Student Loan Debt Exploding After More Government Involvement

During the 2012 campaign, President Barack Obama’s Education Secretary Arne Duncan said the administration’s goal was to make “student loans available to as many people as possible” regardless of credit score, something Obama called an “economic imperative in the 21st century.”

But according to a new Federal Reserve report, “U.S. student-loan debt rose by $42 billion, or 4.6%, to $956 billion in the third quarter,” and federal programs that made it easy for people to borrow loans are pushing more people into debt to the point where some analysts believe bailout funds may next to go writing off defaulted student loans. 

According to the Wall Street Journal:

Payments on 11% of student-loan balances were 90 or more days behind at the end of September, up from 8.9% at the end of June, a rate that now exceeds that for credit cards. Delinquency rates for all other consumer-debt categories fell or were flat.

Because laws passed during the Bush administration made it nearly impossible to discharge student loans in bankruptcy proceedings, student-loan defaults can have a “crippling effect on the ability of many households to access credit in the future.”

Stafford loans, which account for more than three-fourths of federal student loans, “impose no credit standards and are capped at a total of $57,500 for undergraduates” while loans to parents and some graduate students “have no upper limits” if the borrower is not weeded out because of an “adverse credit history,” such as filing for bankruptcy in the previous five years.

Federal loans to those attending for-profit schools have been especially troublesome, according to the Federal Reserve and Education Department figures:

Such students account for 12% of total undergraduate college enrollment and 22% of Stafford loan funds, according to the College Board. Among those whose federal loans came due in the year ended Sept. 30, 2009, 23% defaulted–meaning they went a year without making a payment–within three years …

Student loans became more readily available during the 2000s and “the bulk of the loans were made by private lenders and guaranteed by the federal government” before “Congress cut out the private middlemen and had the federal government start making loans directly” in 2010. Now, 93% of all student loans are made directly by the government.

The Federal Reserve data show that “since the end of 2007, just before the financial crisis hit, total student debt has grown by more than 56%, adjusted for inflation.”

According to the Journal, the Education Department, in an effort to reduce defaults, “has tightened standards for loans to parents and grad students, prohibited federal lending to schools if more than a certain percentage of its graduates default over several years, and allowed borrowers to postpone payments during periods of ‘hardship.'”