Loan Bills Got You Down? You’re Not the Only One

There's something bad happening with student loans. 

Forbes, the Wall Street Journal and pretty much every other financial publication picked up on a TransUnion report last week that found more than half of outstanding student loans are in deferral or delinquency. Bloomberg News reported separately that with almost $1 billion in federal loans earmarked for needy students in default, Yale, the University of Pennsylvania and George Washington University have started to sue alumni for their unpaid Perkins loans. 

Some responded with calls to tighten eligibility requirements for future loans, taking into account each graduate's projected ability to repay and credit history.

"In effect, the [curent] system allows any 22-year-old [any university or college] chooses to admit to borrow a sum equal to the average home mortgage, but without a single one of the actuarial controls that are supposed to minimize the risk that homeowners will borrow too much money," Paul Campos, law professor at the University of Colorado at Boulder, wrote in an article in Salon.

"I'm not convinced the educational loan bubble is something to be worried about," Hilary Wething of the Economic Policy Institute told Campus Progress. "Yes, the amount of student loans has been growing, but not nearly at the same magnitude as our previous bubble to cause massive damage anytime soon." The main driver of increased loan deferrals and delinquencies is youth unemployment and underemployment, Wething said. 

Others still argue, however, that there is another way to combat high deferral and delinquency rates, and a way that would help not just young borrowers facing high levels of unemployment, but also middle-age borrowers and the 198,000 people over 60 who are currently behind on their payments: allowing the refinancing of student loans. 
Refinancing federal student loans with interest rates above 5 percent would save $14 billion for individual borrowers in 2013 and pump $21 billion into the economy in the first year alone, according to a Campus Progress report.

In the last two decades, state funding for public higher education fell 26.1 percent per full-time student, "a major driver of rapidly rising tuition rates," according to a report by the think tank Demos. The percentage of financial aid awarded to students in the form of grants simultaneously decreased from 55 percent to 26 percent between 1980 and 2008. In other words, students increasingly have no other option but to take out loans — the majority of which now have interest rates higher than 6 percent — to fund their education. 

Whether policymakers grasp those distinctions in the coming months is open to question. Last year, Congress scrambled last minute to pass legislation that temporarily retained lowered interest rates for federal student aid. Those federal loans are the same ones now making the news for increased delinquencies.

Zach Duffy is a reporter for Campus Progress. Follow him on Twitter @zachduffy.

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