Student Loans: The Next Debt Bubble

by Nathan Harden

S&P downgraded the USA’s credit rating. Now Moody’s, S&P’s rival ratings agency, has “downgraded” the student-loan market. Here’s an excerpt from my op-ed on the issue in the New York Post:

Total student debt is at an all-time high — and may top $1 trillion this year. Meanwhile, default rates are rising alarmingly. Skyrocketing tuition, lax lending standards and high rates of unemployment have created the perfect financial storm.

Some advice to college students: Learn from our government’s mistakes and avoid borrowing your way into a hole.

Tuition costs have more than doubled since 2000, far outpacing the inflation rate — even surpassing the bubble-fueled growth in real-estate prices.

Tighter lending standards for auto loans and mortgages have vastly improved loan performance. Yet student-loan-default rates are getting worse, not better.

For 2008, the most recent year for which data is available, the default rate was 7 percent, up from 4.6 percent in 2005. Among students who attend for-profit institutions, the default rate is nearly 12 percent.

Despite high default rates, lenders have had little incentive to curtail the amount of money they loan to students because the federal government guarantees most student loans. Yet, for borrowers, the consequences of default are severe.

Unlike most debt, student loans are almost impossible to dispose of through bankruptcy. If students fail to repay, their tax refunds can be withheld and wages and Social Security payments can be garnished.

President Obama’s takeover of the student-loan industry last year means the government no longer backs private loans, and most students now borrow directly from the government. But unless the government improves underwriting standards, we’ll have an ever-growing portfolio of bad loans on the federal books, and all taxpayers will pay for it…

Read the rest here.

Phi Beta Cons

The Right take on higher education.