The Student Loan Debt Crisis

The Student Loan Debt Crisis

There is a new and worsening debt crisis in the United States: Student loans. The collective amount of student loan debt now exceeds the total debt owed by Americans on credit card accounts.

The amount owed on student loans has been growing for several reasons. First, the cost of education is increasing much faster than the rate of inflation. Second, more Americans are having to borrow to finance secondary education because the recession has reduced the number of families with the resources to pay.

What is worse, however, is that the crisis is not just affecting the borrowers. The number of loans for which parents and even grandparents have cosigned has risen dramatically. Currently, about 90 percent of new loans require a cosigner. Many parents believe that higher education is important for their children and cosign student loan obligations to enable their children to attend. Since many parents are themselves struggling financially, an increasing number of grandparents are cosigning student loan debts also.

The problem is taking many people by surprise because when families fall on financial hard times [typically because of illness, death in the family, divorce, separation, or loss of employment], they may first come to understand that there is no way out of student loan debt for most borrowers and cosigners. Student loans were made virtually impossible to cancel in bankruptcy in the 2005 bankruptcy reform legislation. Unfortunately, parents and grandparents with assets often do not have sufficient cash flow to pay for the monthly debt service owed on student loans when they come due. If the borrower doesn’t pay, parents and grandparents are dipping into their retirement and Social Security income in order to keep debt collectors at bay. Social Security and retirement accounts are protected in bankruptcy, but since student loans cannot be cancelled, other assets may be at risk so that parents and grandparents have little choice but to pay with protected resources.

The student loan debt crisis is drawing into question values that families have held for generations. Many are questioning whether higher education is worth the price tag anymore. A large percentage of college graduates are now unable to find employment, and those that do often must work for wages that are inadequate to support both a reasonable lifestyle and the payments on their student loans. More and more recent graduates continue to live with their parents. Financially-savvy young students who are accepted into elite private universities are increasingly choosing instead to attend high-quality state schools for their undergraduate education so they are not strapped with huge student loan obligations when they graduate.