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Big Debt on Campus

Student-LoanWatching the movie The Big Short this week made many viewers wonder… Why didn’t more people know about what was going on? And are there other lingering issues in our money based society that we should be concerned about?

Of course our national debt in excess of $18,000,000,000,000 is something to be very concerned about, but something that is less reported is the $1.3 trillion dollars in student loan debt.  Approximately 40 million students share this responsibility and this number like the debt amount is growing rapidly.  The government has the ability to print money to pay off debt while people obviously cannot (the government solution is to make the debt evaporate into thin air).

It’s hard to believe, but nationwide there is more money owed for student loans than auto loans or credit cards!

One reason for the large student loans is that college costs are rising while education funding from the government shrinks.  From 2001 to 2011, tuition and fees at state schools soared 72% and the pace has continued with no end in site.  In my opinion, the biggest reason college costs have soared is the availability of credit to these same borrowers.  If you had to be credit worthy to receive a college loan or your parents were on the hook for the money and the loan was underwritten (you needed the ability to pay it back), then the amount being loaned for college would shrink dramatically.  If loans were not so available, then colleges couldn’t increase tuition costs because few people could afford them.  Imagine what would happen to enrollments at four year colleges if student loans were capped at say $10,000.  Colleges would either be forced to lower their prices dramatically or face huge declines in enrollment.  The opposite has happened, student loan debt is exploding and colleges across America keep raising prices and building more, new, expensive buildings.


I compare this a little bit to the mortgage frenzy when people were allowed to buy homes with no money down, the appraisal would come in for what ever the lender needed it to be, and income verification was almost an after thought.  Poor lending created the housing bubble and we know how that ended…

Over the past 10 years, the amount of student loan debt has nearly tripled, while defaults are at a two-decade high, with nearly 15 percent of borrowers defaulting within three years.  As an illustration, some 600,000 borrowers who started paying federal student loans in 2010 had defaulted two years later

debt quadrupled[1]

Interesting solution by President Obama in 2014 – You pay only a fraction of your loan back and then it’s forgiven entirely.

Currently, this plan caps monthly payments at 10 percent of a borrower’s disposable income and forgives the balance after 20 years of payments. Those aspects of this plan won’t change. Imagine requiring the banks to do this with your home mortgage.

 What will change is the number of borrowers who can take advantage of this option. Currently, only newer borrowers are eligible for this plan.  However, starting in 2015, borrowers who took out loans before October 2007 or stopped borrowing by October 2011 will now be eligible?  Government officials estimate this number to be about 5 million people.
Based on some of the calculations I have seen, roughly 1/3 of your debt could be forgiven after 20 years of making the 10% of disposable income payment.  I do not understand how the lender (our U.S. Government) can simply take out an eraser and forgive the remaining debt.  Obviously a bank would never be able to afford to do that for all its loans.  How will this impact taxpayers as we somehow must get stuck with those debts.
With student debt mushrooming out of control imagine how much debt will be forgiven in the future due to this promise!
What are your thoughts????


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The Real State of the Union


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