Graduating from college used to mean the beginning of a bright future. For many graduates, it’s just a lead weight around the ankle.
According to a recent report from the Federal Reserve Bank of New York, outstanding student loan debt now stands at $870 billion. Putting that into context, there is a total of $693 billion in outstanding credit card debt and $730 billion in auto loan debt.
Over 40 percent of people under the age of 30 hold outstanding student loan debt, and I don’t think it’s a stretch to say that it’s no easy feat for a college graduate to get a decent job these days. More are moving back home with their parents, getting entry-level jobs and trying to figure out how long they can keep deferring their loan repayment.
I’m not crying for the recent graduates, arguing that there should be better jobs for them. Most of my friends got crappy jobs out of college, and the only thing that saved me from that fate was law school. It’s a rite of passage to get a terrible job; this way, you can make fun of it later in life.
Still, I’ve got a problem with all this. The deck is stacked against borrowers – here’s what I mean. Tuition has outpaced inflation for the past 25 years. The federal government guarantees repayment of student loans. So if you come out of college, you’re less likely now than ever to find a job that is going to cover those loan payments. If you don’t meet your obligation to repay the student loan, the government should go out of pocket.
Given the fact that you’re going to be paying taxes for the rest of your working life, it still doesn’t seem like a losing proposition for Uncle Sam.
But hold your horses. The government doesn’t just get your tax dollars, it can chase you until your dying breath for that student loan money (plus interest, of course). Your Social Security benefits can be reduced to pay the debt. Your tax refunds can be taken from you.
In other words, the government guarantees payment of defaulted student loans – but you are effectively guaranteeing the government.
To make matters worse, it’s incredibly difficult to wipe out student loans in bankruptcy. So a college graduate who falls on hard times for an extended period is likely to have a tougher time getting back on his or her feet once the financial crisis eases. The credit cards may be wiped out in bankruptcy, but not the student loans.
Heck, even some taxes can be wiped out in Chapter 7 bankruptcy.
Talk about a shakedown.
Why It’s Going To Keep Us Down
With such a large amount of debt – an average of $23,000 per college graduate – people don’t have much extra cash sitting around to spend on consumer goods. That’s bad for economic growth because if people don’t buy then companies don’t have as much of a reason to hire people.
With more adults struggling under the weight of student loan repayments there’s less for people to put into their retirement plans. Once those folks get older, they’re going to have less money to pay for their basic expenses. The buden will ultimately fall on the government and the younger generations, who will have to spend their own money to help out their folks. Junior’s got less money to live his own life because he’s caring for his parents in their old age, so that hobbles him as well.
Finally, the student loan burden puts a damper on innovation and entrepreneurship. I’ve personally spoken with dozens of people who would love to open a small business – that’s the main driver of the American economy, by the way – but can’t afford to do it because they have student loans to pay. How many ideas have been lost, how many jobs in new businesses have been foregone, simply because someone who would otherwise be a business owner can’t afford to leave his job because of student loans?
What’s the Solution?
The ability to discharge student loans in bankruptcy should not only be made easier, but standards should be made more uniform. Though there are rules in place with regard to the discharge of student loans in bankruptcy, they are murky and applied differently by different courts – indeed, by different judges. This makes it difficult for lawyers like me to tell people whether a student loan debt can be discharged in bankruptcy.
Short of bankruptcy, repayment rules for student loans need to be rewritten. There are a few restructuring options available through the U.S. Department of Education, but they don’t measure up. Monthly federal student loan repayment tops out at 10 percent of discretionary income for college graduates, but that’s only if the borrower makes a few phone calls and fills out forms. It’s daunting and overwhelming for many people.
No Better Time Than Now
The banks have paid back most of the money the government lent to them during the bailout. Employment numbers have started to turn the corner. The stock market is doing pretty well. If the government wants to empower the current workforce and future generations to make choices that will keep us on solid footing, now’s as good a time as any.
Think I’m right? Call your Congressperson. Think I’m wrong? Let me know.
Image credit: thisisbossi / Flickr