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Sunday, February 23, 2014

Law - "The Hefty Yoke of Student Loan Debt"

Some quotes from Floyd Norris' finance column in the NY Times in Friday:

More than five years after the binge of irresponsible lending led to the credit crisis and Great Recession, the amount of consumer debt in the United States has begun to rise again, but with an important difference. This time the credit standards appear far tougher. Those who should not borrow generally do not.

Fewer consumer loans became seriously delinquent last year than in any recent year, the Federal Reserve Bank of New York reported this week.

Except, that is, for one type of debt: student loans.

There delinquencies continue to rise, and loans continue to be made without regard for the ability to repay.

At one time, student loans were a clear way to provide economic opportunity to people who might not have been able to attend college otherwise. In many cases, they still are. But increasingly it is becoming obvious that student loans are creating large problems that may persist for decades to come. They will impoverish some borrowers and serve as a drain on economic activity. * * *

Until 2009, young adults with student loan debt were more likely to own homes and were more likely to have car loans outstanding than were people of the same age without student loans. Those loans had enabled many of them to obtain college degrees and earn more money, qualifying them for mortgages. Those with student loans generally had better credit scores than those who did not.

But now the opposite is true. “Young people with student loans are less likely to buy a house,” said Wilbert van der Klaauw, a senior vice president of the New York Fed’s research and statistics group.

Those with student loan debt also are less likely to have taken out car loans. They have worse credit scores. They appear to be more likely to be living with their parents.

Norris continues that "the most important lesson of the credit crisis — that those who make loans need to have good reasons to care if they are repaid — was not extended to the student loan market."

The article discusses programs that lead to conventional degrees and those that do not - "the training programs pushed by for-profit private schools." It talks at length about how "the Department of Education has been trying to come up with a rule to exclude [from federal loans] programs that have a clear history of not producing people who can earn enough to repay their loans: a “gainful employment” rule."

The long article concludes:

More also needs to be done to regulate the companies that service the student loans. “There are uncanny resemblances between issues faced by student loan borrowers and struggling homeowners,” Mr. Chopra, the Consumer Financial Protection Bureau official, told me.

In the servicing of government-guaranteed student loans, Mr. Chopra said in a speech at the Federal Reserve Bank of St. Louis, “incentive misalignment may be acute. A default may sometimes be more beneficial and less costly for the servicer, compared to enrolling a borrower in a loan modification program.”

One thing the federal student loan program does not lack is ways to collect the money. Bankruptcy will usually not cancel student loans, and the government has the power to seize income tax refunds and garnishee wages as needed. Some parents who guaranteed student loans that have defaulted find the money taken out of their Social Security checks. For a student, a default can destroy a credit record, making it hard even to rent an apartment, let alone buy a home.

ILB: One thing the article does not mention is the problem of young people with the obligation to pay hundreds of dollars a month toward student loan debts also having to meet the monthly insurance premium requirements imposed by the Affordable Health Care Act.

Posted by Marcia Oddi on February 23, 2014 04:39 PM
Posted to General Law Related