Student loan debt chickens come home to roost

26 03 2012

As college costs continue their upward spiral and students rack up ever more loan debt in pursuit of the almighty degree, a handful of perspicacious pundits have warned that we are in the midst of a higher education bubble that will inevitably follow the same destructive course as the housing bubble. Well, the next financial tsunami may finally be on the horizon: over a quarter of all student loan debt payments are now 30 days delinquent. With outstanding student loan debt recently reaching the watershed $1 trillion mark, that means that about $270 billion in student loan payments are overdue.

In any sane era,$270 billion in late payments would set off some serious alarm bells. But we’re not in a sane era. With a national debt nearing $16 trillion, it’s probably going to take a few more zeros tacked on to that figure to get anyone to sit up and take notice.

There is one other mitigating factor that is helping keep the markets calm: many of those loans are federally guaranteed. In other words, they’re guaranteed by the US taxpayer. If borrowers default, or are forgiven by government fiat, we’re all on the hook. Don’t you wish you had stuck around campus for an extra year or two?

As if on cue, calls for student loan debt forgiveness have already begun. Michigan Congressman Hansen Clarke recently introduced the “Student Loan Forgiveness Act of 2012,” which would provide “full loan forgiveness for current borrowers who have paid the equivalent of 10% of their discretionary income for 10 years or who are able to do so over the coming years.”

Opponents of the bank and auto industry bailouts rightly expressed concern over the moral hazard such interventionism represented. Saving private concerns from the consequences of their poor decisions has set a dangerous precedent; given the right amount of political pull, one’s risks can be socialized and one’s benefits concentrated. Applying that precedent to countless holders of student debt increases moral hazard exponentially in a time where government has already tried its damnedest to diminish the importance of personal responsibility.

Instead of throwing good money after bad as Clarke has proposed, we should focus on eliminating the grants, transfer payments, and federally-backed student loans that make it possible for institutions of higher education to perpetually raise the cost of attaining a degree. As for those already saddled with debt, it makes far more sense to encourage economic growth – ultimately enabling graduates to earn enough to make their loan payments and live comfortably besides – than it does to provide yet another bailout.

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25 04 2012
Student loansharking « Graham Kozak’s Blog

[…] Of course, terrible things have already started happening to Americans’ monthly student loan payments. Recall the staggering fact that payments on about a quarter of our collective $1 trillion in student loan debt are already overdue. […]

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