The Hidden Burden

72%

- According to ProjectStudentDebt.Org, the percentage of students in 2007 who graduated from the University of North Carolina School of the Arts with an average college loan debt of $18,000.

This September, bankers trekked to Washington DC and were handed the equivalent of the cost the Iraq war with no strings and no questions asked. The auto industry is asking for the equivalent of twice their combined market value.

No one is discussing a bailout for people carrying student loans.

How important relief to student loan holders is, was driven home to me while cleaning house and indulging in my guilty pleasure of watching TRU TV (formally Court TV) reality shows. In a show about repo men, a young woman who had had her car repossessed, sat on the curb and cried, “They’ve taken my car! How am I going to get to work? I have $35,000 dollars in college loans!”

This scene is, I am sure, being repeated on curbs and living rooms all across the country.

Since 1995, the average annual tuition cost for both public and private universities has doubled, (http://nces.ed.gov/pubs2008/2008022_3b.pdf, pg 467). Over 70% of college students leave school with some sort of college debt. The amount of student debt rose 6% between 2006 and 2007. During the same period, earnings for 18-24 year old graduates rose only 3%, (Student Debt for the Class of 2007. Report released by ProjectStudentDebt.Org in Oct 2008). The US Department of Education will provide $83 Billion worth of financial aid loans this year, (Department of Education website at Ed.Gov).

This load of debt represents a secret drag on the economy. When graduates are laid off - as they will be in this economy – they are still liable for what they owe. This could force them into a bankruptcy that will follow them for years. If they do have jobs, their debt load will prevent them from getting mortgages to buy a home, get credit, or start a business.

People are staggering under a mountain of debt. They have so much debt that even if the banks were lending, consumers have too much debt to borrow. The average amount of credit card debt per U.S. household in 2007 was $9,840 - an increase of 25% since 2000. According to the Federal Reserve consumers in the US carry $2.6 trillion of all kinds of consumer debt - an increase of 24% from just 2003.

Delinquencies for credit cards are on the rise. According to the American Bankers Association in the first quarter of 2008, bank-card delinquencies jumped to 4.51% - above the five-year average delinquency rate of 4.4%. (This information may be found in Forbes magazine at http://www.forbes.com/finance/2008/09/12/credit-card-debt-pf-ii-in_jl_0911creditcards_inl.html?feed=rss_finance).

Since September, politicians, business people and economists have proposed different ways to stimulate the economy. The goal of all of these plans is to put money back into people’s hands so they can spend and save. The fastest way to do this would be reduce personal debt loads. Less money going to debt service is more money that goes into the economy.

The most effective way the government can address the problem of personal debt load is to forgive or reduce college loans. This is one of the major financial levers the government has access to. It is also an option that has not been discussed at all.

If the government forgave or reduced loans from 1999-2008 it wouldn’t cost more than Paulson’s $700 Billion plan to bail out the banks - which had no impact on the current economic crisis. But forgiving $10,000 of loans per student loan holder would provide a direct jolt to the economy both in the short and long term. Its price tag would be finite and stable as the Government would know the exact dollar value of loans forgiven.

The effects of forgiving Federal student loans would flow into the economy faster than Obama’s public works proposals, and would be broader and less expensive than McCain’s idea of buying bad mortgages. Easing the burden of college loans could also reduce personal bankruptcies, which would preserve loan holders’ future ability to obtain a mortgage or car loan.

There are other benefits to this approach - and not all of them financial. How would the culture of the country be enriched if artists, who graduated from the University Of North Carolina School of the Arts, could practice their art without having to slow, sidetrack or give up their careers to pay student loans? How many more teachers would we be able to hire for public schools if loan holders did not have to worry about paying back a college loan on a school teacher’s salary?

The point of the banker’s bailout was to “unfreeze” the credit markets and get people and corporations spending again. The banks took the money and ran. There was no accountability and they have simply used the money to clean their balance sheets. It is now time for the government to help people who wear Nike’s, sweatshirts and carry backpacks, and not just those who wear Gucci, Armani and carry briefcases.