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Too Big to Fail: Student debt hits a trillion

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Recently, we undertook what we understand is the first major effort to understand the size of the private student loan market. This market went through the same boom and bust cycle we saw play out in markets for mortgages and other credit products.

Our initial findings on the size of the private student loan market are sobering. When we add in the outstanding debt in the federal student loan program, it appears that outstanding student loan debt hit the trillion dollar mark several months ago – much larger than estimates from other recent reports. It seems that this market is too big to fail.

Unlike other consumer credit products, student debt keeps growing at a steady clip. Students borrowed $117 billion in just federal student loans last year. And students continue to borrow private student loans, which lack the income-based repayment and deferment options of federal student loans. If current trends continue, there will be consequences not just for young people, but for all of us.

According to data from the Department of Education, federal student loan debt isn’t growing just with new originations – with so many borrowers unable to keep up with interest payments, debt is growing even for many who have left school. Too much debt means too much risk for a generation of young people, many of whom are struggling in today’s economy.

The lines of job-seekers are long, states are reducing their higher education budgets, and household budgets are straining. Young consumers are shouldering much of the punishment in the form of substantial student loan bills for doing exactly what they were told would be the key to a better life. Large levels of debt might also pose immediate problems for the rest of us.

Excessive student debt can slow the recovery of the housing market. Student loan borrowers are sending big payments every month to their loan servicers, rather than becoming first-time homebuyers. This debt can also put added stress on the borrowing capacity of the household and government sector.

At the CFPB, we are attacking the problem on multiple fronts. Working with the Department of Education, we launched a Know Before You Owe project to solicit input on a “financial aid shopping sheet.” The sheet should help students understand the debt implications of their college choice. We are supervising private student loan providers to ensure they comply with Federal consumer financial protection laws. We are providing tools for borrowers to help them navigate their student loan repayment options. And we set up a student loan complaint system to help ensure that private student lenders and servicers are responsive to potential mistakes and problems that borrowers encounter.

Before we opened our doors, these duties were spread across a myriad of federal agencies. Bringing these functions under one roof means we can better ensure that financial institutions operating outside of the traditional banking system are subject to the same rules of the road as all of you.

But consumer protection is just one piece of preventing a student loan market meltdown. The financial services industry, the higher education community, and policymakers all bear responsibility to address the underlying causes of the growing debt levels.

We all need to understand better and address a number of concerns, such as rapidly rising defaults in the for-profit college sector and high borrowing to gain training in fields with limited opportunities post-graduation. We also need to find methods to get struggling borrowers into alternate payment programs quickly so they can avoid default.

We will continue our conversations with many of you about the steps you have already taken to reduce risk in private student lending. And we can keep exploring what can be done within the realm of consumer financial protection for those who have already graduated with too much private student loan debt.

This summer, we’ll release the full results of our study on the private student loan market. Until then, we must all act to address the impacts that student loan debt has on all of us.

Rohit Chopra is the CFPB’s student loan ombudsman. This post is excerpted from remarks delivered before a conference hosted by the Consumer Bankers Association on March 21, 2012, in Austin, Texas.

  • http://twitter.com/DavidWilton David Wilton

    So what are you going to do about it?

  • Bballinhottie

    I think you should address interest rates in regards to the rising student loan debt!! I can get private loans with lower interest rates then what the government is offering!!

    • Anonymous

      But you can’t go on Income Based Repayment with private loans. 

      • jdruined

         IBR is the biggest scam of them all, have you actually done your research what IBR means for the most people?

        Well, it means that you are fucked for 20-25 years aka the man will taking a cut of your pay check.

        Furthermore, if you get lucky and actually make some money down the road lets say 15 years after school, you will be disqualify from IBR and and all of that unpaid interested will be added to your balance.

        Essentially, if you don’t make it within first year, you are fucked for the next 20+

        Private loans are not much better, but they do not promise to be. Most people assume that federal loans are best thing since sliced bread, but as I said above, banks would kill for such loan terms.

        • Anonymous

          Incorrect. Under the IBR program, you pay 15% of your discretionary income towards your loans. 25 years later, whatever you still owe is forgiven. If you make too much income in the future so that your standard payment would be less than your IBR payment, you pay the standard payment, but you are still in the IBR program, not disqualified, so that your remaining balance is still forgiven after 25 years of payments. Your payments would never be higher than what the standard payment would be. Plus, if you couple that with the Public Service Loan forgiveness program and work in an eligible not for profit or government job, then you can have your loans forgiven in as little as 10 years. 

          And private loans do not qualify, that is all I was saying. Plus, federal loans do not require a credit check. Therefore, while better for some, private loans have serious disadvantages for others. When borrowing, students needs to assess which loans would be best for them in the long run. 

          • jdruined

            To flush the situation further.

            You say that person’s monthly payments could not be greater then what they would under 10 year plan. That still does not address the issue of the intereted being counted, thus after 5 years @ 7%on 150K you would have 50K of additional interest – the payments that you make under IBR. This would come up to 190K. Lets say you make more money after 5 years, would you still have to pay back the full balance (190K)?

            If yes, would the standard payment amount under 10 year plan take actually longer then 10 years to repay?

            Please let me know if I am misunderstanding.

        • http://www.facebook.com/profile.php?id=552802123 Lauren-Noelle Meade

          You have conflicting statements in your argument, so I’m kind of lost. 

          Also, “the man will taking a cut of your pay check [sic]” is not “F’ed”, that’s the point, and it sounds at least as good as any other plan.

        • Null0007

          I don’t think it’s the loan program as much as the loan servicer contracted by the Dept of Ed that fail to follow the rules.  Some of the comments I’ve heard from the customer service reps show that they don’t even understand that they are not a collection agent; that the IBR is a govt program for *everyone.

    • http://twitter.com/theSteveMahoney Steve Mahoney

      Private loans should only be used if you exhaust all federal options.  They are quite dangerous in that the private lenders run by their own rules.

  • Todd Genger

    Unlike other types of debt, student loan debt is not discharged when an individual files for bankruptcy, a crippling consequence in a moribund economy.

  • Amy

    My husband and I pay over $1,000 a month in student loan fees – most of that money goes to a private loan that I took out when I hit my federal loan limit. Private lenders will not adjust payments according to your income, and you can forget about any loan forgiveness when working for non-profits or as an educator. We dream of student loan forgiveness so that we can buy a home and start a family. Unfortunately, it looks like we won’t be in a position to buy a home until we are well into our 40s – about ten years. That pretty much nixes the idea of kids. 

    • Guest

      My wife and I are in the same boat.  We have over 300K in student loans due to us both getting MBA’s.  We have been living with family for last 3 years because we are not able to find employment that pays. Combined we make 70K / year.  We looked at bankruptcy but were told NO.

      • Guest

        If you don’t like this country then move to Russia or Africa. Then you’ll appreciate what you’ve been given by America.

        • http://www.facebook.com/profile.php?id=552802123 Lauren-Noelle Meade

          Troll, that has nothing to do with the comment.

      • http://twitter.com/theSteveMahoney Steve Mahoney

        I realize that Federal Student Loans are NOT eligible for bankruptcy but I assume, based upon your research, that PRIVATE student loans are also NOT forgivable under bankruptcy?

  • jdruined

    You private student loans is your concern, really? I don’t need need protection from private lenders, I need protection from federal gov. My loans have high interest rate, non dischargable in bankruptcy, and interested recapped before repaymenet. Banks would kill for such terms.

    If you really care, clean your house first because federal lending had ruined many from my generation.

  • Asdf

    Why did you censor my comment about how law schools lie about their ability to place graduates, inducing naive youngsters into spending a fortune of borrowed money on degrees that aren’t worth the price?

    • http://pulse.yahoo.com/_UIWHSZHBSUZ47Y5OY7QBDVMM6I ZZ

       I am a lawyer and its too bad they censored your comment because you are correct!  I am blessed to have a job, many are not.   I will never buy or own a home because I have too many loans.  My family was not well off I knew nothing about loans or law school, I was just smart.      Now the loans are just like a huge rock I’m dragging around and will be for the rest of my life.

      • Cemats

        I was fortunate that I started school AFTER I started my career - The perfect example what’s wrong with fed student loans: my mortgage rate is less than the Direct student loan rate AND I owe less after 10 yrs! Why? – Because every bit of extra principal payment must be correctly applied to my mtg – the mtg servicer can’t just change rules or the balance – which is more than I can say for some of the student lenders. I think there’s going to be another Bernie Madoff-like scandle in this industry - very soon.

  • Bored3L

    Look, these are all half measures and you know it. The federal government needs to address this problem seriously. That means either 1) price controls on schools by cutting off federal loan funds for schools with poor placement and high tuition and/or 2) returning the market to normalcy by allowing students to discharge debt in bankruptcy.

    That’s all. You also need to start calculating the true default rate to include people who are on IBR, deferments, or forbearance.
    I know you are just a regulatory agency and not Congress, but you can do at least that much.

    More “transparency” is not going to solve anything when we are told from birth (including by politicians) that college is the path to the American dream and education debt is good debt. It is going to take many years for the reality of higher education in this country to trickle-down to students and by then we may look back on the days of trillion dollar student loan debt as a distant memory. Address this problem NOW so we won’t have to spend more later.

    Federal loan funds are improving “access” to education but are not improving employment outcomes. When everyone has a degree, than the value of the degree as a signaling factor is worthless, and since colleges don’t really provide training for a lot of majors, what is the point?

    • Guest

      Or, maybe you didn’t get a job because you’re in the tiny minority of losers who don’t represent the average college graduate.

  • Thoughtful

    All good thoughtful plans on how to address the problem and raise awareness of taking on too much debt.  However, the issue goes much deeper and is a political problem – how to constrain the ability of colleges to continue to raise tuition/fee levels at much greater than the cost of inflation.  They need to be put on a strict spending diet – but don’t expect that to happen anytime soon, as every time there is an attempt to limit government funding to colleges, everyone screams not to touch my sacred cow.  And I wonder if somone that had it in their mind to attend law school or medical school, or get an MBA because their chosen career virtually requires it – would they not follow those education paths if told only 75%  (or whatever % is more reflective of the turth) of graduates get jobs and at the true level of salary?

  • srh

    Part of the problem seems, to me at least, that there is still this underlying assumption that college automatically means a higher paying job, when it really doesn’t.
    Ideally, research should be done to determine a. which college majors end up with jobs within their field (and salaries) and b. when majors end up with jobs outside their fields, how they came to get those jobs – was it by virtue of having gone to college, or was it another factor like knowing someone who worked in that place – and then grant loans accordingly to the person’s chance of actually being able to repay it .
    A lot of the law school debt that I hear about (and have) would not have come about had law schools reported their employment statistics clearly and accurately. 
    And a fair amount of people who graduated from college at the same time as me (2005) have/had initial jobs that had nothing to do with their major: college seemed to be totally unnecessary for what they had to do and merely served as some sort of social indicator like “I can sit still and be quiet for several hours.”
    College has gotten too expensive to just blindly hand checks over to kids and assume everything is going to work out perfectly for them.  If the cost of school ever goes back down to a reasonable level then maybe lending could be more free, but the odds that kids are taking on simply aren’t very good.

    • Guest

      liked

  • Guest

    CFPB you people couldn’t catch flies if an elephant crapped all over you’re bodies. You think youre going to end the student loan racket? lolololol.

  • Phocion

    Investing in yourself seems like a prudent idea.  Ufortunately, many have made poor choices in selecting their education, schools, and professions.  When does the individual responsibility for those choices become someone elses responsibility? 

    • jdruined

      The same day the school begun promising success, 90%+ rate of employment and median salaries which are in fact nothing more but 10% , in exchange for federal dollars.

      If you put it like that, federal gov might as well accept most of those loans a loss and accept its personal resposibility for giving out taxpayer money to educational fraud.

  • http://twitter.com/LoanReformNow Loan Reform Now

    Thanks for tooting your own horn there and not really addressing any issues other than making a student debt complaint clearinghouse. 

    • Guest

      1. Create a messed up system.

      2. Create an expensive organization that is paid to take complaints on the messed up system.

      3. Profit!

      • Kristinmcarey

         Guest -

        1. Provide a better solution

        2. Explain how it will work

        3. Fixed!

  • http://twitter.com/theSteveMahoney Steve Mahoney

    In speaking with several lawyer partner friends in Denver, they have stated that only lawyers with experience have opportunities.  Very unfortunate for a profession that is so expensive to acquire the degree.

  • Null0007

    The student lenders willingly created this “house of cards” by greedily encouranging default and sloppy loan transfers for the huge unregulated interest and fees. Consumer protection and accountabilitywould make a HUGE difference. The home mortgage industry would not have tolerated the same lack of regulation the student lending suffers from; the fact that the mtg bust occurred within a year or two  reflects this.  In addition, it angers me that private schools that are barely schools at all – some not  even accredited in any way, are able to receive student loan proceeds.           I believe student loans should be restricted to public & state schools ONLY.  If one chooses private school, that’s fine if you can afford it  and can obtain any other sort of loan by way of solid credit. Currently these “so-called” schools sucker low-income and unqualified poor students into schools that will teach them nothing but will keep them in debt for the rest of their lives.   Yale is tuition-free BTW, so if you are poor and are accepted to such an esteemed private school, you won’t need a fed loan anyway.

  • Karenm52

    There are three things that can be done immediately to dramatically change student lending for the better:
     #1. consumer laws applied to all aspects of student lending and borrowing - apply the same safeguards afforded mortgage loans and the mortgage             loan servicing industry for consumer borrowers.
    #2. Limit all student loans – both federal and private –  to ONLY accredited, *PUBLICLY-supported schools and universities students. 
    #3. Student loans should not be trumping child support enforcement. If an individual has been deemed disabled by the Social Security Administration, then it should be mandated that the student loan lender comply. Lenders should not be making their own rules – they should follow the same consumer rules that cover every other form of lending. Owing student loans should not be a valid reason for employment rejection  – which is just too ludicrous (I mean, really -do we need to wonder at this particualr point why a trillion in student loan debt goes unpaid???? -)
    The Federal bailout of lenders like Salle Mae is what fueled this mess;  whenever a loan defaults, lenders smile because taxpayers like you & I get stuck paying by way of the federal guarantor gravy train; rather than waiting to be paid over the life of the 10-20 yr. loan being paid by a borrower, the lender gets a nice big lump sum pay-off immediately; it doesn’t take an Einstein to understand what’s wrong with the student loan industry in the US and how it can be corrected; simply reverse what the lenders lobbied to change in the past 25 yrs.
    My own suggestion: US federal reserve should be selling student loan “bonds” to citizens in the same way savings bonds or tax deeds are sold to citizens.

  • Null0007

    Law & law schools are second only to the student loan debacle; my own personal observation is that law is only lucrative IF you graduated top of your class in one of the better law schools with a high bar pass percentage and you were on the law review staff. That get’s you a good chance of interning at a top firm$$. Without that, chances are you’ll end up making less than the plumber or the local cop chasing ambulances or doing traffic tickets. Same applies to paralegals.  Tell your kids to volunteer in high school in lots of places before you put your money into any career.

  • http://www.swiss-wrist.com/ Rolex watch

    I was very pleased to find this article. I am a late 20-something who has some college under my belt, but am constantly struggling with the decision of whether or not to go back to school and finish my Bachelor’s or not.  Yes I want it to ‘lead to a better life,’ but after talking to many friends and reading articles like this about student debt, I find it harder and harder to talk myself into going back to school.  I figure that school will always be there, and as long as I have a decent job (which I currently have), I will put off school until I can figure out either a way to pay for it with little to no student loans, or until I find a career that will allow me the salary I need without schooling being necessary.  This is, however, still a scary article to take into consideration when I think about having children and what I will do when it comes time for them to attend college.  I will follow your blog for updates though, thank you for posting this!

    -Christina

  • http://twitter.com/theSteveMahoney Steve Mahoney

    Look for schools that have a base per credit cost of $250 – $350/credit based upon level of degree OR $6000 flat rate per year.  If you’d like me to list those option schools, I can.

The CFPB blog aims to facilitate conversations about our work. We want your comments to drive this conversation. Please be courteous, constructive, and on-topic. To help make the conversation productive, we encourage you to read our comment policy before posting. Comments on any post remain open for seven days from the date it was posted.