Federal student loans reach $1.1 trillion as defaults reach all-time high

News Analysis 

Aram Martirosyan, Special to The Star

Since the first quarter of 2007 to 2014, the amount of federal student loans have increased tenfold, growing from around $100 billion to $ 1.1 trillion.

A Gallup Poll of 2015 showed that 70 percent of Americans consider post-secondary education to be “very important,” with certain minorities putting a larger emphasis on it. And while it is true that there is a discrepancy of about 62 percent between median earnings of a four-year college graduate and a high school graduate, the decreasing salaries do not account for the burden of monthly student loan repayments that college graduates are forced to carry.

According to the U.S. Department of Education, as of July 2014, 51 percent of the borrowers are not repaying the loans on time and 18 percent have defaulted on their debts.

According to CollegeBoard, since 2001, there has been an increase of 94 percent in annual tuition for public four-year institutions (excluding room and board), and a 45 percent increase for private schools.

Economists point at analogous lending availability rates prior to the 2008 Great Recession, hinting that a similar scenario is certainly possible, if not inevitable.

What is different between this scenario and the crash of 2008, is that the federal government is the lender for the overwhelming majority of student loans, unlike in 2008, where the owners of the toxic sub-prime mortgage packages were private companies purchasing them from Wall Street financial agencies.

The reason for such drastic change between federal and private lending rates is that after the private lending market collapsed, private companies could not perform any substantial trade of loan packages, regardless of the type of the loan, since their clients refused to purchase them, fearing that the student might default on their payments. This discouraged the private sector, as well as the general public from engaging in lending relationships, thereby leaving the federal government as the only reliable option.

Although the consequences of a default are much less severe in this case, a ruined credit and an ineligibility for any other student assistance programs could impact the livelihood of the recent graduate.

In essence, public institutions, incentivized by the availability of federal or private student loans and by the lack of federal funding, bring the student as a middleman to access federal funds via high-tuition costs. So instead of sufficiently supplying public universities and colleges with the necessary financial resources, the funds enter the school via the federal loan that the students have taken onto themselves. In the process, the financial independence of the graduate is at risk under the heavy burden of repayments and the great probability of default.

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