Borrower – and lender – beware

by Brian Clarey

A milestone was reached last week — and not one of the good kinds.

For the first time in US history, student loan debt surpassed credit card debt, $830 billion vs. $825 billion. It’s a not-unexpected development in these bubble-icious times when red figures on balance sheets far outweigh the black ones. But this is significant on a number of levels.

For one, student loan debt is not like other kinds of debt. Student loans cannot be discharged through bankruptcy; this is debt that, for the most part, will follow the borrower to her dying day.

For another — these days especially — many student loans are built on empty promises.

As factories and manufacturing plants closed by the hundreds in the last dozen years, the blue-collar apocalypse left in its wake millions of unskilled workers desperate for income. In response, many of them bought into another blueprint for prosperity: getting an education, learning new skills, shaping their own destinies through scholarship at public, private and for-profit schools which, they were told, would qualify them for the few good jobs that remained in this country and in this economy. Most of them, particularly adults, relied on some form of student aid to make it happen.

And while some were able to parlay their heavily leveraged educations into jobs that enabled them to pay off their mounting debt, many now find themselves with expensive slips of paper signifying little more than their willingness to take on debt in hopes of bettering themselves.

This is evident in the default rate of student loans. One in five government loans issued since 1995 has entered into default. That number goes up slightly for two-year institutions, and swells to 40 percent for students from for-profit schools.

Borrowers will find that their student loan debt can increase with the same magnitude as a subprime ARM. Stories abound of borrowers whose debt quickly escalated exponentially after prolonged periods of unemployment or hardship — you can read some of them for yourself at — or just ask around. Chances are you know someone who is in trouble with their student loans.

In this way, the situation looks quite a bit like the mortgage crisis — except the lender cannot reclaim something as intangible as an education, and the borrower cannot walk away from the debt, even with bankruptcy protection, ever. Another difference is that most student loans don’t come from banks — they come from the federal government.

One solution would be to return student loans to the same status as all other loans, allowing protection to lenders under bankruptcy. But that would do nothing to help the millions of citizens who borrowed money on the promise of a better future that seemingly does not exist.

But what’s really amazing to us is how two of the most important elements of the so-called American Dream — an education and home ownership — have led to so much misery.

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