Only in post-recession America could the indebted masses become a constituency — and a potential market. Call them Generation Overleveraged.
A whopping 40 million Americans owe an even more whopping $1.2 trillion in student-loan debt. The amount surpasses every other type of household debt except mortgage debt.
While the federal government has enacted laws that will ease future graduates' debt burdens, plenty of 20- and 30-somethings are still in the lurch. And at last these red-ink-stained wretches are garnering some attention from policymakers, politicians and bankers. Eyeing voters, politicians on the left and right have highlighted the issue, while banks are beginning to broaden their reach to refinancing student loans. It's not clear whether true relief or reform is on the way, but there's no denying that momentum has built along with the debt.
The main reason for rising student debt is this: In the halcyon years before the Great Recession, millions of young Americans took out loans to get through university, only to graduate into an economy that didn't need them as badly anymore. They're finding it harder to pay off their loans than they likely anticipated.
That's not to say there hasn't been profiting at their expense. Federal loan interest rates remain high relative to other types of government-backed lending, and private loan rates tend to be even higher. Beneficiaries include for-profit secondary institutions, private lenders and good ol' Uncle Sam.
THE DEBT VOTE
Their rising numbers have turned student-loan holders into a fledgling constituency. Student debt has become a marquee issue for both Republicans, like Sen. Marco Rubio, and Democrats, like Sens. Elizabeth Warren and Kirsten Gillibrand. There's even the hint of bipartisan consensus on the issue. Organizations that face off on other issues, like the conservative American Enterprise Institute and the liberal Center for American Progress, are finding common ground on policy solutions like income-based repayment and refinancing.
To be sure, Rubio has long considered student debt an important issue — the 42-year-old paid off his own loans only last year, with some publicity. And Warren has devoted most of her career to debt.
But the sheer numbers have garnered new attention. Over the past 10 years, the amount of student loan debt has nearly tripled, while defaults are at a two-decade high, with nearly 15 percent of borrowers defaulting within three years. As an illustration, some 600,000 borrowers who started paying federal student loans in 2010 had defaulted two years later. Defaults on private loans, which are less subject to regulation than government loans, are likely worse.
IT'S STILL THE ECONOMY…
Headlines are prone to describe student debt as the next coming bubble, but economists say defaults probably won't trigger a financial collapse. Student loans were never securitized to the extent that mortgage debt was.
Student-loan debt also has warped the economy, contributing to a shortage of primary-care doctors and stymieing entrepreneurship.
That doesn't mean student loans aren't a drag on the economy as a whole. Analysts say that student loan debt has had widespread economic repercussions. In a report published last year, the Consumer Financial Protection Bureau said student debt is one reason that 20- and 30-somethings seem to be living a prolonged adolescence, including living with their parents, failing to contribute to retirement accounts and postponing big consumer purchases such as cars.
"Rising student debt burdens may prove to be one of the more painful aftershocks of the Great Recession, especially if left unaddressed," said the bureau's student-loan ombudsman, Rohit Chopra, in a speech in November.
Student-loan debt also has warped the economy, contributing to a shortage of primary-care doctors — highly indebted med-school graduates are more likely to specialize in big-bucks sectors like dermatology and radiology — and has stymied entrepreneurship. The National Association of Realtors reported in July that nearly half of Americans describe student loan burdens as a huge obstacle to homeownership: "It proves to be a real detriment across the board."
BUDDY, CAN YOU SPARE A RE-FI?
What solutions exist? Historically, it's been much harder to refinance student loan debt than to refinance, say, mortgage debt. But that is starting to change. Over the past couple of years, several big banks have gotten into the student-loan refinance game, including RBS Citizens and SunTrust.
"It's common to hear about refinancing your mortgage, but this is a relatively new practice for educational debt," says Dan Macklin, co-founder and vice president of SoFi, a startup that has refinanced about $400 million in student loans since 2011. Lack of awareness is the biggest challenge in reaching the refinancing market, he says. And it's a huge market, in SoFi's estimation: Some $350 billion could be addressed, Macklin says.
But not everyone in student-debt distress is eligible for refinancing. Generally, you need to be in a better economic position, with a better credit score, than you were when you took out the loan. Lack of awareness about federal loan deferral and forgiveness is also a problem.
THE WAY FORWARD
One area of emerging consensus is that lenders should stop making loans without consideration of borrowers' ability to repay. Clearly, it's difficult to measure a 17-year-old's earning potential, but, analysts say, that doesn't preclude responsible lending. The debate lies in how to do it.
Some would put the onus on the student. They should write and amend loan repayment plans, argued one analyst, which would make them reassess their earning potential and career path periodically. Or they should be prequalified based on their academic record, others argue.
In contrast, a proposed rule by the Department of Education would put the onus on universities and colleges, making them show that a degree from them will provide gainful employment. (Its first attempt to put the rule through was scuttled when the Association of Private Sector Colleges and Universities sued.)
With competing interests and a still-evolving economy, the future of student lending and debt relief remains uncertain. But the issue has gained traction, and that should be a relief to us all, debt-burdened or not.
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