April 29, 2014

Cape Cod Times Editorial: Drowning in debt

April 29, 2014

In the last year, student loan debt surged to $1.2 trillion - about double what it was just seven years ago, according to a report from the Federal Reserve Bank of New York. That's more than credit card and auto-loan debt.

In fact, student loan debt is second only to the amount owed on home mortgages.

U.S. Sen. Elizabeth Warren, D-Mass., is among those sounding the alarm about what economists say could become a major financial crisis if preventive steps are not taken - and soon. In the coming weeks, Warren plans to file a bill that would allow all student loan holders - with private or federal loans - to refinance their debt to an interest rate of 3.86 percent, which would reduce monthly payments and the long-term cost of the loan. Some existing student loans carry interest rates of 9 percent or more, Warren said during a speech at Suffolk University School of Law earlier this month.

Warren's refinancing bill is a good step in making college more affordable. It was also help foster a more healthy overall economic environment.

Student loans have become a revenue center for the federal government, which will reap $66 billion in profits from loans it granted between 2007 and 2012 alone, according to the General Accounting Office. Interest rates on federally backed student loans for undergraduates generate profits two times higher than needed to issue and service the loans, Warren said. That jumps to about three times higher than needed for graduate student loans and even higher for federal Parent Plus loans.

"Tying students to a lifetime of financial servitude as a condition of getting an education does not reflect our values," said Warren, adding that we should invest in our young people because a better educated populace strengthens our economy.

As the cost of college continues to outpace inflation, it has become difficult for families to send their children to college without taking out large loans. In 2012, 71 percent of American private, public and for-profit college graduates had student loan debt averaging $29,400, according to a report from the Project on Student Debt. And one in 10 graduates owes more than $40,000. The average for Massachusetts was $28,460.

Almost 40 million people in the U.S. have student loans and that debt burden is having a negative ripple effect through the economy as people, especially those in their 20s and 30s, paying off large student loans are unable to purchase a home or car, according to the Fed.

About 33 percent of student loans held by people under 30 are delinquent for more than 90 days, Warren said. The amount of delinquent loans represents more money than delinquent balances on credit cards, according to the Fed. In fact, overall consumer debt has declined since the Great Recession, except for student loans.

To make up for lower federal student loan profits, which go into the general fund, Congress could close tax loopholes that benefit the very wealthy. But that is just one of many options that could be considered.

Warren said that she will need the strong support of the public in order to get her bill through Congress because there are no lobbyists working on behalf of student loan holders.

Read the article on the Cape Cod Times website here