Are We Headed To A Student Loan Debt Bubble?

The economic struggles of the past five years have seen a housing bubble that might be followed by a student loan debt bubble, according to Standard & Poor's. “Student-loan debt has ballooned and may turn into a bubble,” S&P stated.  “There are more defaults and downgrades for some student loan asset-backed securities."

Mark Kantrowitz, publisher of FinAid.org, an educational loan and grant website, states that Federal and private student loan debt has surpassed credit card debt.  At just under $1 trillion, student loan debt presents a different angle in the asset backed loans problem of the recent few years.  The angle is the government has a large amount of money at stake, making it nearly impossible for creditors to have their student loan debt discharged through bankruptcy.

As an increasing number of people have suffered in some way through the economic downturn – either through job loss or life circumstances – the Obama administration is seeking ways to fix the growing problem that could, indeed, be as significant as the housing bubble that burst.  The same factors that caused the housing bubble are present in the student loan crisis.  With state aid being taken away from many colleges, funding has decreased, causing rising tuition costs.

 

Also, in previous years, practically anyone could get a student loan as part of government-backed encouragement for everyone to pursue higher education.  Not only were applicants given easy loan money – they were given money through the loan for living expenses, books, and whatever they wanted to spend the money on.  Applicants with un-established credit histories, or even poor credit histories, were given student loans at low rates, and now many of these applicants find themselves $50,000 - $200,000 in debt, despite increasing competition for jobs, especially among professionals.

Obama Relies on Debt Collectors Profiting From Student Loan Woe

With $67 billion of student loans in default, the Education Department is turning to private debt collection companies to recover student loan money.  In fact, the Education Department has already held meetings with consumer representatives to discuss the considerations of requiring debt collectors to offer payments based on income to defaulted borrowers who qualify. 

In a phone interview for Bloomberg News, Justin Hamilton, a spokesman for the Education Department, said, “We want to make sure we are striking the right balance between helping borrowers who have hit hard times and honoring our responsibility to be good stewards of taxpayer dollars.”

Student loans can rarely be discharged, even in bankruptcy.  This makes it difficult for borrowers to escape the debt, especially compared to debt from credit cards.  However, as an increasing number of borrowers have been hit with job loss, unforeseen medical expenses, and otherwise devastating economic circumstances, the government is working to recoup its money while helping the thousands of Americans who have met economic loss and are unable to pay their bills.  Since the government has funded many student loans with tax payer dollars, it can confiscate tax refunds, paychecks, and Social Security payments. 

   

Under these contracts between debt collectors and the Education Department, a defaulted student loan can be “rehabilitated” if a borrower makes nine payments in 10 months. These payments must be .75 percent of the loan’s total each month.  Collectors who are able to achieve this result from borrowers can make up to a 16% commission on the total amount of the loan.  If they are unable to achieve this amount, they are generally given a $150 administrative fee to hold the account and continue collection efforts on it.