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Recovery threatened by runaway student loan debt

Tuesday, April 3, 2012 | 11:35 a.m. CDT

WASHINGTON — The federal student loan program seemed like a great idea back in 1965: Borrow to go to college now, pay it back later when you have a job.

But many borrowers these days are close to flunking out, tripped up by painful real-life lessons in math and economics.

Surging above $1 trillion, U.S. student loan debt has surpassed credit card and auto loan debt. This debt explosion jeopardizes the fragile recovery, increases the burden on taxpayers and possibly sets the stage for a new economic crisis.

With a jobs market that is still wobbly, these loans are increasingly hard to pay off. Unable to find work, many students have returned to school, further driving up their indebtedness.

Average student loan debt recently topped $25,000, up 25 percent in 10 years. And the mushrooming debt has direct implications for taxpayers, since 8 in 10 of these loans are government-issued or guaranteed.

President Barack Obama has offered a raft of proposals aimed at fine-tuning the system and making repayments easier. Yet, the predicament of debt-burdened former students has failed to generate much notice in the GOP presidential campaign. Instead, the candidates are dismissive of government student loan programs in general and Obama's proposals in particular.

Rick Santorum went so far as to label Obama "a snob" for urging all Americans to try to obtain some form of post-high-school education — even though some polls show over 90 percent of parents expect their children to go to college.

Front-runner Mitt Romney denounces what he calls a "government takeover" of the program. Newt Gingrich calls student loans a "Ponzi scheme" under which students spend the borrowed money now but will "have to pay off the national debt" later in life as taxpayers. And Ron Paul wants to abolish the program entirely.

Lifting student debt higher and higher is the escalating cost of attending schools, with tuition increasing far faster than the rate of inflation. And enrollment has been rising for years, a trend that accelerated through the recent recession, fueling even more borrowing.

Mark Zandi, chief economist at Moody's Analytics, argues that government loans and subsidies are not particularly cost-effective for taxpayers because "universities and colleges just raise their tuition. It doesn't improve affordability and it doesn't make it easier to go to college."

"Of course, it's very hard on the kids who have gone through this, because they're on the hook," Zandi added. "And they're not going to be able to get off the hook."

It's not just young adults who are saddled.

"Parents and the federal government shoulder a substantial part of the post-secondary education bill," said a new report by the Federal Reserve Bank of New York. And some of the borrowers are baby boomers, near or at retirement age. The Fed research found that Americans 60 and older still owe about $36 billion in student loans.

Overall, nearly 3 in 10 of all student loans have past-due balances of 30 days or more, the report said.

Complicating the picture further: Like child support and income taxes, student loans usually can't be discharged or reduced in bankruptcy proceedings, as can most other delinquent debt. This restriction was extended in 2005 to also include student loans made by banks and other private financial institutions.

"This could very well be the next debt bomb for the U.S. economy," said William Brewer, president of the National Association of Consumer Bankruptcy Attorneys.

"As bankruptcy lawyers, we're the first to see the cracks in the foundation," Brewer said. "We were warning of mortgage problems in 2006 and 2007. The industry was saying we've got it under control. Nobody had it under control. Now we're seeing the same signs of distress. We're seeing huge defaults on student loans and people driven into financial difficulties because of them."

A report by his group noted that missing just one student loan payment puts a borrower in delinquent status. After nine months, the borrower is in default. Once a default occurs, the full amount of the loan is due immediately. For those with federal student loans, the government has vast collection powers, including the ability to garnish a borrower's wages and to seize tax refunds and Social Security and other federal benefit payments.

Nigel Gault, chief U.S. economist at IHS Global Insight, said the student loan crisis may not torpedo the financial sector as the mortgage meltdown nearly did in 2008, but it could slam taxpayers and the ailing housing market.

"When student loans don't get repaid, debts are going to be transferred from the borrower to the taxpayer," further raising federal deficits, he said. And overburdened student loan borrowers may fail to qualify for mortgages and "stay much longer in their parents' homes," Gault said. Young adults forming households have historically been the bulk of first-time home buyers — and their scarcity could dampen any housing recovery.

"When kids do graduate, the most daunting challenge can be the cost of college," Obama said in his State of the Union address, asking Congress to extend a temporary cut — due to expire in July — in federal student loan rates. The reduced federal rate is now 3.4 percent. If the cuts aren't extended, it will rise to 6.8 percent.

Still, Obama said: "We can't just keep subsidizing skyrocketing tuition. We'll run out of money."

Obama also asked Congress to extend the current tuition tax credit, double work-study jobs over five years and let borrowers consolidate multiple student loans at reduced interest rates.

But in this intensely partisan year, any congressional action seems dubious.

"I wish I could tell you that there's a place to find really cheap money or free money and pay for everyone's education, but that's just not going to happen," Romney says. "Now the government is taking over the student loan business. I think you'll get less competition."

The government has not taken over the student loan business. The private loan industry is still writing student loans, usually at interest rates far above the government ones.

What the Republicans are zeroing in on is a section in Obama's health care overhaul that eliminated big banks as middlemen in managing federal school-loan programs. Also, the new federal Consumer Financial Protection Bureau is clamping down on the lightly regulated private student loan industry.

Santorum, who now says calling Obama a snob for promoting higher education was "probably not the smartest" choice of words, has been seeking to rally blue-collar support by emphasizing that many jobs do not require college degrees — and suggesting many colleges are liberal bastions.


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Comments

Jimmy Bearfield April 3, 2012 | 1:09 p.m.

"some polls show over 90 percent of parents expect their children to go to college."

Then 90% of parents should open savings accounts for their children as soon as they're born and require them to put every penny of birthday money, after-school jobs, etc. into it. In the process, their children also will learn that forgoing a smartphone or pair of Uggs now will save them tens of thousands in interest payments later.

(Report Comment)
Cheyenne Greene April 3, 2012 | 1:38 p.m.

correction: Recovery threatened by government interference in free commerce.
I wonder how it would effect the price of tuition if the government never subsidized it.

(Report Comment)
mike mentor April 3, 2012 | 2:53 p.m.

Still, Obama said: "We can't just keep subsidizing skyrocketing tuition. We'll run out of money."

This guy is dumber than I thought. If he believes this truth, why do so many of his policies fly in the face of it???

(Report Comment)
Ellis Smith April 3, 2012 | 3:31 p.m.

Let's talk about "skyrocketing tuition."

Last month the university regents in a neighboring state approved closure of 58 majors, minors and graduate programs at one of the state's three public universities. They must have really "gutted" that university's offerings.

Not so. This "terrific cut" will affect only 2% of the degrees offered by that university.

The arguing and anguish involved were huge. Those opposed to the cuts called for the university president's dismissal. One legislator even questioned the president's sanity. On the other hand, there were plenty of comments along the lines of "What took you so long?"

In this particular case the university president was simply seeking to balance a future budget - and had been ordered to do so by the regents.

ONLY TWO PERCENT OF THE DEGREES CONFERRED! All presently affected students will be allowed to complete their programs.

Could there be more than one reason for "skyrocketing tuition?" Last week I called it "Club Ed" (intended to sound like "Club Med") and I think that's an apt name for it.

(Report Comment)
Gregg Bush April 3, 2012 | 4:12 p.m.

Twilight grasshoppers
Are karma police - termite
Housing Jenga base.

(Report Comment)
Michael Williams April 3, 2012 | 5:19 p.m.

Cheyenne Greene says, "I wonder how it would effect the price of tuition if the government never subsidized it."
____________________

Precisely, and an excellent comment.

Price follows the availability of money. The more money available (subsidies), the more the price swells to soak it all up.

(Report Comment)
Jimmy Bearfield April 3, 2012 | 6:01 p.m.

"Price follows the availability of money. The more money available (subsidies), the more the price swells to soak it all up."

Health care is another example of this phenomenon.

(Report Comment)
frank christian April 3, 2012 | 6:37 p.m.

I believe it was Chris Foote, possibly, under another name, proclaimed it a godsend that student loan business had been taken from crooked, profit driven, bankers by our benevolent government.

I believe it was I, who stated that with Federal government paying their tuition fees, our college administrators would conceive never ending reasons to increase those fees, as well as a never ending reason to vote for those providing this "windfall".

(Report Comment)
Derrick Fogle April 3, 2012 | 9:26 p.m.

Inflation in Higher Ed is TWICE the inflation in healthcare:

http://www.fogles.net/mostuff/med_edu_in...

However, government subsidies for Higher Ed have actually gone down, as a percentage of cost, not up:

http://www.fogles.net/mostuff/edu_paymen...

This kinda blows a hole in the theory that more government money is what's driving inflation in Higher Ed. Regardless of who is making the loans (gov't or private banking), student debt is still personal debt, not 'free' government money that's driving up costs.

( graphs courtesy Left Business Observer, http://leftbusinessobserver.com )

(Report Comment)
Ellis Smith April 4, 2012 | 5:04 a.m.

@Derrick Fogle:

So what would you say IS driving inflation in higher ed? I don't at all disagree with you, but what do you say IS driving inflation in higher ed? See my previous post ("Club Ed"), above.

As I posted last week, 2012 is the sesquicentennial of the federal Morrill Act (aka Land Grant College Act), signed into law by President Abraham Lincoln in 1862. Missouri was a bit tardy in getting around to passing legislation by the state (required to take advantage of federal largess), but there was that small disturbance known as the Civil War...

A primary purpose of the Morrill Act appears to have been to create conditions where students could attend college at affordable prices and be taught USEFUL things.

"Oh my Gawd, Martha: They have to learn something USEFUL!" One of the things the Missouri legislature did was create a second campus of University of Missouri, and that and the original campus in Columbia jointly formed this state's land grant college.

One more question (not particularly directed at Derrick Fogle): What do you think President Lincoln and Senator Morrill would say were they to visit our present Land Grant colleges? Remember, the rules here do not allow use of profanity.

(Report Comment)
Mark Foecking April 4, 2012 | 7:39 a.m.

Jimmy Bearfield wrote:

"In the process, their children also will learn that forgoing a smartphone or pair of Uggs now will save them tens of thousands in interest payments later."

Except this is the United States. We don't do deferred gratification. Interest payments later is simply, well, LATER! Living for today is just so much more FUN!
\
Unfortunately a huge part of out economy is dependent on that sort of frivolous spending.

DK

(Report Comment)
mike mentor April 4, 2012 | 9:51 a.m.

The examples are many...

It does not have to be "free" money, just available money.

The mortgage/finiancial crisis is probably the most glaring example. Make loans available to a lot more people all of a sudden and prices skyrocketed.

(Report Comment)
Derrick Fogle April 4, 2012 | 1:25 p.m.

@Ellis: I've got a couple answers to that question. First, from the words of Doug Henwood, the author of the Left Business Observer where I got the graphs:

"At the very high end, elite universities are in something of an “arms race” to get the most desirable students. They want to pamper and seduce, with everything from food courts to saunas to supercolliders. ... And given the swelling in the college premium, parents with the means to pay the bills demanded by Harvard and Yale are happy to write the checks, since the eventual degree will grease their kids’ way to the hedge fund trading desk."

This "arms race," of course, trickles down to other public and private institutions in the classic "Keep Up With The Haaaaavaaahds" mentality. Witness the new MU Student Center on Rollins. Very much along the lines of your "Club Ed" comment, just a slightly different facet of it.

Second, my very job at MU is an example/subset of this issue. 15 years ago, most classrooms were equipped with nothing but an overhead transparency projector on a cart, and a screen. Those things cost about $1,000. Today, a basic classroom technology installation runs nearly $8,000 for computers, data projectors, microphones, sound systems, cameras, network infrastructure, etc...

I'm sure some hats on here consider this an abominable waste. But could we seriously train students that are immersed in technology in everyday life, without the technology? The sad part is, from my perspective, we're still in the stone age with instructional technology, compared to what students use and have access to in their everyday life. But, I'm extremely budget-conscious, and I'm a lot more interested in reasonably priced equipment that works for our needs, than in having the latest / greatest / bleeding edge. Still, falling behind the technology curve, despite a nearly eightfold increase in costs, is a bitter pill to swallow.

It also drives me nuts that it's not always just cost that keeps us from delivering the best instructional technology; I'm frequently stymied by usurious licensing fees or legal limitations on content delivery methods. That's got nothing to do with money being thrown at education; it's got everything to do with greed in big media corporations.

(Report Comment)
Ellis Smith April 4, 2012 | 5:59 p.m.

Derrick Fogle:

Do I understand you are part of our university's education process AND you are also extremely budget-conscious? I feel like physically tracking you down and then kissing you on both your cheeks, except some people might misinterpret that gesture.:)

I don't think we are at odds on this matter, except that if you re-read my remarks concerning the situation with the university in Iowa you might conclude that my beef is curriculum "featherbedding," not equipment. "We never saw a program we'd ever want the sun to set on." :)

Every graduate of a technical university or institute, public or private, is acutely aware of costs of equipment. I try to help at MS&T with an equipment endowment for one department.

(Report Comment)
Derrick Fogle April 5, 2012 | 12:01 a.m.

@Ellis: I'm actually pretty far removed from the education process, which is a problem sometimes because I'm one of the technical people responsible for designing, implementing, and providing service for the technology tools the educators use. It's a very challenging job, and I'm sure you can understand the frustrations I sometimes face when there are several layers of administration between me and the people who actually use the technology on a day-to-day basis. I often never meet the people who use the stuff on a day-to-day basis until they call to report that it doesn't do what they need it to. Then, I have to make it do what the instructors need ASAP; if it doesn't, it's worthless, no matter how much money was spent on it.

I'd love to give you an earful or ten, but I really do love my work and it would be very boorish of me to criticize the organization I work for in public, any more than I already have.

As evidence of my money conscious nature, I'll submit my use of a bicycle for transportation. Also, despite the fact that I'm a technology geek, I only have the cheapest, most basic cellphone, because I personally don't need anything more. I don't have a TV or cable service or extra options on my landline, either. I line dry my clothes when I can. Hacky Sack is an inexpensive hobby, too; a $30 footbag lasts me over a year, and it's all the specialized equipment I need.

But, there are a lot of considerations on my job. Our primary business is providing fast, effective service and maximizing classroom uptime across campus. Vis-a-vis this article, students pay an enormous amount of money for their education. If even a single class in a large lecture hall is disrupted because of a technology failure, it represents literally thousands of dollars students have paid, that they suddenly aren't getting their money's worth for. I'm extremely sensitive to that, and I'll spend the money on the right equipment to minimize that possibility.

(Report Comment)
Ellis Smith April 5, 2012 | 4:57 a.m.

@Derrick:

An excellent short dissertation about your work! Thanks. We have (and I use the past tense, since I am "officially" retired) walked different paths but there may be some commonalities. I have always considered a large part of what I do to be teaching, sans classroom*. Correcting production problems is important; showing those who had the problems how to avoid having them in the future is even more important.

You mention layers of bureaucracy; that, as I'm sure you know, is NOT confined to public institutions. Many "technical" problems are the result of bad management decisions. My favorite illustration is the Three Mile Island fiasco. Management was repeatedly told that a pump in the circulation system was going to fail but refused to take the reactor off line because they would lose revenue while doing so. How surprising when the pump failed! And, man, did they "lose revenue." My work never involved nuclear reactors but I've seen many similar situations.

One further point. As you mentioned, college costs have risen roughly double that for overall inflation. What educational improvement is a student receiving for that increased cost? So there's no confusion, I'm talking about overall content, not just one aspect of it.

*--Actually, it's a BIG classroom, sometimes both dirty and poorly organized.

(Report Comment)
Derrick Fogle April 5, 2012 | 8:01 a.m.

@Ellis: That's a tough question. I'm gonna have to think on it before I answer. Check back in a couple days.

(Report Comment)
Ellis Smith April 5, 2012 | 11:30 a.m.

Derrick Fogle:

Take as much time as you wish. I think the question is one which needs asking! The cost of health care has also risen much faster than inflation, but I can easily cite diagnostic services, treatments and immunizations today which were unavailable when I was college age.

Also, before the 1960s it was normal for students to complete a BS or BA degree in only 8 semesters, usually no more than 9 semesters. Believe me, we weren't smarter than today's students. I suppose I could quote Reagan's joke that it was much easier then because there was less to learn. :)

(Report Comment)
Derrick Fogle April 6, 2012 | 9:57 p.m.

@Ellis: It IS a question that needs asking. As far as educational improvement specifically, I don't think there's been much. Has knowledge of chemistry that needs to be taught grown much in the last 30 years? Business or finance? Biology? Engineering? It seems to me like the changes have only been at the margins; certainly not a ~700% increase of new knowledge over general inflation in the last 30 years.

What students have been getting for all that extra money falls mostly outside of knowledge imparted to them as part of their education. What they've gotten is:

*Robust access to the internet and other knowledge stores
*Much better and more comfortable facilities
*The hope of getting the "Educational Premium"
*A lot more debt

The "Educational Premium" is shown in this graph (as usual, from Left Business Observer): http://www.fogles.net/mostuff/edu_benefi...

The problem is, the premium peaked for advanced degrees in 1993, for bachelor's degrees in 2000, and has been stagnant or declining since. Is it still worth getting a BA or BS to earn ~170% (but probably less in the future) of median?

To some extent, the EDU premium is a self-fulfilling spiral. Most University educators are at least BA/BS, and many have advanced degrees. And, since those people earn more, the Universities have to charge more to cover their salaries.

I personally think the buildout of internet access at Universities is one of the most important things students get. True, it's 90% mis-used on FB and pictures of cats (I know, I sit in back of classes sometimes to observe, and I see all the student's computer screens). But the other 10% is the window to the future, and if you know how to use it, an incredible store of knowledge and information.

The better facilities should have some merit too. Haven't many of us been having a hissy fit about the public K12 system failing to get air conditioning installed in some schools? All these "creature comforts" are there to make it easier for students to concentrate on the material, not how uncomfortable they are in stiff wooden chairs and sweltering heat.

Still, the staggering debt seems to overshadow everything else. Especially in the "new" economy where college grads are not only not seeing that historical educational premium, but not seeing much in the way of decent jobs at all. I think the EDU landscape in the US is going to change pretty dramatically over the next 20 years.

That's why I keep a side business going, and have several other business plans and URLs on the shelf ready to put into action. Ironically, or not, going back to school to get a 4-year degree (I've only got an AA) doesn't make the cut of options I would consider if my current job goes sour.

(Report Comment)
frank christian April 6, 2012 | 10:54 p.m.

"It seems to me like the changes have only been at the margins; certainly not a ~700% increase of new knowledge over general inflation in the last 30 years."

U.S. Dept of Education, "it began operating on May 16, 1980"

(Report Comment)
Ellis Smith April 7, 2012 | 4:40 a.m.

@ Derrick Fogle:

Excellent, and I definitely agree. Thank you. I would be interested in learning Mark Foecking's comments on this subject, if he should read this exchange and care to comment.

I agree one significant difference is probably both access to the Internet and, for those of us who work largely with numbers (business, finance, engineering, physics, etc.), it takes the drudgery of of homework assignments and allows students to concentrate on problem identification and solving rather than spending time "crunching numbers." But is that, or the current practice in engineering education of group projects, an invention of American universities?

Two further comments:

1) Sometimes we become so dazzled by our "grandness" that we forget what it is we are supposed to be doing.

2) Most of what I learned in life, including my engineering specialty, I learned AFTER I received my BS degree, and that's no criticism of my teachers or the institution from which I graduated.

(Report Comment)
Derrick Fogle April 7, 2012 | 11:20 a.m.

@Ellis sez: "...I learned AFTER I received my BS..." Bingo! The electronics technology and logic I learned in college 30 years ago hasn't changed. Transistors still function the same way. If/Then logic is no different. But the actual programming languages and applications for electronics have sure changed!

Probably the single most common point I've ever heard made by VIPs giving commencement speeches, is the importance of education is that it teaches us how to learn, not what to learn. What we learn in the process of our education is often quickly outdated, but great things can be built on the foundation of learning.

I still have to learn new stuff every day. I can't even count the number of specific programming and scripting languages I've had to learn at this point. My exposure to logic constructs in college are what gave me the tools to learn all those other languages. The same is true for the actual electronics side of things; the equipment I work on is thousands of times more complex than what I was exposed to in school, but the knowledge of how electronics and electromagnetic signal propagation works allows me to quickly sort out and identify problems with equipment, even when I've never seen the specific piece of equipment before.

And concurrent to your earlier statement, I also educate others every day. Not only on my job, but I have kids too; the importance of my role as an educator cannot be overstated. There's also ample evidence that my Hacky Sack endeavors are my most powerful educational tool. I rarely actually teach others how to play Hacky Sack, but just being out on campus doing my thing teaches young people the importance and promise of dedication and passion for something. I teach by example: "If you work hard enough, you can be a super freak show, too!"

(Report Comment)

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