A Third of All Federal Student Loans Could Go Bad, Treasury Advisory Committee Warns

By Barbara Hollingsworth | November 19, 2014 | 5:18 PM EST

(AP photo)

(CNSNews.com) – Four years after the federal government took over the student loan program, nine percent of student loans are in default and another 23 percent have the potential to go bad as well, according to a report by the Treasury Borrowing Advisory Committee (TBAC).

“Millions of student-loan borrowers are in default on their student loans; many more could face default in the near future,” Deputy Treasury Secretary Sarah Bloom Raskin said during a Tampa speech on Nov. 6th, two days after the report was released.

(See November 2014 Quarterly Refunding Charge 1 FINAL.pdf)

According to data released Nov. 7 by the Federal Reserve, Americans currently owe $1.3 trillion on their student loans. The level of education indebtedness has increased 84 percent since 2009.

”Since the passing of the Student Aid and Fiscal Responsibility Act of 2010 (SAFRA), all federal student loans are made directly by the Department of Education and funded by the U.S. Treasury,” the TBAC report explained. “For a variety of reasons, loan growth is increasing and default rates are high and rising.”

And the current nine percent default rate, which exceeded auto loan delinquencies for the first time ever, is likely the tip of the iceberg.

In June, President Obama issued an executive order allowing borrowers to cap their loan payments at 10 percent of their monthly incomes. But TBAC pointed out that “the principal and interest on the loans capitalize” during this period, “making balances larger for students and exacerbating repayment potential.”

“Outstanding balances [are] declining more slowly than originally anticipated due to both increased volumes of loans in deferral and forbearance as well as longer loan tenors,” the advisory committee said. “Behind the default rate is a shadow book of potential future defaults, reflected in the volume of loans in deferment and forbearance. Those loans add 23% to the 9% that are already listed in default.”

The Class of 2014 is “the most indebted ever,” according to the Wall Street Journal, which pointed out that the average student loan increased 35 percent between 2005 and 2012, while the median salary for 25-to-34-year-olds with a bachelor’s degree decreased 2.2 percent. “It that continues, debt burdens could start to become more unwieldly,” the WSJ noted.

Although supporters of SAFRA initially assured American taxpayers that the federal takeover of the student loan program would save them $87 billion, TBAC says it will likely wind up costing taxpayers more than $88 billion instead.

And that estimate “does not include the potential cost or benefit associated with recent proposals to redesign elements of the student lending program, including: (i) reducing the interest rate; (ii) increasing repayment options; and (iii) addressing the pace of origination with a focus on qualifying institutions eligible for such programs.”

The personal consequences of default for some 40 million Americans with outstanding student loans are substantial. They include a damaged credit rating, loss of tax refunds and other government benefits such as Social Security, fines, revocation of professional licenses and possible wage garnishment until the debt is paid.

“While fixed-rate student debt is insulated from interest rate risk, given the consequences of default discussed earlier, political pressure may nevertheless mount to forgive or extend student debt,” the report added. If that happens, “the gross cost of maturity extension in order to increase the probability of repayment would be approximately $220 billion.”

The report also explained how the failure of many students to graduate is undermining the main goal of the student loan program.

(AP Photo)

“Today an average of 40% of students at four-year institutions (and 68% of students in for-profit institutions) do not graduate within six years, which means they most likely do not benefit from the income upside from a higher degree yet have the burden of student debt….

"This outcome contrasts to the goal behind the Federally subsidized student loans which has been to ensure access to higher education, economic opportunity and social mobility,” and raises “questions about the value of loans for most borrowers.”

“Failure to graduate remains the most deadly of traps for higher education,” the Treasury committee warned.

According to a March study by the New America Foundation, 40 percent of the trillion-dollar student debt was spent on expensive graduate programs, with one in ten borrowers racking up more than $153,000 in combined undergraduate/graduate student loans..

But the study points out that “students pursuing these degrees already have an undergraduate degree, and they should be far more informed consumers. Therefore, they shouldn’t need a lot of public support to finance their next credential.”

Related: Obama's Balloon: Federal Student Loan Debt Up 517% in 5 Years

Obama's Student Loan Plan Will Actually Drive Up College Debt and Tuition

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