There is $1.2 trillion in outstanding federal student loan debt as of the end of April, up almost 10% from prior year and 55% from 2007 according to Eduvisors.com. In comparison, there is about $170 billion outstanding in private student loan debt. The difference, not surprisingly, is that nearly all borrowers can get approved for federal loans.
In the midst of a Government policy that encourages massive borrowing without consideration of a young person’s ability to repay that debt, the federal Government is sending out mixed messages about whether the debtor should have to repay that debt at all. The Obama administration established the Pay As You Earn Program, where monthly student loan payments are capped at 10% of borrowers discretionary income (assuming they have any discretionary income) regardless of how much they owe. The borrower can have his or her debt entirely forgiven after 20 years, or after 10 years if they work in the government or for a non-profit organization. Not surprisingly, this program is very popular and expensive to the taxpayer. Coupled with that, a bill is pending before the Senate to allow borrowers to refinance their old private or federal loans into new government loans at lower rates. Critics of the Pay As You Earn program argue that debtors usually have very little discretionary income to repay anything, even though many Government jobs pay the same or more than their private sector counterpart.
On the other hand, the federal government has dramatically stepped up wage garnishments on borrowers who have defaulted on their federal student loans. Wage garnishments are up almost 50% from 10 years ago as college grads, burdened with student loans, are unable to generate sufficient income to service this debt.
Washington is divided over how to fix the problem. Most student loans cannot be wiped out through bankruptcy proceedings. And, the federal government can usually withhold a portion of social security retirement, disability benefits, income tax refunds, and lottery winnings to recover unpaid debt. Some observers say the government should be far more aggressive collecting on defaulting student loans. Many commentators agree that the real problem is a growing federal program that encourages massive borrowing without any consideration of the borrower’s ability to repay that debt. If more care and discretion was given to who was allowed to borrow money, far less energy and effort would have to be put into wage garnishments and collection activities.