NEW YORK (MainStreet) — Student loans grew in 2013 at an alarming rate, with no sign of a slow-down as trend lines generally pointed up.
The crisis and its essence could be boiled down to a single number, not difficult to report, but hard to comprehend. Sometime last spring, the total number of outstanding student loans passed the $1 trillion mark. That was quickly followed by another milestone, when the total number of outstanding federal loans minus private loans, about 10% of the market, also blew by $1 trillion. The World Bank puts the U.S. Gross Domestic Product at around $16 trillion.
The economic crisis was the perfect conspirator as refugees from the recession sought asylum on campuses of all kinds as they have throughout the decade. To get there, they borrowed money. The loan balances of some 40 million Americans with student loans is closing in on $30,000 per student.
The Consumer Financial Protection Bureau (CFPB) reported that some 7 million borrowers, representing about 13% of outstanding loans are in default. That doesn't include nearly 9 million borrowers whose payments have been deferred due to economic hardship.
Studies by the New York Fed found that student loan debt has become a noteworthy drag on the economy. People who are beginning their careers have concluded that they can't afford auto loans and home mortgages, nor do they want to risk starting a family because of their student loans are devouring their paychecks.
Meanwhile the cost of federal loans increased. Last summer, interest rates on Stafford loans for undergraduates went from 3.4% 3.85%. Congress tried to sell the increase as a victory for students—a last minute deal prevented rates from doubling from 3.4% to 6.8%. But there will be increases on future loans, and they will be tied to rates on the 10-year Treasury bill in a rate environment that is expected to increase. By the end of the decade, 6.8% might look cheap.
Some hope for a reduction in these interest rates may lie in the Senate, which began to hold hearings in September on the reauthorization of the Higher Education Act. Passed in 1965 and a product of Lyndon Johnson's Great Society, reauthorization was last completed in 2008. A spokesperson for Senator Tom Harkin (D-Iowa) has mentioned the possibility that the rates charged for unsubsidized Stafford loans could be reduced through reauthorization, expected to be complete in the spring.
Many industry observers are skeptical. Possibly as an acknowledgement that they'll need a hedging strategy in case reauthorization of the Act doesn't address needs they deem critical, Senators Dick Durbin (D-Illinois), Jack Reed (D-Rhode Island) and Elizabeth Warren (D-Mass.) have proposed a student loan Bill of Rights.
It would include default avoidance options such as alternative payment plans, the right to be know the terms and conditions of a loan, how and when monthly payments are applied, the right to grace periods when one loan servicer takes over for another and lender accountability, including the timely resolution of errors. These rights should appear to be self-evident, but a student loan Bill of Rights hit the radar because these rights are trampled upon so often.
President Barack Obama also re-discovered student loans in 2013 as the amount of outstanding loans have doubled since he took office. Obama's college ranking plan, rolled out in a campaign-style bus tour in August would evaluate the performance of colleges based on outcomes such as graduation rates, affordability and access, with a key benchmark being the proportion of students receiving Pell Grants.
Aid to individual colleges would be linked to these rankings. But critics have charged that the wealthiest colleges and universities will score the highest in Obama's ranking system.
An anonymous poll of 675 college and university presidents conducted by Gallup and Inside Higher Education found that only 2% of the respondents believe the plan will be "very effective" at making higher education affordable. Only 19% percent thought its impact on their institution would be positive.
Federal Regulators—particularly the Consumer Financial Protect Bureau—have provided reason to hope that thinking outside the box might have some currency inside the Beltway.
The CFPB has honed in on student loan servicers and the idea that they should be regulated more closely. The CFPB is dissatisfied with the attempts they have made to modify the loans of struggling borrowers and wants servicers to change business practices they say result in unnecessarily high fees. For the first time, these non-bank entities that act as payment processors and debt collectors are subject to examination by the federal government. The Department of Education outsources the processing and debt collection of its own loans to these entities.
Largest servicers include the SLM Corp.(Sallie Mae), The Pennsylvania Higher Education Assistance Agency (PHEAA), Great Lakes Educational Services and the National Educational Network. Examinations of Sallie Mae have already taken place since it services loans for banks the CFPB regulates.
The policy has been put into place. Execution will wait until next year.
—Written by John Sandman for MainStreet