The $1 trillion Student Loan Market Begins To Implode
The Department of Education shows two-year default rates at for-profit colleges up to 15 percent and student loan debt increasing at a rate of $170,000 per minute. [via]
Students and workers seeking retraining are borrowing extraordinary amounts of money through federal loan programs, potentially putting a huge burden on the backs of young people looking for jobs and trying to start a career.
The amount of student loans taken out last year crossed the $100 billion mark for the first time and total loans outstanding will exceed $1 trillion for the first time this year. Americans now owe more on student loans than on credit cards, reported the Federal Reserve Bank of New York.
Students are borrowing twice what they did a decade ago after adjusting for inflation, the College Board reported. Total outstanding debt has doubled in the last five years – a sharp contrast to consumers reducing what’s owed on home loans and credit cards.
Taxpayers and other lenders have little risk of losing money on the loans, unlike mortgages made during the real-estate bubble. Congress has given the lenders, the government included, broad collection powers, far greater than those of mortgage or credit-card lenders. The debt can’t be shed in bankruptcy.
The credit risk falls on young people who will start adult life deeper in debt, a burden that could place a drag on the economy in the future.
“Students who borrow too much end up delaying life-cycle events such as buying a car, buying a home, getting married (and) having children,” said Mark Kantrowitz, publisher of FinAid.org.
“It’s going to create a generation of wage slavery,” said Nick Pardini, a Villanova University graduate student in finance who has warned on a blog for investors that student loans are the next credit bubble – with borrowers, rather than lenders, as the losers.
Full-time undergraduates borrowed an average of $4,963 in 2010, up 63 percent from a decade earlier after adjusting for inflation, the College Board reported. What’s happening with:
- Defaults. The portion of borrowers in default – more than nine months behind on payments – rose from 6.7 percent in 2007 to 8.8 percent in 2009, according to the most recent federal data.
- For-profit schools. The highest default rates are at for-profit schools that tend to serve lower-income students and offer courses online. The University of Phoenix, the nation’s largest, got 88 percent of its revenue from federal programs last year, mostly student loans.
“Federal student loans are like no other loans,” said Alisa Cunningham, research chief at the Institute for Higher Education Policy. “The consequences are so high for making a mistake.” [via]
