TOPICS > Economy

The State Of Student Loans: More Debt, More Defaults, More Problems

May 30, 2012 at 12:00 AM EDT
Americans owe $1 trillion in student loan debt. How did that happen, and what's the impact on the nation's economy? Economics correspondent Paul Solman reports as part of his Making Sen$e of financial news series.

JUDY WOODRUFF: Now: the first of two reports on the ever-growing student loan debt problem.

NewsHour economics correspondent Paul Solman tallies up the larger toll it’s taking and what it means for new graduates.

It’s part of his ongoing reporting Making Sense of financial news.

PAUL SOLMAN: America’s age-old academic rite of spring: commencement. Degree in hand, graduates are about to begin real life and the world of work.

What’s different these days is the cost of that degree, and the extent to which it’s been financed with debt. Americans owe $700 billion in car loans, more than $800 billion on our credit cards. But student debt now tops $1 trillion, and it’s not just weighing down the 37 million former students who owe it, but the whole economy.

Here’s economist Paul Krugman in a recent public interview.

PAUL KRUGMAN, columnist, The New York Times: The preponderance of the evidence is that the biggest single factor keeping us where we are, keeping us in this depression is the overhang of debt.

PAUL SOLMAN: And student debt, we asked him a few days later.

PAUL KRUGMAN: Household debt is the big ball and chain on this economy, and student debt is a big part of it.

PAUL SOLMAN: But how, you might wonder, could people like Ricky Evans, age 32, who works in finance in the D.C. area and earns upwards of $70,000 a year, still have student loans of more than $80,000?

MAN: Honestly, back then, I barely understood interest rates.

PAUL SOLMAN: What about 27-year-old teacher Beth Hansen? In addition to working full-time at a Maryland middle school, she now works two other part-time jobs, running an after-school book club, singing in a church choir, and yet earned only $46,000 total last year, while still owing more than $60,000.

MAN: Looking for employment?

BETH HANSEN, middle school teacher: Yes.

PAUL SOLMAN: She’s now looking for a waitressing job to make ends meet, working tables after teaching seventh and eighth graders all day. Did she understand the load she was taking on?

BETH HANSEN: Think, how old was I when I signed my first promissory note? Seventeen. Am I really going to read said promissory note from beginning to end?

PAUL SOLMAN: Or understand it.

BETH HANSEN: Or understand it even if I had read it.

MARK KANTROWITZ, Most students will sign whatever piece of paper is put in front of them, and they won’t pay attention to it.

PAUL SOLMAN: Mark Kantrowitz is a financial aid expert.

MARK KANTROWITZ: There’s no one out there telling them, don’t borrow too much.

PAUL SOLMAN: Daniel Habtemariam, 28, a medical statistician who had attended the Krugman event, says student debt is depressing pretty much everyone he knows.

DANIEL HABTEMARIAM, medical statistician: I know for myself and as well as for many of my peers, we have put off major life decisions, put off having children, putting off buying a house. My peers don’t have enough revenue, they don’t have enough income, they don’t have enough security and enough sort of confidence in their future income.

PAUL SOLMAN: And the overhang of debt is restraining them?

DANIEL HABTEMARIAM: It’s a terrible burden, yes.

PAUL SOLMAN: Beth Hansen is typical.

BETH HANSEN: I live in a one-bedroom apartment, and it’s the cheapest one I can find, and it’s still 35 percent of my monthly income.

That also makes it so much more difficult to pay off my student loans. And thinking about my life with my future with my fiance, are we going to be able to buy a house? No, because I have no money in the bank. There’s no money for a down payment. There’s no collateral.

PAUL SOLMAN: The standard loan contract allows anyone who cannot pay, like Hansen, to put off payment for years. But the amount owed rises in the meantime, as the deferred interest is added to the total bill. Meanwhile, since the crash, many public employees have seen their earnings decrease.

BETH HANSEN: I have actually been making less each year because they furloughed us one year. And then, this year, they increased the amount that I had to pay into my retirement. So I have gotten a 2 percent pay decrease.

And I don’t know what they’re going to do next year, but there’s certainly been no cost of living increase in four years.

PAUL SOLMAN: Four years after graduating, Hansen has just started making loan payments, $468 a month. To cover it, she’s interviewing for that waitressing job. Will she ever pay off her loans?

BETH HANSEN: I may die first, in which case, they would need a copy of my death certificate to finally cancel my loan.

JUDITH SCOTT-CLAYTON, economist: College is a very good investment.

PAUL SOLMAN: Economist Judith Scott-Clayton studies higher ed.

JUDITH SCOTT-CLAYTON: Your level of education is the biggest single predictor of your lifetime earnings that you can control, that you can do something about. And so it makes a lot of sense to borrow, to finance this investment, which is going to pay off over the whole, you know, 30 or 40 years that you’re working.

PAUL SOLMAN: But tell that to recently minted B.A.s in the job market of the past few years, whose reality has clashed with the pretty picture painted during orientation week.

BETH HANSEN: They tell you, oh, you have made such a good decision by joining our family. This is going to pay off so well in your future, and our graduates have received this and this award and that award, and they’re prestigiously employed at, you know, X and such. And so, you think that that’s clearly what’s going to happen for you as well.

PAUL SOLMAN: So students borrowed money from the government or private lenders, each with different terms, interest rates and payback options.

The students tended to ignore the total tab, or even what’s called the opportunity cost, the income they might have earned if they hadn’t gone to school. Now the next generation sees what happened, and may become wary.

But a frightened overreaction is also a risk, says economist Judith Scott-Clayton.

JUDITH SCOTT-CLAYTON: The risk is that if they decide not to go because they’re afraid of taking out debt, they may actually end up in a worse situation than had they decided to go.

PAUL SOLMAN: Now, one reason student debt has surged past a $1 trillion, 80 percent of it owed to Uncle Sam, is because college has become increasingly expensive.

But the Cato Institute’s Neal McCluskey argues that’s because of student debt financed by government loans.

NEAL MCCLUSKEY, Cato Institute: The massive inflation we see in tuition, in college prices, have gone up faster than health care, faster than almost any other major industry.

Well, that’s a product in large part of federal student aid. And, again, that’s the — if you give someone $100, you tell them they have to use it for college, and colleges know they have it, of course they’re going to raise their prices.

PAUL SOLMAN: The government begs to differ.

MARTHA KANTER, U.S. Undersecretary of Education: Federal subsidies are not the reason that college costs have escalated.

PAUL SOLMAN: If government aid drives tuition, says Undersecretary of Education Martha Kanter, how come prices are rising fastest at state schools?

MARTHA KANTER: Just last year, if you look at states, over 80 percent of states have dramatically cut American higher education. Institutions of higher education raise tuition when that happens.

PAUL SOLMAN: But no matter who’s responsible, soaring tuitions mean soaring debts mean more defaults. And that’s very bad news, says Mark Kantrowitz.

MARK KANTROWITZ: When someone defaults on a student loan, it’s like a trip through hell, I mean, all the negative things that occur, the garnishments, the interception of your income tax returns. Your credit is ruined.

PAUL SOLMAN: Moreover, unlike credit card and other borrowing, Congress has legislated that you can’t even escape student debt through bankruptcy.

Robert Applebaum is an advocate for student loan reform.

ROBERT APPLEBAUM, Not only can you not go to Chapter 7 bankruptcy, which is a discharge of your debt. You can’t go to Chapter 13 bankruptcy, which is just a restructuring of your debt, so essentially refinancing.

You go into massive amounts of debt just to get an education that you need as a prerequisite to get a job, and then spend the rest your life paying off that educational debt. There’s got to be a better way.

PAUL SOLMAN: The policy question then that hangs over the trillion-dollar student debt overhang: Is there a better way, and, if so, what is it?

JEFFREY BROWN: Paul’s next report looks at the move to forgive student loan debt.

Online, you can figure out whether it’s still possible to work your way through school. You can use our college cost and income calculator.