The financial tidal wave of 2008 left millions of American homeowners "underwater," owing more on their homes than their properties are worth.
This has decimated consumer demand and destroyed countless dreams.
Yet homeowners are not the only group of Americans who find themselves "underwater." After decades of skyrocketing tuition and stagnant wages, American students and graduates now often owe significantly more on their student loans than their degrees are -- in dollar terms -- worth.
This week, President Obama took a decisive stand for students, fighting to prevent a three-point hike in interest rates on federally-subsidized Stafford loans. Over the past several months, he has also proposed an accelerated income-based repayment program and new incentives for states to contain costs. These are steps in the right direction. But we need more decisive action to get America's "underwater" students and graduates back on dry land.
The ever-growing cost of getting a degree is at the heart of the problem. Public institutions, where a majority of students are educated, have steadily increased tuition as public financing has declined. Amidst unprecedented state budget cutting, average public tuition increased by an astounding 8.3 percent in 2010 alone.
With many of their parents facing pay cuts or unemployment, students have had to take out more and more loans to cope with these quickly rising costs. The average borrower graduating from a public or private institution owed an unprecedented $25,250 according to recent figures. Americans' outstanding student loan debt obligations now exceed $1 trillion.
The problem is not just the immensity of the debt. It's the scarcity of opportunity for borrowers.
While the unemployment rate for new college graduates stood at 9.1 percent in late 2011, a recent Rutgers University study found that only 53 percent of a random sample of recent graduates of U.S. four-year universities were holding full-time jobs. Even fewer were making use of their university-level skills.
That explains why delinquency and default rates for student loans are rising sharply -- even with income-based repayment programs in place. Students who studied hard, played by the rules, and are now desperate to find work are being denied basic opportunities and are, accordingly, falling behind on payments. They are finding that their degrees, like homes at the height of the real estate bubble, were vastly mispriced assets that are now hard to finance. Yet, unlike the debt from a home bought in the boom years, it is impossible to walk away from the debt incurred by getting a degree. A student borrower cannot discharge or even refinance their debts in bankruptcy, regardless of how desperate his or her situation becomes. And, if a student borrower does default, he or she will face perpetually rising interest rates and compounding fees with no hope of escape. Mike Konczal, a prominent blogger, has rightly called this "modern-day indentured servitude."
We must set these students free.
This month in the U.S. House, I have proposed H.R. 4170 -- The Student Loan Forgiveness Act of 2012 -- which would eliminate many of the awful consequences of educational indebtedness. In doing so, it would give Americans greater purchasing power, helping to jumpstart our economy and create jobs.
The bill provides full loan forgiveness for current borrowers who have paid the equivalent of 10 percent of their discretionary income for 10 years or who are able to do so over the coming years. It moreover caps interest rates on federal student loans at 3.4 percent and enables existing borrowers to break free from crushing fees by converting many private loans into federal loans.
Crucially, Americans who are behind on their payments due to a setback such as unemployment or illness would be eligible to enroll in the new program. The bill seeks to ensure that no one would be consigned to "indentured servitude" because of a stroke of bad luck.
To control costs and create prudent incentives for both students and institutions going forward, the bill allows future enrollees in the program to receive forgiveness up to a limit of $45,520 after paying up to 10 percent of discretionary income for 10 years. Under the bill, both current and future borrowers could still opt for the benefits of the existing income-based repayment program as an alternative.
If you support this solution, please join the movement by signing your name at hr4170.com. Also, please consider asking your Representative in Congress to sign on as a co-sponsor.
For at least a century, this country has run on an implied social contract that says "if you study hard and work hard, you'll have a steady middle-class income and a stable career."
Let's reinstate that contract and put student borrowers back on higher ground.