A July 2012 report from the Consumer Financial Protection Bureau (CFPB) estimates that total outstanding student loan debt now totals more than $1 trillion. Of that total, more than $150 billion is comprised of private student loan debt. The same practices that led to the collapse of financial markets in 2008 related to mortgage-backed securities may lead to similar fallout due to defaults on student loan repayment. In order to avert a possible financial crisis, schools, alumni, companies and state governments are beginning to develop plans to help graduates repay student loans.
Déjà vu all over again
Following practices undertaken in mortgage lending, from 2005 to 2007, lenders aggressively marketed student loans directly to the students. With schools isolated from the process, many students borrowed more than they needed to finance their education, borrowed irrespective of their actual need and took on more debt than their credit scores would have dictated as sound. CFPB reports that ten percent of recent grads from four-year colleges now face monthly student loan payments in excess of 25 percent of their income.
What effect will the crushing burden of student loan payments have on the economy and on business? Kate Davidson enumerated the possibilities in her June 15, 2012 article for American Banker titled, “Student Loan Debt Crippling Financial Independence, Young Borrowers Say.” The nature of private loans as opposed to federal loans is that they offer fewer repayment options. Forced to divert a large percentage of their monthly income to loan repayment will mean that less spendable cash can go toward purchasing a home, vehicle, funding retirement accounts or even for starting a family.
“One borrower who said he is struggling to repay $55,000 in private loans through Sallie Mae, said it was ‘nearly impossible’ to reach someone at the company who could help him lower his payment. Unlike subsidized federal loans, the borrower said, the private loans do not qualify for 25-year extended repayment, income-based repayment options, or income-sensitive repayment options,” Davidson said.
A familiar story
Burdened with as much as $200,000 in debt, it’s easy to understand projections that nearly one in seven loans is delinquent or in default. It isn’t just a young person’s problem either. People who earned their degree in the 1980s are finding that their Social Security checks are being garnished to cover loans that are decades old. What can be done? Dominic Balsulto explored a few ideas in his April 5, 2012 article for the Washington Post titled, “Student loan debt: Can these innovations save America’s workforce?”
Among the solutions discovered by Balsulto is a plan for peer-to-peer (P2P) lending and crowdfunding where social media is used to assist alumni in investing in future graduates. One such platform is the Silicon Valley-based company Social Finance (SoFi), which was begun at Stanford with about $2 million contributed by 40 alumni to fund loans for 100 business graduate students.
Balsulto reported, “In addition to offering students below-market-rate student loans, SoFi hopes to create a connection between students, alumni and future employment, with the idea being that alumni will be so deeply invested in the success of the students they’re supporting (and, yes, their investments) that they will help them find future work.”
State and local solutions
State and local governments are joining with some private and nonprofit companies to help graduates deal with their student loan debt according to Jeanna Smialek. In her July 18, 2012 article for Bloomberg Businessweek titled, “Student Debtors Find Much Forgiven in Small Towns,” Smialek describes how loan payment incentives have been attracting qualified workers to small towns in Kansas.
Drawn by the need to make high monthly loan payments, graduates are often forced to take jobs that they would otherwise avoid. In order to attract qualified candidates, many states and companies are offering loan payment incentives.
“Kansas allocated $1 million for the first year of its program, which applies to 50 rural counties that have seen a 10 percent drop since 2000,” Smialek said. According to Smialek, Nebraska is now looking into offering loan incentives of its own as it sees its skilled workers migrating into Kansas.
Student loan assistance programs are currently most prevalent in the health care professions where they can be found in 30 states and the District of Columbia. For years, physicians and other medical workers could qualify for loan forgiveness by working in underserved communities through the National Health Service Corporation.
The economic impact of the student loan crisis affects more than just the student who owes the debt. It affects the larger community and ultimately the nation. By helping individuals to meet their loan obligations, companies and state governments will receive a larger return on their investment.
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