Student Loan Debt: The $1.2 Trillion Industry

John Russell

Student loan debt held by U.S. students represents $1.2 trillion. The average student borrower will graduate $26,600 in the red. But this is only for an undergraduate degree, which doesn't make you particularly competitive in the job marketplace. Post-graduate or professional degrees are much more crippling.

Medical school student loan debt, for instance, totals an average of $278,000 at private schools and $208,000 at public schools, according to the Association of American Medical Colleges. Interest rates on student loans are at credit card levels--and rising. So, because student loans are paid over the space of years (or decades), the debt can balloon to two or three times the original sum.

Student loan debt is often viewed as an investment, like a house. If you want to live in a house, and don't have the $200K to pay for it, you get a loan. But student loan debt is fundamentally different: a degree is not a house. When you buy a house, a bank will only approve the loan if the house is worth as much as or more than the amount of the loan. The house serves as collateral for the home loan; if you default on your loan, the bank repossesses and sells your house to get their money back.

There is no equivalent collateral for student loans. And how could there be? While certain colleges provide demonstratively better returns on investment than others, there is no equivalent way to guarantee a student loan. If a student defaults on their student loan, does a lender repossess the last 4 years of the student's life or sell their degree to repay the debt?

No. For example, a recent top story featured the Masons, two parents who recently lost their daughter and took in her three orphaned children. Because the Masons had co-signed their daughter's $100,000 student loan, they were now stuck paying an accrued debt of over $200,000.

The business-backed political intrigue includes a 2005 Bankruptcy bill stipulating that private student loans are one of the only types of loans that cannot be legally discharged--meaning they cannot be cleared under any circumstances. Including death. So now the Masons have no daughter, 3 grandchildren, and $200,000 in their late daughter's student loan debt.

The 2005 Bankruptcy bill made private student loan debt non-dischargeable, transferable and final; the combination of which spawned a new market, student loan debt insurance. For a monthly fee, student loan debt insurers will happily pay back student loans in the event of your death, something that would have helped the Masons. Such insurance will also pay back your incurred loans if you decide to not complete your degree, which happens to one-third to one-half of undergraduates.

But such tactical maneuvers are simply demonstrations that clever minds find creative ways to take money from the student's pocket and put it in their own. These are business strategies; big, lucrative business strategies. Not solutions. The root problem seems clear; student debt is too high.

Inquisitrs, what do you think?

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