In late 1965, President Lyndon Johnson stood in the modest gymnasium of what had once been the tiny teaching college he attended in Texas and announced a programme to promote education. It was an initiative that exemplified the ‘Great Society’ agenda of his administration: social advancement financed by a little hard cash, lots of leverage and potentially vast implicit government commitments. Those commitments are now coming due.
“Economists tell us that improvement of education has been responsible for one-fourth to one-half of the growth in our nation’s economy over the past half-century,” Johnson said. “We must be sure that there will be no gap between the number of jobs available and the ability of our people to perform those jobs.”
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To fill this gap, Johnson pledged an amount that now seems trivial, $1.9 million (Rs.9.6 crore), sent from the federal government to states which could then leverage it ten-to-one to back student loans of up to $1,000 for 25,000 people. “This act,” he promised, “will help young people enter business, trade, and technical schools — institutions which play a vital role in providing the skills our citizens must have to compete and contribute in our society.”
Almost a half-century later, these modest steps have metastasised into a huge, federally guaranteed student-loans industry. On October 25, the Obama administration added indebted students to the list of banks, car companies, homeowners, solar manufacturers and others which have benefited from federal handouts. Deanne Loonin of the National Consumer Law Centre has one client with $300,000 in debt from a failed effort to become an airline pilot.
Two things, however, are clear. The size of student debt is vast (touching $120 billion or Rs.612,000 crore), and lots of borrowers are struggling. More than 10 million students took out loans for the latest academic year, according to a report issued on October 26 by the College Board, a consortium of academic institutions. Almost a third of students graduating from college, and 69 percent of the ones dropping out, hold debt tied to their education.
The total amount of debt is staggering. The New York Federal Reserve Bank puts it at $550 billion (Rs.2805,000 crore), but includes a footnote in the ‘technical notes’ section suggesting this may be an underestimate. Sallie Mae, the school-loan equivalent of the housing industry’s Fannie Mae and Freddie Mac, reckons there are $757 billion-worth of outstanding loans. A bank heavily involved in the area says there is at least another $111 billion (Rs.566,100 crore) in purely private loans, and with new lending estimated in excess of $112 billion for this year alone, the total amount outstanding will surpass $1 trillion in the not-so-distant future.
Signs of strain are everywhere. In September, the department of education reported that in 2009 the default rate, which is defined as non-payment for 270 days, had reached 8.8 percent. By some estimates, delinquency rates — an earlier indicator of stress — for student loans exceed 10 percent, ten times that for credit cards and car loans. Loonin’s average client has a low-paying job, $30,000 of debt and is in arrears.
This is despite punitive laws to enforce repayment. In response to clever students burying their obligations in court during the 1970s, anti-default provisions were imposed to make it almost impossible to shed student loans in bankruptcy. In 1991, the statute of limitations for non-repayment was eliminated.
Many troubled borrowers could avoid default if they used government options to consolidate their loans and make minimum payments, says Loonin, but they are unaware of the possibility. Their primary contact with the industry after being granted a loan is through collection agents who are compensated based on how much they collect, and who therefore have little incentive to explain alternatives.
The changes announced in mid-October are designed to ease the pressure on struggling graduates. Borrowers who qualify will get payment relief, not debt relief. Their payments will be capped at 10 percent of income rather than 15 percent, but interest will continue to be applied to their underlying debt and may expand rather than contract over time. There will also be forgiveness after 20 years, rather than 25. The administration says these changes will have no cost to taxpayers. If there is one lesson of the past 46 years, it is to be dubious of that claim.
(Excerpted and adapted from The Economist)