Student Loans: The New Bubble That Threatens the US
A trillion dollars! That's how much Americans borrowed for their studies. A burden that is more and more unbearable… and a bubble that could burst.
His degree now lies on the bottom of a drawer, buried under reminders and warnings. Since his graduation in 2005 from the prestigious Rhode Island School of Design, a school of architecture, Silas Adams was able, for a while, to pay back part of his $133,000 student loan (€100,000). While he was working in California for a leading property developer, the bills for his student loan were bearable. But his decision to return to his hometown north of New York City to try his luck as an entrepreneur has changed things dramatically. “I can’t afford to pay anymore, unless I lived on the street,” he said. “I don’t regret any of the decisions that brought me here, though this situation has been testing my parents’ support, since the creditors call them several times a day.”*
Across the United States today, ringtones are causing the same anguish for millions of families. After the ravages of the subprime mortgage crisis – the seizure, due to non-payment, of thousands of homes bought with illusory credit – another aspect of the American dream is crumbling: outstanding student loans have reached $1 trillion (more than €753 billion), a figure equal to household credit card debt. In the last 10 years, financial institutions have given more than ever before to help young Americans pay their tuition fees and their daily expenses on campus, yet, in the past three months, more than 11 percent of these individual debts were not honored. This is a default rate higher than that of consumer credit!
University studies, a key investment in the promotion of American society, now offer more disappointments than prosperous careers. In a country with a nearly eight percent unemployment rate, lower wages and the absence of career prospects may make repayment impossible. Student debt has never before reached such heights. Today, 68 percent of young American graduates leave with a loan to repay, estimated on average to be $26,600 (€20,000), compared with less than $10,000 (€7,500) in 1989.
One student in 10 graduating from medicine or from a reputable business school enters the workforce with close to $62,000 in debt (€47,000). At a time when the economy is slipping, the burden is becoming less and less bearable. Nearly 20 percent of all U.S. households, including all generations, pay monthly bills for their studies.
On networks like Copains d’avant [Editor’s note: a French social networking site used to find old friends, similar to Facebook], which abound on the Internet, it is not uncommon to see graying friends celebrating, at more than 50 years old, the last payment for their sociology course. De facto, the most indebted households are below the age of 35. For 40 percent of this age group, student loans are added to mortgage and car payments. More and more often, this debt restricts access to home ownership, reduces daily consumption and, by extension, the country’s growth. This horizon darkened by unemployment, low wages and decades of debt should discourage higher education. Already, only a third of undergraduate students reach graduation.
Yet, given the employment situation, many are trying to improve their education and their chances of being hired by a temporary return to lecture halls, which offers another paradoxical advantage: “While we are studying, the repayments are suspended,” explains Kevin Stump, age 23 and “leaden” with more than $13,000 (€9,800) of debt. “That’s why, when I realized that my first salary would never allow me to pay back my loan, I borrowed again to enroll part-time in a new program, while continuing to work.” His strategy now consists of getting his degree “as slowly as possible,” in the hope that the job market will improve and that his future qualifications, in public relations, will earn him a decent salary.
The federal government distributes money to families…
Why would it refuse? The money still flows freely. While household debt decreased on all other fronts, outstanding student debt increased by 4.6 percent in the third quarter of 2012 alone. And by 56 percent since 2007. Who are the generous lenders? In the leading capitalist country, the response could come as a surprise: The federal government, to the tune of 93 percent of the funding.
To overcome the impoverishment of families during the crisis and to ensure access to education to the largest possible population, the Obama administration has innovated by removing private intermediaries, who record loan requests, and has designated the Department of Education as the distributer of funds. Due to these relaxations, no guarantee is required as long as the total remains below the limit of $57,000 (€43,000). In addition, civil servants are compelled to offer the same loans to engineering students with guaranteed jobs as to art history students with less certain prospects. In the U.S. – a country long revered for its businesses' openness to hiring arts students in banks on simple faith in their intellectual abilities – a dose of realism is needed. Universities are now requested to inform prospective students frankly about the value of their diplomas on the labor market.
The universities also bear a core responsibility for the astounding costs of studies. At Harvard, Yale or Duke, the minimum bill exceeds $37,000 per year (about €28,000), not including housing or medical insurance. But these hyper-selective and highly regarded institutions, which give scholarships for students of modest backgrounds, do not constitute the heart of the problem. The bulk of fee increases come from state colleges, institutions which are meant to provide higher education to the offspring of the middle class. "From California to Kansas, the states in chronic budget crisis have disengaged from education, sometimes reducing subsidies by two-thirds,” says Rory O'Sullivan, one of the leaders of Young Invincibles, a lobby group of students and young workers. “As a result, the remaining share borne by the students is increasing. This is an enormous transfer of public domain to the private sector that the federal government is trying to change for the better.”*
Private universities at all levels do not profit from this. Thus 93 percent of students at Clark Atlanta, a university historically open to the black population of Georgia, pay for their studies. For these students, mostly from modest backgrounds, the loan amount averaged $47,000 (€35,400). Nearly double the national average. A risky gamble on the future.
*Editor’s note: These quotes, while accurately translated, could not be verified.
His degree now lies on the bottom of a drawer, buried under reminders and warnings. Since his graduation in 2005 from the prestigious Rhode Island School of Design, a school of architecture, Silas Adams was able, for a while, to pay back part of his $133,000 student loan (€100,000). While he was working in California for a leading property developer, the bills for his student loan were bearable. But his decision to return to his hometown north of New York City to try his luck as an entrepreneur has changed things dramatically. “I can’t afford to pay anymore, unless I lived on the street,” he said. “I don’t regret any of the decisions that brought me here, though this situation has been testing my parents’ support, since the creditors call them several times a day.”*
Across the United States today, ringtones are causing the same anguish for millions of families. After the ravages of the subprime mortgage crisis – the seizure, due to non-payment, of thousands of homes bought with illusory credit – another aspect of the American dream is crumbling: outstanding student loans have reached $1 trillion (more than €753 billion), a figure equal to household credit card debt. In the last 10 years, financial institutions have given more than ever before to help young Americans pay their tuition fees and their daily expenses on campus, yet, in the past three months, more than 11 percent of these individual debts were not honored. This is a default rate higher than that of consumer credit!
University studies, a key investment in the promotion of American society, now offer more disappointments than prosperous careers. In a country with a nearly eight percent unemployment rate, lower wages and the absence of career prospects may make repayment impossible. Student debt has never before reached such heights. Today, 68 percent of young American graduates leave with a loan to repay, estimated on average to be $26,600 (€20,000), compared with less than $10,000 (€7,500) in 1989.
One student in 10 graduating from medicine or from a reputable business school enters the workforce with close to $62,000 in debt (€47,000). At a time when the economy is slipping, the burden is becoming less and less bearable. Nearly 20 percent of all U.S. households, including all generations, pay monthly bills for their studies.
On networks like Copains d’avant [Editor’s note: a French social networking site used to find old friends, similar to Facebook], which abound on the Internet, it is not uncommon to see graying friends celebrating, at more than 50 years old, the last payment for their sociology course. De facto, the most indebted households are below the age of 35. For 40 percent of this age group, student loans are added to mortgage and car payments. More and more often, this debt restricts access to home ownership, reduces daily consumption and, by extension, the country’s growth. This horizon darkened by unemployment, low wages and decades of debt should discourage higher education. Already, only a third of undergraduate students reach graduation.
Yet, given the employment situation, many are trying to improve their education and their chances of being hired by a temporary return to lecture halls, which offers another paradoxical advantage: “While we are studying, the repayments are suspended,” explains Kevin Stump, age 23 and “leaden” with more than $13,000 (€9,800) of debt. “That’s why, when I realized that my first salary would never allow me to pay back my loan, I borrowed again to enroll part-time in a new program, while continuing to work.” His strategy now consists of getting his degree “as slowly as possible,” in the hope that the job market will improve and that his future qualifications, in public relations, will earn him a decent salary.
The federal government distributes money to families…
Why would it refuse? The money still flows freely. While household debt decreased on all other fronts, outstanding student debt increased by 4.6 percent in the third quarter of 2012 alone. And by 56 percent since 2007. Who are the generous lenders? In the leading capitalist country, the response could come as a surprise: The federal government, to the tune of 93 percent of the funding.
To overcome the impoverishment of families during the crisis and to ensure access to education to the largest possible population, the Obama administration has innovated by removing private intermediaries, who record loan requests, and has designated the Department of Education as the distributer of funds. Due to these relaxations, no guarantee is required as long as the total remains below the limit of $57,000 (€43,000). In addition, civil servants are compelled to offer the same loans to engineering students with guaranteed jobs as to art history students with less certain prospects. In the U.S. – a country long revered for its businesses' openness to hiring arts students in banks on simple faith in their intellectual abilities – a dose of realism is needed. Universities are now requested to inform prospective students frankly about the value of their diplomas on the labor market.
The universities also bear a core responsibility for the astounding costs of studies. At Harvard, Yale or Duke, the minimum bill exceeds $37,000 per year (about €28,000), not including housing or medical insurance. But these hyper-selective and highly regarded institutions, which give scholarships for students of modest backgrounds, do not constitute the heart of the problem. The bulk of fee increases come from state colleges, institutions which are meant to provide higher education to the offspring of the middle class. "From California to Kansas, the states in chronic budget crisis have disengaged from education, sometimes reducing subsidies by two-thirds,” says Rory O'Sullivan, one of the leaders of Young Invincibles, a lobby group of students and young workers. “As a result, the remaining share borne by the students is increasing. This is an enormous transfer of public domain to the private sector that the federal government is trying to change for the better.”*
Private universities at all levels do not profit from this. Thus 93 percent of students at Clark Atlanta, a university historically open to the black population of Georgia, pay for their studies. For these students, mostly from modest backgrounds, the loan amount averaged $47,000 (€35,400). Nearly double the national average. A risky gamble on the future.
*Editor’s note: These quotes, while accurately translated, could not be verified.