Student loan default trend compared to the subprime loan crisis

A woman posing in her graduation gown outdoors

Student loan default is increasing as borrowing for college is compared to the environment that led to the subprime loan crisis. Flickr photo.

Student loan default is exploding and people are starting to wonder if the investment is worth the return. Hundreds of thousands of students are graduating from college this month heavily in debt. They are preparing to enter a U.S. economy saddled with a stubbornly high U.S. unemployment rate. Job creation  is stagnant. The jobs that are being created are unskilled, low-paying positions. Higher end jobs are disappearing as U.S. graduates compete with foreign workers willing to work for far less money. A lack of lending standards and naive borrowing for college has the student loan crisis being compared to the subprime loan crisis.

Borrowing for college out of control

Student loan debt, a crisis brewing in the shadows of the financial and housing meltdowns, is in the spotlight now that thousands of graduates borrowing for college  can’t pay back their loans. The New York Times called student loan default an echo of the subprime loan crisis. Students and their families made emotional, not reasonable, decisions borrowing for college. Their predicament is similar to subprime borrowers who assumed the value of their houses would always go up. Universities enrolled students without verifying whether they could afford tuition and set them up with lenders who made big loans without any idea of what students would earn after graduation–just like the mortgage lenders who didn’t ask borrowers to verify their incomes.

College degrees losing value

A recent student loan debt study by the College Board’s Trends in Student Aid found that 10 percent of people who graduated in 2007-8 had borrowed $40,000 or more. The median debt for students with a bachelor’s degree was $22,380. The Los Angeles Times reports that government surveys indicate the vast majority of job gains this year have gone to workers with only a high school education or less. The Bureau of Labor Statistics projects that seven of the 10 fastest-growing employment sectors over the next decade won’t require more than on-the-job training. These jobs include health care aides, customer service representatives and food preparers and servers. Meanwhile, well-paying white-collar jobs such as computer programming have become vulnerable to outsourcing to foreign countries.

Student loan bankruptcy

The student loan debt crisis has many graduates facing bankruptcy as they put their expensive degrees to use at the local Starbucks. In an opinion piece for, Daniel L. Bennett of the Center for College Affordability and Productivity said the colleges, not taxpayers, should be held accountable for student loan bankruptcy. Bennett said colleges are signing naive students up for loans destined to fail. It’s doubtful that borrowing $100,000 with an interest rate of 10% to pay for an undergraduate degree will have a happy ending, yet colleges enroll students with these debt loads all the time. Bennett said the schools should share in the financial fallout of student loan bankruptcy.

Student loan defaults climbing

Student loan defaults will continue to climb according to Education Department projections. A report on federal loan borrowers who began loan repayments between October 2007 and September 2008, and who defaulted on their loans by the end of September 2009 show that rate climbing to 7.2 percent from 6.7 percent in 2007 and 5.2 percent in 2006. The higher rates, if they continue to climb, suggest that increasing numbers of institutions could find themselves at risk of penalties as the government begins following defaults over a three-year instead of a two-year window, beginning in 2014.

Student loan reform

As the student loan debt crisis unfolds, colleges are currently protected when the borrowing for college backfires. But the department of education is preparing guidelines that would revoke eligibility of for-profit colleges from federal loan programs if the incomes of their graduates won’t finance their student loan debt.

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