Federal Student Lending Swells: The Next Bail Out ?

Josanne Baxter-Engish, at home in California with her son, above, said she stopped repaying $2,900 in student loans because she can't afford it.

The federal government has long sought to make college affordable to many young Americans by offering various grants and loans to help students out. However, student borrowing from the federal government has grown substantially in the last decade and has put millions of college graduates in massive debt, says the Wall Street Journal.

Stafford loans account for more than three-fourths of federal students loans and are capped at a total of $57,500 for undergraduates.

Since the end of 2007, student debt has grown more than 56 percent.

Ninety-three percent of student loans last year were made available directly by the government, which has low approval standards for loans.

U.S. student loan debt rose by $42 billion, or about 4.6 percent in the third quarter.

Furthermore, payments on 11 percent of student loan balances were 90 days or more behind in

September, up from 8.9 percent at the end of June.

The bulk of loans before 2010 were made by private lenders and guaranteed by the federal government. However, under the Obama administration, the federal government started making loans directly to students.

Because the government does not demand collateral, nor does it have any underwriting requirements, students are encouraged to take as much as they need in loans. Considering the job market is bad for many students out of college, it is increasingly difficult for students to pay off their loans.
Moreover, student debt is difficult to discharge in bankruptcy. Because of this, a borrower has a more difficult time trying to take out consumer loans without paying higher interest rates. Parents that take out loans to help their student pay for college are also affected -- some parents owe as much $184,500.

There are some proposals that could help the student loan problem. For example, students can undergo an assessment of credit-worthiness or impose tougher standards. Both of these could weed out potential borrowers, which would result in lower rates of delinquency.
Source: "Federal Student Lending Swells," Wall Street Journal, November 27, 2012.