The Student Loan Crisis Everyone Saw Coming
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When there are Americans whose Social Security checks are being garnished to pay off their outstanding student loan debt, then it is clear that the United States has a problem. And the rising number of seniors who haven’t paid off loans taken out decades earlier is only one of several reasons to be alarmed by a report on student loan debt released by the Federal Reserve Bank of New York in March.
Total debt, as of the end of the third quarter of 2011, had reached $870 billion, a number, the Fed was quick to point out, that eclipses what Americans owed on their credit cards and on their auto loans. According to a more recent report from the Consumer Financial Protection Bureau (CFPB), the amount currently owed on both federal and private student loans has already broken the trillion-dollar barrier.
That’s not just bad for the people struggling to pay off their debt — people who, according to CFPB student loan ombudsman Rohit Chopra, are being punished for “doing exactly what they were told would be the key to a better life.” The burgeoning debt numbers also pose a growing threat to the larger economy: money spent paying back student loans is money that isn’t stimulating overall economic growth. Who will dare risk becoming a first-time home-buyer, for example, or buy a new car, when still struggling to pay back thousands of dollars on their education?
The Fed and CFPB reports launched a new round of well-deserved hand-wringing about the student loan “crisis.” But one of the things that makes this crisis different from previous financial disasters — like, for example, the subprime mortgage debacle — is that it actually hasn’t been ignored. In fact, you can make a good argument that the Obama administration has tackled the student loan crisis vigorously from the get-go, and achieved some signal triumphs, even while being ferociously opposed by Republicans at every single step of the way. Judging the overall success of Obama’s efforts is tricky — it may take many years for Obama’s reforms to make a dent in the overall quantity of outstanding debt — but there is little question that the White House is trying, and that for some students, at least, it has become easier to pay the bills.
The story begins in July 2009, when Education Secretary Arne Duncan announced a number of changes to how the federal student loan program operates. Interest rates on existing student loans were cut almost in half, from 6 percent to 3.4 percent. More important, Duncan introduced a new way of paying back loans, called “income-based repayment.” Previously, student loan borrowers had to pay back a set amount each month, regardless of how much they were earning. Under the new system, borrowers only had to pay 15 percent of whatever income they were making, and if, after 25 years, they still hadn’t paid off their loan, the remaining debt was written off.