Student debt crisis threatens US economy

A series of independent studies and reports at various levels are jolting Americans out of their sense of lull over a looming crisis that has been in the offing for quite some time now, but was largely ignored. The growing student debt in colleges and universities across the nation seems to be headed in the direction of the massive foreclosure crisis, going by recent data released by the U.S. Department of Education.

The report shows that the national cohort default rate on federal student loans is 7 percent for borrowers who entered repayment in 2008, which is comparable with the default rate for credit cards (8.8 percent) and home mortgages (9.1 percent). In fact, earlier this year it came to light that the total amount outstanding on student loans was $875 billion, which actually exceeded the amount that Americans owe on their credit cards.

Another report from the Project on Student Debt - an initiative of the non-profit Institute for College Access and Success - indicates that college seniors graduating in 2009 had an average of $24000 in student loan debt, marking a 6 percent rise from the previous year. These figures, however, are based only on data reported voluntarily by public and private non-profit four-year colleges and the actual average is likely to be significantly higher when one takes into account many for-profit institutions, where student loans are typically higher.

What is more alarming is that the default rate in for-profit institutions is also the highest and students in these institutions are also known to enter more risky, non-federal loan agreements. 43 percent of all student loan defaulters attended for-profit schools even though they represent only 10 percent of all university students.

For most American students, a four-year college degree is affordable only when they consider loans. But even as college costs in America skyrocketed, few students or their families seemed to be bothered by it because of the ease of credit, planning to address the issue when the time to foot the bill arrived. Many of the for-profit schools are also accused of deceptively luring students into signing up for programs and loans, even when they knew that their earning potential post graduation was not likely to match the repayment requirements.

The situation has been made worse by the recession that dried up jobs for graduates. The Project on Student Debt report puts the unemployment rate for recent college graduates at 8.7 percent in 2009 (up from 5.8 percent in 2008), the highest annual rate on record for college students between the age of 20 to 24.

Lack of employment opportunities, inability to refinance and the lack of options to wipe out the debt in bankruptcy means that students are left with a crushing lifelong burden affecting their credit histories and long term spending capabilities; this, if sustained, could have a significant depressive effect on the economy as a whole.

Small steps have been taken to stem the problem at the root. For example, speaking to CNBC in an interview, Secretary of Education Arne Duncan pointed out that in the first steps towards reform of the educational loan system, the government has begun lending directly to students, rather than subsidizing and guaranteeing loans from private lenders. This has reportedly resulted in savings that are being funneled into an additional $40 billion worth of Pell Grants, the need-based Federal assistance granted to low-income undergraduate and certain postbaccalaureate students. There is also a proposed government crackdown on for-profit colleges which would tie the institutions' aid to the eventual employment of their graduates and rates of default among them.

However, for a vast majority of college students and their families, already saddled with growing interest burdens and a bleak employment market, these steps hold no promise.