Clarence Fanto: Student debt and the future of graduates
It's a most joyous time of the year for high school graduates and their parents, with multiple ceremonies this weekend and over the next two weeks in Berkshire County.
Yet, increasingly we hear horror stories about the massive amount of debt so many college students have to take on in order to deal with astronomically high tuition, fees, plus room and board expenses. Figure $20,000 or more at the best state universities around the country, up to $60,000 or even higher at the most elite private colleges. Per year.
According to the U.S. Department of Education, the default rate on student loan repayments is 13.4 percent, a 10-year high. Not surprising, considering how difficult it is for college graduates to land a well-paying job, or even any position reflecting their level of education, potential, and commitment to their chosen fields.
Huge numbers are difficult to absorb, but total student debt has hit $1.1 trillion, more than total credit card debt. As cited in the New York Times this past week, TransUnion Corporation, supplier of credit information to lenders, has determined that too many loans are being handed out to high-risk borrowers.
It could be the next financial bubble to burst. As a precaution, the nation's largest private student lender, known as Sallie Mae, is splitting into two companies in order to deal with more than $100 billion in loans it has written, with more to come.
Who can forget the housing crisis with mortgage foreclosures and "short sales" of bank-owned properties caused by wildly irresponsible lending to subprime borrowers.
We risk a replay and the U.S. Consumer Financial Protection Bureau is sounding the alarm that lenders may have "rekindled their dangerous infatuation" with poor-risk borrowers, as The Times put it.
The director of the consumer bureau, Richard Cordray, has compared the student loan market to the subprime mortgage phenomenon that imploded, sending housing prices on a fast slide and setting off the 2008 financial crisis that has left the nation deeply scarred.
"We learned a hard lesson in the wake of the mortgage meltdown," said Cordray. "We cannot just sit by and watch this happen to people again."
According to the TransUnion survey, more than half of outstanding student loans are being "deferred" -- a step short of outright default -- because graduates can't afford the monthly payments. Despite a recent surge in the housing market, there's concern that many graduates will have to put off buying homes because of their student loan debt.
Enter Congress, in its infinite lack of wisdom. Unless it approves new legislation, interest rates on government-subsidized Stafford loans, now at 3.4 percent, will double to 6.8 percent on July 1. Given low interest rates topping out around 4 percent for 30-year home mortgages and much lower for short-term borrowing, that's a calumny.
Previously known as the Federal Guaranteed Student Loan program, it was renamed in 1988 to honor Republican Senator Robert Stafford of Vermont for his work on behalf of higher education. These loans guarantee repayment to the lender in case of a default.
But default is a black mark on anyone's credit history. Last year's college graduate was saddled with $27,000 in loans, on average. If the interest rate doubles a month from now, many more students will face an even more impossible debt load.
In the current atmosphere of extreme polarization, it's hard to believe Congress will accomplish anything. But this is a quick and vital fix, and why anyone would challenge the need to maintain Stafford loan rates at their current, reasonable level, is beyond comprehension.
Clarence Fanto can be reached at email@example.com
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