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Student loan experts sound alarm on 'trillion-dollar blackhole'

Aarthi Swaminathan
Finance Writer

Student loan experts warned the House that the student debt crisis is now a “trillion-dollar blackhole” and was hurting the financial system.

“Every 28 seconds, another borrower defaults… like kerosene on a fire, student debt is … tearing our country apart,” stated Seth Frotman, former student loan ombudsman and the executive director of the Student Borrower Protection Center. “We cannot continue to be lobbied into believing that the companies getting rich off the misery of millions of Americans are not part of the problem… [and] the trillion-dollar black hole in our financial markets.”

Frotman, who made the comments during a hearing with the House Committee on Financial Services on Capitol Hill, was also accompanied by other panelists who also highlighted the difficulties student borrowers were facing — whether they had federal or private loans.

(Source: New York Fed)


There is presently $1.5 trillion in outstanding student loans and around 11% of them are more than 90 days delinquent. In the second quarter of 2019, student loans comprised of 35% of those in the severely derogatory balance.

“Patriot Act” host and former “Daily Show” correspondent Hasan Minhaj, who was also invited to join the panel, also noted in his opening comments: “This issue is sidelining millions of Americans, people are putting off marriage… retirement.”

A graduate throws his fist in the air on May 31, 2019. (Photo: REUTERS/Gabriela Bhaskar)

Bringing it back to the private industry

Both sides disagreed on a fix to the crisis, with many Representatives floating the idea of bringing student loans back to the private sector as a solution — reversing the move former President Obama made in 2010.

Representative Patrick McHenry (R-NC) was the first to make that argument.

“It is a consequence of Democrat policies that have nationalized student debt lending… we’ve saddled a generation with unaffordable debt, and an education that does outmatch the cost of that education,” said Rep. McHenry. “The largest consumer lender in the nation, we don’t adhere to the same laws that we demand of the private sector… the federal government must become a responsible lender.”

But privatizing all the student loans in the federal government's hands wasn’t going to fix everything, one panelist noted.

During her testimony, Persis Yu, a staff attorney at the National Consumer Law Center, asserted that the student loan system is generally “biased, secretive and lawless.” She added that even when the loans were private, forced arbitration causes causes stop the borrowers from going to court.

U.S. Representative and Chairwoman of House Financial Services Committee Maxine Waters (D-CA) speaks during a hearing in Washington, U.S. July 10, 2019. (Photo: REUTERS/Erin Scott)

While the course of action was hotly debated — from addressing the rising cost of college tuition fees, privatizing student loans, improving transparency to even claiming that the crisis wasn’t in the committee's jurisdiction — House Committee Chairwoman Maxine Waters (D-CA) stressed the urgency of the situation.

“This crisis is affecting people across the country and ultimately it negatively affects our entire economy,” she stated.

“I literally made a student loan payment while I was sitting here… and I looked at my balance and it [was] $20,237.16,” Rep. Alexandria Ocasio-Cortez (D-NY) stated towards the end of the hearing. “And just made a payment … I feel really accomplished right now.”

Ocasio-Cortez added that student loan servicers were predatory, and were “setting people up to fail.”

Aarthi is a writer for Yahoo Finance. Follow her on Twitter @aarthiswami.

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