There’s been a back and forth debate for a couple of years now over whether student debt constitutes a bubble, or just the largest source of personal debt that’s somehow nothing to worry about.
But with the rest of the economy slowly but surely recovering while student debt continues to grow, the crisis is standing in starker contrast and it’s becoming clear that something needs to be done.
The Federal Reserve released a report on the third quarter of this year, which saw an overall drop in debt and foreclosures and an increase in lending, usually a sign of economic recovery. The only exception to this hopeful picture was student loan debt, which increased by $23 billion.
And, the most ominous number in the report, the percentage of student loans that have been delinquent for 90 days or more rose to 11%.
The increase in delinquent loans doesn’t mean that the banks will take the kind of hit they took from delinquent mortgages in 2008. Unlike mortgage debt, student loan debt never goes away. It can’t be discharged in bankruptcy or permanently defaulted, and the federal government guarantees most of it. So the banks will never find themselves holding debt that will never be repaid.
A bursting student loan bubble won’t be like the mortgage bubble, where banks suddenly realized they’d been accounting for money that wasn’t there and stopped lending. It will come when the population is so debt-burdened that they stop spending. More delinquencies mean that more people are finding their student loans to be unmanageable, which means they’re less likely to put money into the economy by making major purchases like homes or cars.
Nearly two-thirds of Americans between the ages of 25 and 34 say they have friends or family members who have moved back in with their parents because of economic conditions, according to a March report by the Pew Research Center. Thirty-four percent of young adults say they have postponed marriage and/or parenthood because of debt.
“Young people with considerable debt burdens end up delaying life-cycle events such as buying a car, purchasing a home, getting married and having children,” said a February, 2012 report by the National Association of Consumer Bankruptcy Attorneys — a group that claims to have been among the first to warn of the dangers of the housing bubble.
We can’t expect real economic recovery, or even to remain stable at the precipitous level of economic stability we have now, if more and more people are putting the majority of their income toward paying off student loans rather than stimulating the economy.
There are flexible repayment plans, such as the new Income-Based Repayment plan, that can make repayment more manageable for struggling borrowers, but they’re underused. Many people struggling to repay their loans don’t know about the options available to them, Deanne Loonin, an attorney and director of the Student Loan Borrower Assistance Project at the National Consumer Law Center told TIME.
This is a problem in itself — people who are struggling need to make an effort to educate themselves about their debt and how they can manage it, and the federal government needs to simplify the overwhelming system for figuring out which repayment plan is best. Much of the information out there is written in jargon, with similar repayment programs difficult to distinguish from one another.
There are a lot of things that need to be reformed about the student loan system, from outlandish tuition rates to limited options for discharging unpayable loans. But a good first step would be to get the word out about what options are already available so that some of the distressed borrowers out there can get their payments down to a manageable level and go back to contributing to the economy and living their lives.