June 5, 2012

College Loans: A Punitive System?

News emerging on several fronts points to what increasingly looks like a student-loan system stacked against young adults fresh out of college.

The Federal Reserve Bank of New York last week said college debt outstanding surged to a record $904 billion – the figure, from a new and improved Fed data set, was higher than had previously been thought. What was also noteworthy was that the central bank said a $300 billion spike in college debt since 2008 has occurred during a time other U.S. households slashed $1.5 trillion from their loan balances in a massive, post-recession belt tightening.

Student loan debt “continues to grow even as consumers reduce mortgage debt and credit card balances,” Fed senior economist Donghoon Lee said.

Washington is the first place to look for one Kafkaesque aspect of the college loan system. Politicians are engaged in brinksmanship over whether to allow the expiration of a temporary interest rate reduction for the Stafford Loan program put in place in 2007. This would cause the rate to double, returning to its previous level of 6.8 percent.

That’s a nice interest-rate spread for the federal government, which currently pays historic lows of about 1.5 percent on 10-year U.S. Treasury Bonds and 2.5 percent for 30 years. Even taking into account the sky-high default rate on student loans, is 6.8 percent a fair price for recent graduates to pay? …Learn More