Student loan debt is not ‘good’ debt

Come graduation time next month, there will be many grandparents — many with student loans themselves — sitting at the ceremonies for their grandchildren, who will leave college with their own education loans. Some in both groups will take those loans to their graves.

The balance of student loans outstanding in the United States has been growing for years. Until the Great Recession, people thought the level of debt being carried by borrowers was manageable. They thought the good jobs would come, making the debt a good investment. This sentiment is changing in the face of the reality that the loans are a hardship for many, especially seniors who either took out loans for themselves or borrowed and or co-signed for their children or grandchildren.

Using data from Equifax credit reports, the Federal Reserve Bank of New York has found that people 50 and over are carrying nearly $135 billion in student loan debt. Those 60 or older have student loan balances of more than $36 billion.

The total outstanding student loan balance now stands at about $870 billion, surpassing the total balances due on credit cards ($693 billion) and auto loans ($730 billion).

Of the 37 million borrowers who had outstanding student loan balances as of the third quarter last year, 14.4 percent, or about 5.4 million borrowers, had at least one past-due student loan account.

“With college enrollments increasing and the costs of attendance rising, this balance is expected to continue its upward trend,” the New York Fed report said. “In sum, student loan debt is not just a concern for the young. … Given that student loans are an indispensable tool for educational advancement, this form of debt will remain a critical policy focus for generations to come.”

You see, this is the problem I’ve had all along with student loans. The loans have become indispensable. As far back as 2006, Deanne Loonin, an attorney with the National Consumer Law Center, predicted that many student loan borrowers would face a lifetime of debt with little or no chance of escape.

“For all too many Americans seeking to advance themselves through education, the student loan programs are similar to a bait-and-switch scam,” Loonin wrote in the report “No Way Out: Student Loans, Financial Distress, and the Need for Policy Reform.” “They are lured in at the outset, usually when they are quite young, by flexible underwriting and eligibility standards and the promise of economic rewards through education. After school ends, this aura of benevolence quickly disappears.”

Just recently, the National Association of Consumer Bankruptcy Attorneys provided more evidence in yet another report that student loans are the next “debt bomb” that will result in another economic crisis. The group’s members say they are seeing an influx of people who want to file for bankruptcy to get rid of the loans but can’t.

During a massive overhaul of the bankruptcy laws in 2005, lenders succeeded in making private student loans as difficult to discharge through bankruptcy as are federal student loans, which are backed by the U.S. government. Compared to private loans that often have viable interest rates, federal loans typically have lower interest rates and offer better repayment terms and options.

Student loan debt can only be discharged if the debtor can prove that repayment of the loan would result in “undue hardship.” But few people have the money it takes to pay for such litigation, the bankruptcy attorneys’ association said.

Legislation was introduced last year in both the House and the Senate that would allow private student-loan debt to be discharged in bankruptcy. Borrowers would still have to pay off any federal loans, however.

Getting that legislation passed will be tough and, really, it won’t solve the problem. Ever since the debut of my column in 1997, I’ve cautioned against the growing reliance on debt to fund a college education. I never embraced the notion that student loans should be viewed as “good” debt. Hearing this kind of pitch, people didn’t see the dangers in having debt that could be stretched out for 20 to 40 years.

This is no Chicken Little story. The sky is falling for many borrowers who are dragging student-loan debt into their senior years. We have to act to come up with a comprehensive plan to eliminate the overreliance on debt for education because the debris from this debt bomb has already dropped on far too many families.

Michelle Singletary: singletarym@washpost.com.

Washington Post Writers Group

>Correction: In an earlier version of this column, the amount of student debt carried by those over 50 and over 60 was incorrectly reported. The column should have said that people 50 and over are carrying nearly $135 billion in student loan debt. Those 60 or older have student loan balances of more than $36 billion. The column has been corrected.

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