With the U.S. making billions off of federal student loan collections each year, it’s easy to see why you don’t see a lot of action or talk in Washington on the subject.
Even rarer is to hear a federal employee make a plain assertion about just how dangerous an investment they can be.
But William Dudley, the president of the Federal Reserve Bank of New York, didn’t hold back Wednesday as he gave a speech outlining the consequences of the bizarre and unique government-run student loan program.
“Unlike virtually all other forms of credit, student loans are generally not underwritten: they are frequently offered to young borrowers who have little or no credit history and little to no current income. The amount of credit extended, on average, runs in the tens of thousands of dollars. These loans are also not collateralized, nor are the interest rates risk-based. However, lenders (now primarily the taxpayers), are given additional security in that student loans, unlike other forms of debt, are not dischargeable in bankruptcy. This also means that delinquent student loans tend to remain on a borrower’s credit record long after the borrower has stopped making payments, thus leading to very high measured rates of delinquency. In addition, many special programs exist to allow borrowers to postpone repayment on their student loans to an extent not available for other kinds of household lending. New York Fed economists have shown that for the 2009 cohort of graduates, only 17 percent of their original debt had been paid down after five years. More than 20 percent of high-balance student borrowers owe more now than when they graduated in 2009. For the 2005 cohort of graduates, only 38 percent of their original student debt had been paid down, on average, nearly ten years after graduation.”
Put even more simply, because the government has the ability to get its money back through basically any means necessary — eliminating the bankruptcy option, being able to garnish your wages, your tax returns, Social Security income — the student has no recourse.
They are also stuck paying them back for even longer, something President Obama has made worse with his generous payment plan programs. This program may help financially stressed students, but in the long run it hurts both the country and the debtor.
Dudley goes on to say that while student loans help a lot of students, they aren’t right for everyone and the current system hands some a raw deal.