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Recovery threatened by runaway student loan debt
Question of the Day
“This could very well be the next debt bomb for the U.S. economy,” said William Brewer, president of the National Association of Consumer Bankruptcy Attorneys.
“As bankruptcy lawyers, we’re the first to see the cracks in the foundation,” Brewer said. “We were warning of mortgage problems in 2006 and 2007. The industry was saying we’ve got it under control. Nobody had it under control. Now we’re seeing the same signs of distress. We’re seeing huge defaults on student loans and people driven into financial difficulties because of them.”
A report by his group noted that missing just one student loan payment puts a borrower in delinquent status. After nine months, the borrower is in default. Once a default occurs, the full amount of the loan is due immediately. For those with federal student loans, the government has vast collection powers, including the ability to garnishee a borrower’s wages and to seize tax refunds and Social Security and other federal benefit payments.
Nigel Gault, chief U.S. economist at IHS Global Insight, said the student loan crisis may not torpedo the financial sector as the mortgage meltdown nearly did in 2008, but it could slam taxpayers and the still-ailing housing market.
“When student loans don’t get repaid, debts are going to be transferred from the borrower to the taxpayer,” further raising federal deficits, he said. And overburdened student-loan borrowers may fail to qualify for mortgages and “stay much longer in their parents’ homes,” Gault said. Young adults forming households have historically been the bulk of first-time home buyers — and their scarcity could dampen any housing recovery.
“When kids do graduate, the most daunting challenge can be the cost of college,” Obama said in his State of the Union address, asking Congress to extend a temporary cut — due to expire in July — in federal student-loan rates. The reduced federal rate is now 3.4 percent. It the cuts aren’t extended, it will rise to 6.8 percent.
Still, Obama said: “We can’t just keep subsidizing skyrocketing tuition. We’ll run out of money.”
Obama also asked Congress to extend the current tuition tax credit, double work-study jobs over five years and let borrowers consolidate multiple student loans at reduced interest rates.
But in this intensely partisan year, any congressional action seems dubious.
“I wish I could tell you that there’s a place to find really cheap money or free money and pay for everyone’s education, but that’s just not going to happen,” Romney says. “Now the government is taking over the student loan business. I think you’ll get less competition.”
The government has not taken over the student loan business. The private loan industry is still writing student loans, usually at interest rates far above the government ones.
What the Republicans are zeroing in on is a section in Obama’s health care overhaul that eliminated big banks as middlemen in managing federal school-loan programs. Also, the new federal Consumer Financial Protection Bureau is clamping down on the lightly regulated private student loan industry.
Santorum, who now says calling Obama a “snob” for promoting higher education was “probably not the smartest” choice of words, has been seeking to rally blue-collar support by emphasizing that many jobs do not require college degrees — and suggesting many colleges are liberal bastions.
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