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Nancy Smith

Student Loans: Housing Bubble All Over Again

November 18, 2011 - 6:00pm

Student loans are more than fire traps for millions of American families. Trust me, they're the next subprime mortgage crisis.

They're the easiest loans out there. Enrolled in a couple of classes? Congrats, your loan application is accepted.

Fiscally mismanaged colleges and universities that should have been out of business long ago? Propped up by mediocre-at-best students paying their tuition with easy-peesy student loans.

Now all of a sudden, here's what we've got:

Student loan debt that surpassed total credit card debt in the U.S. This years graduating class of college seniors had the highest average debt to date, and that total just jumped above the $1 trillion mark.

And by the way, of that $1 trillion, approximately 80 percent was federal student loan debt and 20 percent was private student loan debt.

It used to be a college loan was an investment. In the current economy, it's turned out to be considerably less valuable than most of us ever imagined. So what happens? A whole bunch of Americans find themselves under water, with large debts they can't pay off easily, debts that no bankruptcy court can settle.

The big student-loan game-changer came in 2005, with the passage of the bankruptcy reform bill. It changed the law so that even private student loans couldn't be discharged during bankruptcy. What a bonanza for lenders, who quickly found a credit risk-free loan averaging 7 percent a year.

Now new loan debt is piling up faster than kids can pay their loans off.

If only new college grads could find jobs that pay, or -- in some cases -- if they could find jobs at all.

Said Mark Kantrowitz, publisher of and, who has compiled the estimates of student debt, including federal and private loans, "In the coming years, a lot of people will still be paying off their student loans when it's time for their kids to go to college."

So, what do you say? Is this, as the Wall Street Journal calls it, a scenario we can dub the Higher Education Bubble? It costs so much money people have to go into debt to buy it, it's a status symbol, it's seen as a social good and government subsidizes it through tax incentives. The similarities between the Housing Bubble and the Higher Education Bubble are quite amazing.

Inflation in general in the United States since 1986 has been 107 percent. Inflation for college tuition is 466 percent.

When the government made it exceptionally easy for students to borrow massive amounts of money, the colleges followed the lead by increasing their tuition rates. This combination led to record-level borrowing. Today, the average undergraduate student loan debt is nearing $20,000. Those who go on to graduate school often end up with an additional $30,000. Law and medical students report an average accumulated debt from all years (undergraduate and graduate study) of $91,700.

One big problem is this: When students fail to make payments, the government is forced to allow a minimum payment schedule. At the rate of these minimum payments, which often are adjusted and readjusted, Uncle Sam is taking a beating.

There are three types of student loans in the U.S.:

  • Federal student loans made to students directly: No payments while enrolled in at least half-time status. If a student drops below half-time status, the account will go into its six-month grace period. If the student re-enrolls in at least half-time status, the loans will be deferred, but when they drop below half-time again they will no longer have their grace period. Amounts are quite limited as well. There are loan forgiveness provisions for teachers and health professionals serving low-income areas. Currently, certain loan forgiveness or discharges are considered income by the Internal Revenue Service.
  • Federal student loans made to parents: Much higher limit, payments start immediately.
  • Private student loans made to students or parents: Higher limits and no payments until after graduation, although interest will start to accrue immediately. Private loans may be used for any education-related expenses such as tuition, room and board, books, computers, and past-due balances. Private loans can also be used to supplement federal student loans, when federal loans, grants and other forms of financial aid are not sufficient to cover the full cost of higher education.

In 2007, Attorney General of New York State Andrew Cuomo led an investigation into lending practices and anti-competitive relationships between student lenders and universities.

What happened was that many universities steered student borrowers to "preferred lenders." It resulted in those borrowers incurring higher interest rates. Some of the "preferred lenders" allegedly rewarded university financial aid staff with kickbacks -- which led to changes in lending policy at many major American universities.

Meanwhile, the biggest lenders, Sallie Mae and Nelnet, are widely unpopular. They frequently find themselves embroiled in lawsuits. Remember the False Claims Suit in 2007? It was filed on behalf of the federal government by former Department of Education researcher Dr. Jon Oberg, against Sallie Mae, Nelnet, and others.

Oberg argued that the lenders overcharged the U.S. government and defrauded taxpayers of millions and millions of dollars. In August of 2010, Nelnet settled the lawsuit and paid $55 million.

Is Congress going to let the "higher education bubble" burst? Or will it take some action to revisit the dysfunctional, dangerous sacred cow that the American student loan system has become?

Students may be the most ill-served by this system. But the federal government -- the American taxpayer -- will pay the dearest price in the end.

This is an opinion column: Reach Nancy Smith at or at (850) 727-0859.

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