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You can almost hear Sonny and Cher singing "the beat goes on" as the pockets of crud keep popping up along the rotten road of the economic crisis that keeps on giving.
According to The Wall Street Journal: "Defaults on student loans are skyrocketing amid a weak job market for graduates and steadily rising tuition costs." Citing numbers from the U.S. Department of Education, the Journal reports that "default rates for federally guaranteed student loans are expected to reach 6.9% for fiscal year 2007. That's up from 4.6% two years earlier and would be the highest rate since 1998," adding that "The situation is mirrored in the smaller private student-loan market. In 2008, SLM Corp. also known as Sallie Mae, wrote off 3.4% of its private loans that were already considered troubled, according to its latest annual report -- more than double the figure in 2006. Student Loan Corp., a unit of Citigroup Inc., wrote off 2.3% of those loans in 2008, compared with 1.5% a year earlier."
At the center of the situation is the job market. The fewer jobs available for new graduates is in turn leading to more people pleading for help. And with no end in sight, the situation looks set to worsen, at least in the short term.
The Journal cites the example of 24 year old sales associate in New York. The young woman "graduated last year from DePaul University with a major in international studies and $87,000 in debt, translating to monthly payments of $685, the vast majority of which are private loans." According to the Journal, this amounts to about one third of her take home pay and she is receiving $200 a month from her grandparents in aid to help her with the debt. Yet, the grandparents' aid is set to run out in January, setting up the potential for financial difficulties for the new graduate.
There are some clauses in many government backed loans aimed at helping loan holders during difficult times, such as making interest only payments. But those will eventually raise the amount to be paid per month. Two other options are deferments and forbearances where "the government will cover any interest payments for a set period," or "the borrower can suspend payments temporarily but is still on the hook for the interest that continues to build while payments are on hold, which is then amortized over the life of the loan," respectively. But those options only delay the inevitable, the fact that the loan has to be paid back.
The problem is that private loans often don't have those options attached to them and private loans "have soared in recent years as limits on federal borrowing failed to keep up with rising college costs." The Journal reported that "Students borrowed $19 billion in private loans in the 2007-2008 school year, six times the amount they borrowed a decade earlier, after factoring in inflation, according to the College Board, a New York-based nonprofit."
Private lenders, amidst a mortgage related crisis are being forced to be more lenient on student loans. But, you get the feeling that at some point their patience will run out.
Conclusion
Student loans are a way of life in the United States where two income families often use their income as little more than cash flow to keep their mortgage, car payments, and the expenses of daily living going. Many families use large amounts of money, often $30-$40,000 per year in private elementary and high school education expenses, even before their children get to college.
The cycle has now been in place for at least two or perhaps three generations. And it looks set to run into some resistance.
The young woman featured in the Wall Street Journal article noted that she felt as if she was "being punished for having gone to school."
And she's likely not alone. There is a much bigger problem here than just paying off student loans. It's the potential for the beginning of a new line of thinking among America's youth. Why bother to try to achieve anything?
In the long haul, the most troubling of all outcomes is that moment when the bright and willing are no longer interested in putting out the effort to succeed, because success isn't worth the trouble.
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