Can it be fixed?
It wasn’t that long ago that the nation was shaken by the subprime mortgage crisis. Defaults on subprime mortgages caused a banking and consumer credit emergency that led to the deep U.S. recession from late 2007 through mid-2009. How does the student loan crisis compare to the subprime mortgage crisis? Will we face another recession? What will the next president and Congress do?
Growing Student Loan Debt
Taking out student loans for college seems like a good step toward an important goal: Obtaining a college education. In the ideal world, students would graduate, move on to nice careers, and pay down their loan debt efficiently. However, a substantial portion of student borrowers end up unable to repay their loans.
Since the subprime mortgage crisis ended, student loan debt has risen dramatically.
In fact, student loan debt shoots up by an estimated $2,726 every second, according to MarketWatch. That’s $9.81 million per hour. As of the morning of March 30, that debt is $1.347 trillion. It will be a lot higher by the time you read this article.
The composition of this debt has changed, too. Attendance at for-profit colleges has risen in recent years. The share of total student debt taken by this group of students rose from 12% in 2000 to 20% in 2014.
Problems Paying the Debt
These days, more people are making their mortgage, auto loan, and credit card payments on time. But not their student loans. The delinquency rate has been skyrocketing. About 11.5% of student loans are now 90 days or more past due, up from 8.7% only 6 years ago.
The problem is much worse for students who borrowed to attend for-profit colleges. Default rates (loans that are 9 months or more past due) on student loans are much higher for these borrowers. About 45% of these for-profit student loan borrowers default on their loans 5 years after the onset of repayment.
That’s almost half! How is that not a crisis?
These default rates on for-profit student loans have reached the high levels of subprime mortgage default, according to MarketWatch.
Why do borrowers of these for-profit student loans have such troubles? One big reason is that
unemployment is much higher and has risen more, since 2000, than for other students. For-profit institutions do not seem to be delivering the expected jobs and pay.
Comparison to Subprime Mortgage Crisis
In both the subprime mortgage crisis and the student loan crisis, default rates are high within specific sub-groups of borrowers, those with subprime mortgages and those with for-profit student loans. What will happen? Can we deal with student loan defaults the same way as mortgage defaults?
Despite the similarities between these two groups, the consequences of massive student loan default will likely be different. During the subprime mortgage crisis, borrowers lost their homes due to foreclosure, but their debt went away. They could start anew, although with damaged credit. The financial institutions that bought the subprime mortgages bore the brunt of the burden.
With student loan defaults, however, borrowers cannot make the debt go away. Filing for bankruptcy will eliminate credit card, medical, and other debts, but not student loan debt. In this case, borrowers carry damaged credit, and they still have the debt, which the Department of Education can still pursue. They can see reductions in tax refunds and Social Security checks. Because the U.S. government owns the vast majority of student loan debt, the taxpayers bear this burden, also.
Summary & Conclusion
Student loan debt has reached the crisis level of mortgage debt. Default rates of for-profit student
loans have reached the high levels of subprime mortgages borrowers. With student loans, however, borrowers cannot get rid of the debt. Presidential candidates have talked about the high debt level of student loan borrowers. However, there has been little comment on how student loan default has reached the crisis levels seen with subprime mortgages. Will our next president work with Congress to address this growing concern? Only time will tell.
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