You don't need a Ph.D. in math to know that student-loan debt is compounding at an alarming rate. In the last six weeks alone, two new government reports have detailed the growing student debt burden, which has no doubt contributed to the weak economic recovery and could remain a drag on growth for decades to come. First came a report early last month from the Federal Reserve Bank of New York stating that the $870 billion in loans carried by some 37 million present and former students exceeded the money owed by all Americans for auto loans, as of the Sept. 30 end of the government's 2011 fiscal year. It's also greater than credit-card debt. The report went on to note that delinquencies, officially reported at about 10% of outstanding loans, were actually more than twice that number when things like loan-payment deferrals for current full-time students were properly accounted for.
But that was just prelude for a speech in late March, when an official of the new federal watchdog agency, the Consumer Financial Protection Bureau, asserted that total student debt outstanding actually topped $1 trillion. The Fed, it seems, failed to account for much of the interest that had been capitalized, or added to outstanding loan balances on delinquent and defaulted loans.
The cause of the binge is the unfortunate concatenation of steeply rising tuitions in the face of stagnating family incomes, a precipitous decline in states' funding of public universities and two-year colleges, and the burgeoning of avaricious for-profit colleges and universities—which rely on federally guaranteed student loans for practically all of their revenue, in exchange for dubious course offerings.
Ever-rising tuitions are the biggest part of the problem. As the chart nearby shows, tuition and fees at four-year schools rocketed up by 300% from 1990 through 2011. Over the same period, broad inflation was just 75% and health-care costs rose 150%.
However you apportion blame, it boils down to this: Two-thirds of the college seniors who graduated in 2010 had student loans averaging $25,250, according to estimates in a survey by the Institute for College Access & Success, an independent watchdog group. For students at for-profit schools, average per-student debt is even greater for training in such fields as cosmetology, massage therapy, and criminal justice, as well as more traditional academic subjects.
WHETHER YOU HAVE KIDS in school or they've long since graduated, this is a big deal. Graduates lugging huge debt loads with few job opportunities to pay them off are reluctant to buy cars, purchase homes,or start families. Family formations, a key bulwark to home prices, have been in a seemingly inexplicable funk over the past five years or so.
Prospects are even more harrowing for defaulters on student debt. They are virtually excluded from the credit economy, unable to get mortgages, take out auto loans, or even obtain credit cards. "We are creating a zombie generation of young people, larded with debt, and, in many cases dropouts without any diploma," says Mark Zandi, the chief economist at Moody's Analytics.
Debt taken on by students pursuing professional degrees in graduate schools is even more daunting. Federal Reserve Chairman Ben Bernanke turned some heads in an aside during congressional testimony last month when he said that his son, who is in medical school, would probably accumulate total debt of $400,000 before completing his studies. Law students, even at non-elite law schools, often run up debt of as much as $150,000 over the course of earning their degrees. This even though top-paying law jobs at major corporate law firms are shrinking, consigning many graduates to lives of relative penury. Many are resorting to lawsuits against their schools, charging, with some justification, that the schools gilded the employment opportunities that awaited graduates.
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