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College Debt Bubble is Ready to Explode

For the first time ever, student loan debt has surpassed credit card debt.  Over the last decade, young people have eagerly received hundreds of thousands of dollars from private lenders working with financial aid offices to earn bachelor’s degrees. According to Yahoo, thanks to easy credit, declining grants and growing tuitions, more than two-thirds of students graduated with debt in 2008, up from 45% fifteen years ago. Outstanding student loan debt ballooned, it grew roughly four-fold in the last decade to $833 billion, with the average debt load being $24,000 according to the Project on Student Debt.

If that wasn’t bad enough, defaults have increased amid the lack of employment for new graduates.  In 2008, the most recent year for which this data is available, nearly 3.4 million students had begun repayment and more than 238,000 had defaulted on their loans. Borrowers can get temporary relief from payments if needed (called forbearance or a deferment), and those doing so increased 22% in 2007, up from 10 percent from a decade earlier.  Over a 15-year period, default rates range from 20% for federal loans to 40% on loans who attend for-profit schools.

One advantage of federal student loans is that they carry some consumer protections: lower interest rates; payment forbearance or deferment in the event of unemployment; income-based repayment programs; and forgiveness programs for public service careers. But the government will garnish the wages, income tax refunds and social security and disability checks of students who default on their obligations.

Similar to how lenders offered no money-down mortgages to unqualified borrowers during the housing boom, private student loan firms offered instant online approval for up all of college costs, and in some cases for four or more consecutive years. As tuition costs have outpaced the caps on federal loans, more families have turned to private loans, which carry higher interest rates and stricter repayment rules. Last year, private lenders supplied about $10 billion in loans (compared with $100 billion in federal loans). A study by the College Board found about a third of graduates in 2007-2008 had private loans. About two dozen private lenders offer student loans, and their business is growing at 25 percent annually, after a temporary decline amid the recent credit crisis, according to finaid.org.

Private loan terms can be more treacherous than public loans, with fewer options for payment deferral, and fees and penalties for missing payments. Private lenders can also commence collection actions in State Court. For its part, private lender Sallie Mae says it has set up customized workouts for thousands of financially distressed customers.  

Although, as little as 12 years ago, some bankruptcy relief was available for student loan obligations, at present, absent extreme, long term (permanent), hardship, there is little or no relief available in bankruptcy.   The time is long overdue for students and parents to lobby their lawmakers to address this growing issue that could have an adverse affect on our economy for years to come.