Student Debt Crushes Borrowers And Threatens The U.S. Economy

imagesBack in 2010, CNBC did an extensive report on student debt, part of which highlighted a website called studentloanjustice.org. The site was created to give borrowers advice on dealing with their loans. Its founder, Alan Collinge, defaulted on his own debt and then joined a fight to restore consumer protections to such loans. He told CNBC that he has heard multiple stories of drastic solutions to the burden: suicides and people leaving the country to escape what they can’t manage. Just last month, a Wisconsin man was arrested while trying to rob a credit union because of $250,000 in student loan debt that he couldn’t pay; he saw prison as his best option.

Since the report by CNBC, alarm bells have been getting louder over what is happening to our young people as well as what a threat the enormous, snowballing debt poses to the country. On Saturday, New York Times columnist Charles M. Blow called the situation a “dangerous new normal”, concluding that:

“Our national educational aspirations and the debt crisis that they’re creating are colliding. We are on an unsustainable track. This will not end well.”


Graph courtesy of Real Clear Policy

Graph courtesy of Real Clear Policy

The problem seems unresolvable, especially by desperate students. According to an analysis by economist Donghoon Lee of the Federal Reserve Bank, student loan debt is the only household debt that has risen through the ‘Great Recession’ and is now the second largest debt nationwide, after mortgage debt. Between 2004 and 2012, both the number of borrowers and the average amount they owed rose by 70%. The poorest households, of course, owe the largest percentage of their income. The bottom one-fifth owe 24% of their incomes to education loans.

We’ve created a vicious cycle in this nation. College degrees are absolutely essential to making a decent living, but in the current economic climate, graduates can’t find jobs, or are underemployed, so they can’t meet the payments on the loans that enabled them to get those degrees. At the same time, funding for education has been slashed by state and local governments. From 2001 to 2012, appropriations for education fell by a third while tuition rose by 40%. It’s an impossible quagmire for young adults who know they need a degree in order to compete in today’s society.

The charts in Donghoon Lee’s analysis clearly lay out all the elements of the problem: the growth of student loans, the increase in debt delinquency, the rise of student debt in relation to other debt, and also the reasons why a college education is a necessity. What is not obvious is that the debt is adversely affecting both ends of the age spectrum: the students themselves and, often, their parents who also went into debt to educate their children.

The consequences for the individual are enormous. As Martha C. White recently wrote for Time:

“The fallout from falling behind on a student loan can literally last for decades. Unlike most other debts, student loans are almost impossible to discharge in bankruptcy. Most student loans are federal loans, and the government can garnish paychecks, withhold tax refunds, and pursue other means for getting their money back.”

The consequences for society are also vast. White continues:

“The broader economic implications are troubling. Graduates struggling to dig out from a mountain of student debt also tend to put off getting married, buying homes, and having kids. And … they’ll have less spending power when they do eventually buy big-ticket items like homes and cars.”

In other words, the prospects for economic recovery for the nation, including a housing recovery, are dimmed by the direness of the situation. Even those who keep up with their repayment schedules will have far less disposable income with which to stoke other parts of our economy. As William E. Brewer, Jr., president of the National Association of Consumer Bankruptcy Attorneys, said in a recent report:

“Take it from those of us on the frontline of economic distress in America: This could very well be the next debt bomb for the U.S. economy.”

When the debt bomb goes off, as it soon might, average Americans will learn whether the federal government deems them as worthy of a bailout as it does big banks and auto companies. If not, we all will suffer the consequences.

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