Wednesday, April 24, 2013
Student Debt and the Stalled Recovery
As many people now know, student loan debt has surpassed $1 trillion, but few people understand the structure and effects of this type of educational mortgage system. First of all, a recent New York Federal Reserve report shows how recent college graduates have contributed to the recession by not buying cars and homes like they once did. Due to their high level of student debt, low employment rates, and bad credit ratings, college grads cannot afford to contribute to the consumer economy.
More importantly, while students with debt graduate with on average $26,000 in loans, this amount soon balloons once these students fail to make their payments. The New York Fed reports that 31% of federal student loans are in default, and only 56% of all student loans are in repayment (the rest are in forbearance or deferral). Of course one of the major reasons why students are not able to pay back their loans is that they cannot find jobs, and the jobs they are finding often come with low wages. In fact, according to a recent Pew survey, only 42% of college grads have jobs requiring college degrees. For the most part, only students with diplomas in medicine, engineering, and computer science are finding jobs that match their education.
Meanwhile, as a record number of students default on their loans, these debts are being sliced and diced and sold on the secondary market, just like mortgages. In this toxic brew of debt, speculation, and federal guarantees, we may be seeing the roots of the next big financial meltdown. Student loans are a great target for speculation and exploitation because unlike most forms of debt, they are exempt from bankruptcy protections, the Truth in Lending Act, the FDCPA, state consumer protection laws, state usury laws, and the statute of limitations. Yes, student loans are ripe for a speculation bubble due to the fact that they are backed by the federal government, and there is virtually no way for the debtors to escape from their escalating debt.
Stepping back, we can now see that perhaps the most devastating result of the state defunding of higher education is the creation of a generation of indentured students who will never be able to use their education in a productive manner. (many of the sources and ideas for this blog entry come from the blogger and avid commenter Unemployed_Northeastern)