forbearance, which resulted in contracts that added accumulated interest to total indebtedness, and 15% actually defaulted. A significant proportion of those borrowers (63%) who have not been able to meet repayment schedules now owe more than they borrowed.
This phenomenon has been building for more than a decade. Until 1998, when amendments to a Higher Education Act made student loans extremely difficult to discharge in bankruptcy, people whose persistent low income prevented them from repaying student loans were able to discharge them, and the Federal Government picked up the tab to the lender. Since then, these loans have continued on the books as individual debt, a millstone around the necks of people struggling to keep afloat financially and a government (and taxpayer) obligation that does not figure in the national debt.
The magnitude of the problem is impossible to estimate accurately from the available figures. Between 1965 and 2009 the Federal government guaranteed 878 billion dollars worth of loans from private lenders and made 292 billion dollars in direct loans. Most loans made before 1990 have been paid off or discharged but the rate of borrowing increased dramatically in recent years, as has the number of borrowers whose indebtedness grew due to accumulated interest and penalties.
In several respects the student loan crisis is worse than the mortgage crisis that precipitated the current recession. Unlike houses, which have an intrinsic value, are transferable, and in the long run appreciate in value, college educations have no monetary value except to the person who obtained them and depreciate rapidly with time, especially if the individual is unable to find employment in his field. College educations have a short shelf life. Young people who are graduating today with record levels of indebtedness face a poor job market because of a persistent recession. Even if the economy recovers, the skills in demand by employers will be somewhat different from what they were even five years ago, and the most recent crop of graduates – a large one, because people are staying in school in record numbers – will have an edge over those five years ahead of them.
If individuals, on the average, cannot afford Higher Education, employers, with a few exceptions, do not feel that the value to them of a college-educated workforce justifies meeting more than a fraction of the cost, and society as a whole, through taxpayer subsidies, is unwilling to underwrite the difference, the inescapable conclusion is that America cannot afford its current Higher Education system. Pretending that we can, running up our collective credit card to do so, simply postpones the inevitable and makes the ultimate collapse all the more devastating. We need to rethink our assumptions.
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