When Student Loans Go Bad, We’re All on the Hook

There’s not going to be a bailout for the next financial crisis because the federal government already owns the bad debt. 40% of federal student loans are given to parents and students with subprime credit scores, and 11% of the Parent Plus loans are already delinquent (no payments made for over a year). We’ve racked up over $1,200,000,000,000 in student loan debt — quadrupled since the year 2000 — and the government is not showing signs of slowing down.

What does this mean?

National debt isn’t necessarily a bad thing, but debt without a secure backing is. The problem with this student loan debt is that it’s going to people without consideration of their degree or their ability to pay those loans back. These loans can’t be wiped out in bankruptcy, and the debt can sometimes be passed down to children, so even as more loans are given, the interest on the currently issued ones continues to grow.

What happens to bubbles?

They burst. Eventually.

What can we do about it?

Two things need to happen:

  1. The federal government needs to find a better way to fund college for disadvantaged applicants. Loans allow students from diverse economic backgrounds the opportunity to go to college. We have to continue doing that, but it can’t happen by extending more credit to subprime borrowers. Grants, scholarships, need-based aid, and regulations that push colleges to admit students from diverse backgrounds are all better options. In addition, the government needs to hold colleges accountable for their growing costs.

Former startup CTO turned writer. Founder of Draft.dev

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