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Scope of Student Debt Crisis Holds Generation Back

It’s been called a debt bomb waiting to explode. The next bubble on par with the subprime mortgage mess. A crisis that’s taking a toll on an already-weak economy.

Whichever scary word you prefer, there’s no doubt that student-loan debt looms as a major long-term problem facing the country’s population of college graduates and beyond. The economy might be seeing a modest recovery of late, but there doesn't seem to be any relief for this pocket of borrowers.

There’s no shortage of data that tell the story.

Outstanding student loan balances rose to $956 billion as of Sept. 30, an increase of $42 billion from the second quarter of 2012, according to a Federal Reserve Bank of New York November report on household debt. And that’s an 80% increase from five years ago, when total student loan debt totaled $530 billion. (Meanwhile, in October, the Consumer Financial Protection Bureau clocked outstanding student loan debt in the U.S. at $1 trillion.)

Student-loan debt has achieved the dubious honor of exceeding credit-card debt, auto-loan debt and mortgage debt: Overall consumer debt dropped by $74 billion in the third quarter, continuing the nearly four-year trend of falling household debt, driven largely by a decline in mortgage debt, the New York Fed noted.

The quarter-to-quarter increase also boosted the delinquency rate for student loans – 11% of student-loan balances were 90 or more days delinquent. What’s more, this figure likely understates the actual delinquency rates because nearly half of these loans are in deferment or grace periods, and therefore temporarily not in the repayment cycle, the New York Fed noted.

But given the nature of student loans, the big numbers aren’t all that surprising. Education-related debt – which cannot be discharged through bankruptcy as most other types of debt can – is repaid over decades, not months to years like credit card or car loan debt. “There are always going to be more new student loans issued than progress in repaying existing debt,” says Mark Kantrowitz, publisher of Fastweb.com and FinAid.org, financial aid information sites. And during a recession, it’s natural for delinquency and default rates to rise, he says.

Behind the numbers
We can blame, at least in part, the fact that more people are going to college. Total undergraduate enrollment in post-secondary institutions increased from 7.4 million students in 1970 to 13.2 million in 2000 and 18.1 million in 2010, according to the National Center for Education Statistics (NCES). By 2021, enrollment is expected to reach 20.6 million.

Of course, the poor job market students are graduating into reduces their chances of paying down their balances. While the unemployment rate for those 20-24 and 25-34 have both declined since 2011, jobless rates for those age groups are still higher than they are for the overall population. An Economic Policy Institute report from May said hourly wages for young college graduates dropped by 4.6% from since the Great Recession (from 2007 to 2011).

But escalating tuition rates are most often blamed for ballooning student debt. Between 2000 and 2010, average tuition for a four-year institution rose 71%, from $12,922 to $22,092, according to the NCES. (To put that figure in context, the rate of inflation over the same period was about 30%.)

Indeed, it’s a crippling financial burden that’s saddled young adults with thousands of dollars in debt they are often ill-equipped to pay back. The difficult job market young graduates come into makes payback all the more overwhelming. Countless stories have been told about debt forcing many 20-somethings to put their lives on hold. More than three-quarters of young adults ages 25 to 34 have moved back home with their families during the recession, the highest share of young adults living in multigenerational households since the 1950s, according to a Pew Research Center report published in March.

Parents’ problem
The effects of the debt crisis have trickled up to the older generation in another way. Student-loan debt for those age 60 and over has been the fastest-growing education debt of any age group, as tracked by the New York Fed.

Between 2005 and 2012, total debt for people 60 and over swelled by more than 430%, as millions of parents have taken out loans to help pay for their children’s college education. The average balance for this age group was $19,225 as of the first quarter of 2012, up 63% from 2005. The average loan balance across all age groups was $24,301, up 55% from 2005, according New York Fed figures.

These loans are even eating into sacred benefits once thought untouchable. A SmartMoney.com article last summer reported that the federal government is withholding money from a growing number of Social Security recipients who have fallen behind on federal student loans.

Legislative help
If total student debt at graduation is less than the graduate’s annual starting salary, he or she will be able to pay off the debt in 10 years, says Kantrowitz. But if balances exceed yearly income, the borrower will struggle to pay it down and would need “alternate repayment plans” to afford the monthly payments. (The average time it takes to pay back student loans is either 12 years or 16-18 years, depending on whom you ask, Kantrowitz says.)

One such alternate plan is known as income-based repayment for which most major types of federal student loans are eligible. Under IBR your monthly payment is based on a percentage of your discretionary income, which is the amount by which your income exceeds 150% of the poverty line. (Generally, borrowers will qualify for IBR when their total federal student loan debt exceeds their annual income, Kantrowitz says.)

Congress is trying to address the crisis. Republican congressman Tom Petri plans to introduce
legislation that would implement a program similar to IBR that would have student-loan payments deducted from borrowers’ paychecks. Instead of allowing debt forgiveness after 20 or 25 years in repayment, which is how the current IBR plan works, Petri’s bill would eliminate that, and cap the total interest at 50% of the original loan amount.

Kantrowitz lists several other pieces of pending legislation meant to ease the student debt problem, including a proposal that Congress reconsider the 2005 law excluding (private) student loans from bankruptcy, and to switch interest rates on new loans from a fixed rate to a variable-rate scheme.

Whether they come to fruition – and are effective – remains to be seen. But lawmakers realize action must be taken to ease the debt burden graduates carry with them far into adulthood. “We are not in a student loan bubble, at least not yet,” Kantrowitz says. “If current trends continue, we might be in two decades.”