Guest column: Student loan debt is next big bubble

By Evan Montague/Lansing Community College

Graduation stories abound this time of year, inspiring students and educators alike with the promise of a career and personal success.

Imagine starting this journey with a monthly payment of $276 for the next 10 years -- if not longer.

The average Michigan undergraduate student loan borrower is graduating with $24,000 in student loan debt. According to statistics from the New York Federal Reserve Bank and the United States Department of Education, student loan debt is nearing $1 trillion, even exceeding total credit card debt ($791 billion).

The growth in debt could mean that this is the first generation to fare worse than their parents.

Most of the recent attention has been focused on the pending doubling of the student loan interest rate, which will go into effect July 1. If this change were to go into effect, the rates on new Stafford student loans would go from 3.4 percent to 6.8 percent. This would impact more than 300,000 students in Michigan, resulting in nearly $1,000 in additional loan burden. Finding solutions for dealing with this $6 billion issue, which will impact up to 7.4 million student borrowers nationwide, has much support, but little agreement on how to pay for the lower rate.

Student loan indebtedness and the reliance on student loans as the primary federal student-aid program have resulted in alarming growth in borrowing. Student loans comprise 39 percent of all federal aid administered for the 2010-11 academic year.

The related issue looming large is the increase in the student loan default rates. The U.S. Education Department is transitioning from a two-year to a three-year calculation in these rates. All institutions have seen their default rates increase based on these new calculations.

The fiscal 2009 official cohort default rate published by the Education Department indicated that 10,711 Michigan student loan borrowers defaulted on their loans, leaving the state with an 8.2 percent default rate. Many observers see this as the beginning of the next housing bubble -- a bubble nearing the bursting point.

The surest way to impact the growing debt, as well as default rates, is to minimize the reliance on federal student loans. This requires advance planning regarding higher education choices and options.

There are numerous new requirements for colleges and universities to post clear information about costs, outcomes and indebtedness. Financial literacy is an often stated concept and some institutions are looking for support to implement programming, trying to move from short-term borrowing to a long-term approach.

There is no question that the current trajectory is unsustainable, with pending economic implications. There also is no question that, as a state, we need to increase the number of individuals completing continuing education and training for long-term economic development.

Paying for higher education continues to rank as a top concern for parents and students; having an educated work force skilled to meet the demands of a changing economy is a central focus for policy-makers, as well.

Hopefully, these common goals will bring individuals together to begin releasing “air” out of the balloon avoiding an all out “pop!”

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Phil Anderson
Tue, 05/15/2012 - 8:50am
Clark Howard makes a lot of sense - students need to exercise caution that the amount of student debt not exceed the reasonable first year salary they are likely to achieve. I reca an NPR program a year or two ago featuring an extremely unwise woman bemoaning that she had student loan debt on nearly $220,000. Why? To start, she wasn't content to go to an in-state school but opted to pay out-of-state tuition. Then she got a Masters' degree - and then a second Masters' degree ---- all in order to teach in elementary school! Would I want a ditz like that woman teaching my kids?
Tue, 05/15/2012 - 1:04pm
Phil, You're not a retired prison guard indirectly advocating for more inmates to be locked up at $30,000 annually with mandatory sentences for selling pot to pay off their student loans are you? You've got to shut off Fox News and go get a job if you can find one. I believe retirees don't deserve a free ride, especially when they put the rhetorical screws to those less fortunate because they still believe it's 1958.
Wed, 05/16/2012 - 12:08am
So you are more interested in blame than in how to get students to make decisions that don;t create such a burden for them. Tha is an interesting approach, it seem very consistent for Michigan, blame and don't fix a thing. The reality is that it takes thought not simply showing up to learn, it takes thought to work rather then simply do what you like, it takes thought to get and keep a job not just showing up. How much thought did these students put into taking out student loans or did they just take the money and not think about paying it back?
David Waymire
Tue, 05/15/2012 - 9:36am
Evan, you should mention that under Govs. Granholm and Synder, we've cut state support for higher education by 30 percent. It's not because we couldn't afford to sustain higher ed...after all, we spend $1 billion more for prisons than higher ed, and personal income increased by 20 percent during the last decade. It's because policymakers have made a choice...they want families and children to pay more and take out loans. This is a short sighted choice, as you point out. But it is one, nonetheless. Failure to continually point out that higher tuition has been caused mostly by state budget cuts allows those at fault to hide their responsibility.
Tue, 05/15/2012 - 11:25am
There are similarities between the housing loan bubble and the student loan bubble. Remember that the banks may have played a large part in the housing bust, by offering mortgages to all applicants without thoroughly investigating their ability to repay. I think much of that goes on in giving student loans. The students potential to repay should play a large role in whether or not the loan is offered. As to what causes higher tuition, the schools need to look at their administrative overhead. The schools primary job is to put trained and talented professors in the classroom. All other administrative positions need to be looked at. However, these other positions are usually the last to be cut or looked at for efficiency improvement.
Tue, 05/15/2012 - 11:56am
Where does it say that going to a 4 year university is an entitlement? There are plenty of community colleges where a student can get just as good of an education as they would from a Bangladeshi TA at a 4 year U for a small fraction of the cost. For the last two years at a 4 year University ... By saving $60 a month (What many people spend on cable TV! Rabbit ears work fine!) I was able to save enough ($27K) to cover the last two years of tuition with ZERO financial aid and ZERO student loans. Yes this does require summer and part time jobs from my kid, but that's life. And yes this could be repeated for a second kid.there are plenty of expenses that could be given up if you really want something. Enough whining. PS David- College tuition costs have been on a cost rocket way before the last 4-5 years of budget cuts!
Tue, 05/15/2012 - 1:08pm
Matt, My nephew that graduated from college last year and is working two part-time jobs and an unpaid internship has already taken the available undergraduate jobs. Community colleges are not cheap, just cheaper.
Wed, 05/16/2012 - 1:29pm
The simple solution is to focus available student loans to degree programs with a job potential. Community college degree in music, anthropology, or even a two year degree in business is not going to prepare graduates for the real world. If we had a match requirement for student loans, the students would have some skin in the game. Good grades, more money & lower interest rate. Internship, more money lower interest rate. Reward success and accomplishment in areas you want to promote and let the basket weaving majors foot their whole bill.