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Generation Debt: Student loan debt a drag on economic recovery

This article first appeared in the St. Louis Beacon. - The rapid growth of student loan debt -- now at $1.2 trillion -– is one more aftershock of the U.S. financial crisis that dried up funding for millions of families, said Rohit Chopra, assistant director at the Consumer Financial Protection Bureau.

“Many families are under water on their mortgages so they can’t take out home equity loans. Many families experienced unemployment that hit their savings hard. Many people saw huge declines in their retirement accounts. In addition, many states saw fast declining revenues, and they ended up cutting support to higher education,’’ Chopra said.

“The result is that the cost of college not only shifted from the public to the individual family but from within the individual family it moved from parents to children," Chopra said. "While addressing college costs is important, it doesn’t do all that much for tens of millions of Americans struggling with student debt today.”

Chopra, who serves as student loan ombudsman with the bureau, will be speaking today at a symposium on student loan debt at the St. Louis Federal Reserve.

Huge loan burdens -- along with growing defaults -- could have a domino effect on the nation’s economic recovery, as young Americans put off buying homes, starting businesses or having families, he said.

The bureau estimates that 7 million Americans have defaulted on federal student loans, despite income-based repayment options that don’t exist for private loans.  Chopra called that “alarming” because there are significant consequences for federal loan default.

“You could see tax refunds taken away. Wages can be garnished without court order. You may not pass employer-verification checks. The landlord may be less willing to rent to you,’’ he said.

Chopra believes that a lack of data is making it difficult to understand what is going on in the student loan marketplace -- and to know if specific policy solutions would work.

“One of the things that is striking is that the average balance of borrowers in default is actually not that high,’’ he said. “And that suggests to me that one of the major populations of Americans in default on a student loan may not be ones who have borrowed huge amounts, but perhaps they did not complete their education. We have a large number of people who start college and do not finish. They don’t get the benefits of a degree, but they do have the debt.”

Chopra said the situation is worse for private loan borrowers who don’t have access to income-based repayment.

“What’s particularly noteworthy is the similarities to the subprime mortgage market,’’ he said. “There were a number of modification and refinance programs available to people with mortgages that were owned by a government-sponsored entity. So many of the subprime mortgage loans were securitized, and that introduced a whole other set of incentive issues with the bond holders that invested in those mortgage-backed security trusts.’’

Chopra said the bureau has recommended that Congress require schools to certify private student loans. That would prevent lenders from marketing directly to borrowers who may not realize they are eligible for federal loans. He also believes that loan modification and refinancing programs should be developed to allow borrowers to take advantage of historically low interest rates.

“Many feel that their student loans are holding them back, and there is certainly some evidence that those with student loan burdens are unable to even purchase a car or a home or even start a family,’’ he said.

Read the Beacon's earlier story:

To understand why analysts are increasingly concerned about student loan debt in the United States, here’s a fact that bears repeating: In 2012, student loans hit the $1 trillion mark and are now greater than credit card debt ($670 billion) and auto debt ($810 billion).

They also warn of growing economic repercussions from a complicated loan system that leaves millions of Americans struggling to meet their monthly loan payments.

Rohit Chopra, assistant director at the Consumer Financial Protection Bureau,  has warned that dysfunction in the student loan market has remarkable similarities to the failed mortgage market that triggered the Great Recession. Chopra will deliver the keynote address Monday at a symposium at the St. Louis Federal Reserve that will tackle the issues surrounding college debt, which now averages $27,000 an individual.

The St. Louis Fed’s Center for Household Financial Stability is organizing the symposium "Generation Debt: The Promise, Perils and Future of Student Loans." Presenters include economists, experts from the field of higher education and consumer advocates.

Student loans are currently the fastest growing item on household balance sheets, said Ray Boshara, director of the Fed’s household finances initiative. That high debt load is spilling over into other aspects of the U.S. economy and society. For example, young Americans, struggling to pay bills, might wait longer to form families.

"Generally, when you put your incomes together you can build a stronger balance sheet, retirement savings, first-home purchase, small business ownership,’’ Boshara said. “But there’s a big and generally a negative effect on the balance sheet because of unhealthy levels of student loans.’’

He adds that growing delinquencies in student loans are a bad economic sign.

"Delinquencies in student loans tend to predict high delinquencies in other kinds of consumer and mortgage debt,’’ he said.

The symposium isn’t about bashing student loans, which provide an important path to higher education for many Americans, Boshara said, but it will identify "perils” that need attention.

Among the presenters will be Jen Mishory, 28, deputy director of the Young Invincibles, a nonprofit based in Washington that focuses on economic issues affecting 18- to 34-year-olds. 

"It is a huge issue for this generation,’’ said Mishory, who saw concerns over student loans gain traction last year after the debt reached $1 trillion. 

"That was a wake up,’’ Mishory said. “I certainly think there is energy around this issue, and folks are starting to think more broadly about taking these issues on.’’

Average debt grows in Missouri and Illinois

The average student debt for Missourians between the ages of 25 and 34 increased 120 percent between 2005 and the second quarter of 2013, according to research by Bryan Noeth, a policy analyst at the Fed’s household finance center. In Illinois, average student debt rose 144 percent.

Noeth analyzed data from Equifax credit reports to determine debt from both federal and private loans in the Fed’s 8th District, which includes the St. Louis region. Part of the overall increase in debt can be attributed to growing college enrollment, including community colleges, he said.

Another major factor is rising tuition. In Missouri, for example, tuition at four-year public universities rose about 25 percent between the 2004-2005 to 2012-2013 school years.

Noeth found that other factors also contributed to the rise in student loan debt, including the fact that other sources of financing tightened, such as home equity lines or credit cards.

"You’re talking about substantial increases in student debt, and also people aren’t paying back as quickly,’’ he said. "More people are making zero payments.”

When financially strapped borrowers take advantage of deferment or forbearance plans, the missed payments get capitalized -- and their debt increases, Noeth said.

A changed economic landscape

Mishory said there are solutions, including an income-driven repayment model that could lighten the burden for borrowers -- particularly college graduates struggling to find good-paying jobs in today’s post-recession economy.

"On the whole, a college degree still brings up your salary potential, but it’s tough when you’re graduating into a recession or its particularly tough if you don’t graduate,’’ she said. “And there are a lot of students who go to college and are unable to finish for a variety of reasons. They end up with the debt and not the degree. If you have a system based on your income it provides some protection.’’

Mishory, a 2010 grad of Georgetown University Law Center, also serves on an advisory board for the Consumer Financial Protection Bureau. She said that reforms should target both future borrowers and also those who have already graduated and are struggling to stay afloat. Streamlining the complicated repayment system would help many.

"We have these types of repayment plans, but they are not utilized enough,” she said.

To learn more

Consumers Union, the policy division of Consumer Reports, has summarized issues surrounding student loan debt in a report "Degrees of Debt: Stories from Student Loan Borrowers Highlight Urgent Need for Reform.” It is available on the Consumers Union website. Among proposed reforms: 

  • requiring lenders and servicers to use plain language and spell out loan repayment terms before borrowers sign up.
  • requiring colleges to do a better job of explaining financial aid packages that often include both federally backed and private loans. (Private loans often won’t consider income when setting repayment terms.)
  • monitoring servicers of student loans to ensure they are providing accurate information to borrowers
  • changing bankruptcy laws that prevent student loan debt from being discharged.
Mary Delach Leonard is a veteran journalist who joined the St. Louis Beacon staff in April 2008 after a 17-year career at the St. Louis Post-Dispatch, where she was a reporter and an editor in the features section. Her work has been cited for awards by the Missouri Associated Press Managing Editors, the Missouri Press Association and the Illinois Press Association. In 2010, the Bar Association of Metropolitan St. Louis honored her with a Spirit of Justice Award in recognition of her work on the housing crisis. Leonard began her newspaper career at the Belleville News-Democrat after earning a degree in mass communications from Southern Illinois University-Edwardsville, where she now serves as an adjunct faculty member. She is partial to pomeranians and Cardinals.