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Between the Lines: Trashing a Generation

Student loan debt hits $1 trillion; predatory practices triple, quadruple what's owed.

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Thursday, October 18, 2012

By now all the sources that calculate the level of student loan debt agree that it stands at over $1 trillion. Student debt has become the new feeding trough for collection agencies.

The student loan crisis is so severe that you can hardly understand the economics of the next decade or more without taking into account the bubble created by abundant, though not cheap, loan money. The easier it was to borrow for college, the more tuition soared. University presidents' salaries rose; campuses were tricked out with amenities unimagined in older times when the student lifestyle was relatively austere.

Even if it hadn't been for the financial crash, predatory lending tactics and the fact that student loans can't be discharged in bankruptcy would have stolen money from the pockets of a generation—from more than one generation, because parents who sign for certain kinds of loans for their children are on the hook as well. This year, around 115,000 people—nearly twice as many as in 2011—had student loan payments, on their own loans or their children's, deducted from their Social Security checks.

But the crash ruined everything. It made even modest loans difficult and in some cases impossible to pay off. President Obama's rule linking monthly payment to actual income has brought relief to some, but in the total picture, that degree of relief is miniscule. Democrats and Republicans share much of the blame for this situation, for they both treated students as less than people, less than citizens—as children, as deadbeats convicted before the fact.

Through the 1990s, now-House Speaker John Boehner, who once promised lenders that he would "take care" of them, was helping put profits in their pockets with no regard for the future of young people trying to educate themselves. The banks were taking no risk because the government guaranteed the loans, but they could collect mountains of interest, fees and penalties from borrowers even after the borrowers were thrown into default—in some cases for the rest of their lives.

Here's the frightening thing about that trillion-dollar figure: it's impossible to prove how much of it is actually bona fide, how much is original loan principal. Many loans have been inflated through the years by interest that ballooned when people were even temporarily unable to pay, and when borrowers default, the original loan can double, triple or quadruple. Like credit card debt, student loan debt can trap borrowers on a treadmill, leaving them unable to pay down the interest so as to reduce the principal. These examples, submitted by former students in Massachusetts, come from the Student Loan Justice website:

"$21,000 in debts [sic] as of 6/96. Ballooned to $46,000 thru 'consolidation' techniques of Sallie Mae, USA Funds, DCS and DOE as of 02/02. By the time these are paid off I will have paid over $280,000. I have paid $11,000 in the last four years and the principal hasn't even moved by $1,000."

"I worked from day one, freshman year to pay my education. No parental help! I took two small loans, principals $2,200 each. Mass Higher Ed subsequently put me in default when I had a near-fatal illness... Then they were sent to their attorneys. They suddenly jumped from $4,400 to $20,000. I would blink and it was now $30,000... It is now $58,000. I lost my chance to go to med school, can't buy a home, car, nothing."

The lack of foresight on the parts of the government and the universities that is making a generation the victims of usury is monumental. President Obama took an important step by taking the lending function away from the banks, but there will be no large-scale relief until the discriminatory prohibition against discharging student loans in bankruptcy is eliminated. Gambling debts can be discharged in bankruptcy, though student loans can't; there's black humor there, but struggling borrowers can hardly be expected to laugh.

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