According to a recent USA Today report, student loan defaults are at their highest rate since 1998 and appear to be headed even higher going forward.
Perhaps in anticipation of high student loan defaults, the government has made it next to impossible to default on a student loan through the execution of a bankruptcy action. A curious move when consumers who spend unwisely and elect to put themselves in bankruptcy and can sometimes gain relief from indebtedness through a bankruptcy action.
Peter Mazareas, Vice President of the College Savings Foundation stated that, “it is going to be a generational challenge in terms of current students who are maxing out their indebtedness.”
They are coming to grips with the unpleasant reality that they may be paying $1500 to $2500 a month in student loans. For the first time in America, student loan indebtedness has surpassed total credit card debt. Because college tuition has far outpaced inflation for the past 20 years, student borrowing has continued to increase and increased by an astounding 25-percent last year.
Parents have been a contributing factor in the college equation. Contributing parents may have lost their jobs or have had to retrain for jobs with lower salaries that have left them unable to assist with college debt.
Historically some parents took home equity loans in support of college and now with home value being downgraded they are less able and likely to take these loans.
In addition, parents may have lost substantial amounts from their retirement accounts when the stock market tanked. Now these same parents are trying to rebuild retirement accounts based on the premise that you can borrow from college you can’t borrow for retirement.
According to some figures, the average student is graduating with $30,000 in college loans and many will owe substantially more.
As these new graduates make their way into the work world, some will be carrying debt loads that are crippling given the lower salaries that they will command. There will be groceries to purchase, car payments, and rent fees and of course, a substantial student loan payment.A payment that could run between $300 and $700 a month minimally.
Given that the American economy is largely dependent on consumerism, what can we expect from this generation that is so hampered by debt already? If this generation is hobbled by debt will they contribute to a new or deeper recession? Will they put off buying a home, buying a car, starting a family because of onerous college debt?
There seems to be two camps on this issue of student loan indebtedness. One camp that proposes that there should be no accommodation in the student loan repayment issue and another that proposes a student loan bailout. In my estimation these positions represent the extremes on both sides of the issue.
Clearly, some accommodation will be needed in order to avoid mass student loan default.
Will these students be put in debtors prison, will they be considered criminals if they fail to pat their loans?
Unless some unforeseen events occur that change the current economic picture significantly record numbers will default on their student loans.
It may be possible to reconfigure loans to create a longer trajectory in satisfying the loan. Connecting loan forgiveness to address societal issues might be considered and delaying repayment may also improve the overall picture. I don’t believe that government can simply ignore or fail to act on this gathering storm.
I know that students and families want to pay back student loans; in fact, the system depends on loans being repaid so that the money can be lent out again. Everyone recognizes this; however, extraordinary times call for extraordinary measures.
The bail out of Wall Street may for some, may have made the argument for student loan bail outs more plausible.
Remember, all kids count.
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