Mary Altaffer/AP

Would Forgiving Student Loans Boost the Economy?

March 26, 2009 10:30 AM
by Anne Szustek
As Wall Street gets billions in bailout money, people struggling to pay off student loans are wondering where their bailout is.

Student Loan Campaigner: “My Only Assets are My Couch and Television”

New York lawyer Robert Applebaum graduated from Fordham Law School in 1998 with $80,000 in student loan debt. He then went on to take a job in the Brooklyn District Attorney’s office with an annual pay of $36,000. Unable to balance student loan debt on that salary with the high cost of living in New York City, he put his loans on forbearance for five years, letting interest accrue while deferring monthly payments. The principal on his loans grew to $100,000.

“Despite having a law degree, I’m middle class and I don’t have any money at all,” Applebaum told BusinessWeek. "I don't own a house or a car. My only assets are my couch and television.”

Meanwhile, he was watching newscasts about banks receiving billions in federal dollars, while their executives refurbished their offices and took spa vacations. In frustration, Applebaum started the Facebook group “Cancel Student Loan Debt to Stimulate the Economy.”

He only expected that a few friends and acquaintances would join. Within two months of starting the group, it gained 180,000 members and developed into an organization that’s now appealing to Congress to address its cause.

Monthly student loan payments often total hundreds, if not thousands, of dollars a month. The statement of the Facebook group argues that if the money were used to forgive student loan debt, it would do more to revive the economy than the promised tax cuts stipulated under last month’s $787 billion stimulus package. Furthermore, the manifesto continues, banks and lending institutions would not suffer, because they’re already receiving bailout funds
The student loan industry has taken steps to alleviate debt burden. For example, Sallie Mae, the nation’s largest provider of college savings, announced this week that it is replacing its traditional private loans with the Smart Option Student Loan Program, which allows students to begin paying off the loans while still in school, lowering the outstanding principal on the loan by the time they graduate.

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Background: Student loans, the economy and graduate indebtedness

Detractors of the Facebook group’s cause (visible as commenters to the BusinessWeek article) may say that students shouldn’t take on so much loan debt. Yet the country needs public defenders, government servants, journalists and teachers—careers that require a pricey education, but don’t have the highest starting salaries. Others might suggest that students choose a less costly institution.

But student loan statistics show that choosing better-paying careers and cheaper schools have had little impact on paying down students’ debt: “about 40% of students who did graduate work in medicine, law or business have student loan debt levels exceeding their current salaries,” according to a 2008 report released by student lender Nellie Mae. “Twenty-five percent of undergraduates who attended four-year private institutions, compared to 21% of those who attended four-year public institutions, have student loan debt greater than their current incomes.”

Private higher-education institutions often have large endowments that they can tap to give grant money to needy students, which may narrow the price advantage between a public and private school. However, the downturn on the Dow and the credit crunch have taken a hit on university endowments and student lenders’ coffers are drying up, making educational financing that much tougher. Families are thus turning to private student loans, rather than federally backed loan programs such as the Perkins and Stafford, to meet the gap. The volume of private student loan lending is far outpacing that of government student loans—25 percent annual growth compared to 8 percent a year.

Many private lenders have been unable to keep up, due to the prevailing economic conditions. In a bid to help resuscitate the private student loan market, the Federal Reserve announced the formation of a $200 billion lending facility in November, under the Troubled Assets Relief Program, or TARP. And in May, the Department of Education made an agreement to buy up federally backed student loans, such as Stafford Loans, issued by private lenders.

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