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Student Loan Debt

Student loan debt has now surpassed credit card debt in the United States, with job prospects bleak even for graduates with degrees. As defaults increase, can anything be done?
Mike Funkhouser Courtesy of Mike Funkhouser

Janyne, a 28-year-old retail worker from San Jose has more than $50,000 in student loans. Worst of all, the degree Janyne (who asked that her last name not be used) earned from Brooks College, a now-defunct trade school in Sunnyvale, offered no immediate help in landing a job to pay off her debt.

In 2004, a year after she started attending Brooks, 60 Minutes did an expose showing that the school, a for-profit satellite campus of Brooks College in Long Beach, consistently misled prospective students about graduation and job placement rates.

In 2008, two years after graduating with a degree in fashion design, Janyne suffered a stroke that left her with memory loss. Job hunting went from difficult to impossible. In the time since, student loan creditors, looking to recoup money for the education that Janyne no longer retains and failed to lead her to a job, have been hounding her. She is now starting over by retaking design classes at West Valley College in Saratoga.

"I tried to work with them, but they don't really want to work with me," Janyne says. "I work two retail jobs, and I'm not making a lot of money. I'm going to school again. Hours fluctuate. Sometimes, I have enough to pay my bills and sometimes I don't."

Janyne's loans were sold by Sallie Mae (the SLM Corporation) to another company, she says, making it difficult to find someone to talk to and solidify how much she had to pay. Now, Jayne ignores calls if she doesn't recognize the phone number.

"I'm hoping once I get out of school I can get a job and pay down the debt," she says. "But, right now, there is nothing I can do about it. It's scary, it's overwhelming, it stresses me out, and I'm worried I'm going to have another stroke from it. I'm trying to deal with it, and I'm just happy to be alive right now."

Janyne's story is one of millions in the United States. The numbers are astounding; as of May 2012, total student loan debt has reached $1 trillion, far surpassing credit card and auto loan debt. The average student leaves school owing about $24,000. As a result, graduates are putting off buying cars, houses and even starting families to afford monthly loan payments that for many surpass the amount of the average mortgage. In an interview on Bloomberg Surveillance, Neil Soss, chief economist at Credit Suisse in New York, confirmed that rising student loan debt is preventing potential buyers from entering the housing market.

Some graduates burdened with debt hope to eventually qualify for the Public Service Loan Forgiveness program, which forgives student debt for public service professionals who work for 10 years, full time, in underserved communities. But people like Janyne, who hit on hard times, can forget about applying to have the student loans discharged. Unlike gambling and credit card debt, education debt is virtually impossible to cancel through bankruptcy.

"We live in a country that values consumerism over education, which is why I could discharge my considerable debt in bankruptcy if I had spent the money on shoes, travel and restaurant meals," writes Ann Nichols on her Forest Street Kitchen blog, after confessing that she'd gone into default for law school debt. "Because I spent the money on an education, it is not dischargeable."

Robert Applebaum, founder of the website and movement Forgive Student Loan Debt (newly rebranded as StudentDebtCrisis.com), says that hearing stories like these—and sometimes worse: "student loan suicides" are tragically becoming more common—are the norm in his work.

"Those stories have been my education into the injustices that exist with student loans," he says. "As time has gone by, I've pretty much heard every story you can imagine. I get frustrated by the number of people who are suffering."

Applebaum's activism began soon after he wrote an essay titled "Forgive Student Loan Debt to Stimulate the Economy" and posted it to a Facebook group that he formed in 2009. After the essay was written up on the Huffington Post and received mention in The New York Times and The Economist, the group reached 300,000 members. Subsequently, Applebaum became the leader of a movement to forgive student loan debt as a way to resuscitate the economy.

"This is a problem that we can address proactively, for a change, or reactively, like we did with the housing market crash," he says.

In July of 2011, Applebaum reposted a video of Rep. Hansen Clarke, D-Mich., calling for student loan forgiveness as a means of economic stimulus. By the end of the day, the two men were on the phone, talking about how they could "work together to address this crisis."

The result, HR 4170, the Student Loan Forgiveness Act of 2012, currently has 1.1 million petition signatures. The act calls for federal student loan debt to be forgiven after 10 years of income-based payments. It would ensure that interest rates on federal loans are capped at 3.4 percent. Future borrowers would be subject to a maximum forgiven amount of $45,520. According to the authors, student loan forgiveness would "free many of these Americans to invest, buy homes and start businesses."

Applebaum says that the plan would also benefit people without student loan debt. "If it worked to stimulate economic growth, then everybody benefits," he says. "If they do nothing, in five years or so we're going to be talking about $2 trillion in student loan debt. We're on this unsustainable path, and the taxpayers are footing the bill because of federal guarantees on these loans."

student loans

On the Bubble

Mitt Romney introduced his own solution to the crisis during a campaign speech before the Latino Coalition. The wealthy Republican presidential candidate proposed the reintroduction of private competition as a way to solve the debt crisis. Since 2010, private companies have been eliminated as intermediaries in the federal loan process; they can still offer student loans, but without government backing. Romney's plan would "welcome" private-sector participation in providing "information, financing and education itself."

If you look at Romney's support base and where he makes his money, this is no surprise. The student-lending industry has donated almost $30,000 to Romney's campaign, according to the Center for Responsive Politics. And when Romney was its chief executive, Bain Capital invested in EduServ Technologies, which processed student loans for repayment.

It was, however, the private lenders that helped students get into this mess in the first place. As with the subprime mortgage fiasco, these lenders handed out loans left and right, especially in the for-profit college industry, without enough attention to whether borrowers would have the ability to make loan payments after graduation. According to the Department of Education, 25 percent of borrowers who went to for-profit colleges default within three years. Compare this to 10.8 percent at public institutions.

"Subprime-style lending went to college, and now students are paying the price," said Education Secretary Arne Duncan after the July 20 release of a scathing report on the private lending industry.

A joint effort between the Department of Education and the Consumer Financial Protection Bureau—a 1-year-old agency that's been tasked with the responsibility of educating consumers on credit, mortgage and student debt—the report paints an unsettling picture in which private lenders practiced risky lending at the expense of students' well-being. Since 2008, lenders have tightened up underwriting practices, but that still leaves borrowers from 2005 to 2008 with unresolved debt issues.

Rising debt, skyrocketing tuition, decreased job prospects and increased default will lead the United States into even more financial disarray, asserts Glenn Reynolds, a law professor at the University of Tennessee, in his new book, The Higher Education Bubble.

"College is getting more expensive, a lot more expensive," writes Reynolds. "At an annual growth rate of 7.4 percent a year, tuition has vastly outstripped the consumer price index of 3.8 percent. It's skyrocketed past spiraling health care increases of 5.8 percent. Even the housing bubble at its runaway peak pales in comparison."

Local Democratic member of Congress Rep. Anna Eshoo says that she is working to keep student loan rates low. "Education is an investment in our collective future," Eshoo says, "but families can't be faced with going broke in order to educate their children. Higher education must be within the reach of everyone."

Who Do You Pay?

Applebaum, however, says there's probably a "zero" chance of the Student Loan Forgiveness Act of 2012 actually being passed by Congress, given current Republican congressional leanings.

Even if it did, it wouldn't be enough to help San Jose native Mike, who works in the real estate and service industries a total of 65 hours a week and has only seen his student loan debt grow since earning a business management degree from San Diego State University in 2007.

Like most college graduates, Mike was given a grace period to find employment before his loan payments started. He found a job in Japan and began chipping away at his modest debt, which was roughly $25,000. But when the company he worked for went bankrupt, Mike found himself stranded in a foreign country while his creditors back home were anything but sympathetic. By the time he returned to San Jose, the job market was in the tank, and he was deep in debt. Eventually, Mike says, he ran out of opportunities to keep pushing off payments, and he defaulted.

"This isn't something that I decided—to go into delinquency," Mike says. "I was forced into it."

Mike also never consolidated his loans, making it even more difficult to track his debts once they went into collections. He saw his student loan debt rise from a little more than $25,000 to $39,404 in just a few years. Meanwhile, his credit was being chewed up as his loans were spit back and forth between collections agencies.

"To be honest, when you have $39,000 in debt, you never see the amount coming down," he says. "And then it's confusing: Do I pay you guys? Do I pay the U.S. Department of Education? It's back and forth, and they're never clear."

Josh Koehn and Tad Malone contributed to this story.

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