$1 Trillion in school loan debt called "too big to fail"

Paula Duffy's picture

Student loan debt has reached a $1 trillion says the Consumer Financial Protection Bureau, and the housing market is hurting as a result of it.

The latest figure on the massive amount of outstanding student loans is much much than previously expected. In a speech given to Consumer Banking Association late last week, Mr. Rohit Chopra estimated that the $1 trillion mark was reached sometime around the beginning of the new year.

Previously reported as hovering around $850 billion in fourth quarter 2011, that figure came from studying consumer credit reports from one company in the field, Equifax.

Last fall the Federal Reserve reported the stunning news that student loan debt exceeded the total outstanding consumer revolving credit debt. Since that time concern about delinquencies on student loan paybacks has grown, some of it related to the high percentage held by private banks. Many private institutions don't offer loans with deferment options like federal student loan programs and defaults are on the rise as a result of that.

The uptick in student loan debt has many causes, one of which is the number of adults, some nearing what would be retirement age, who have returned to school. Many are unemployed or fear a pink slip and are earning credits and taking vocational training classes to get them back in the job market with new skills.

The latest numbers come from the Consumer Financial Protection Bureau, created in 2010 in the wake of the banking and credit crisis. It studied the private student loan market as well as the federal loan programs.

In a statement issued by the Bureau, Mr. Chopra who is the CFPB’s student loan ombudsman, called the number "sobering" and characterized it in the words that became famous during the days of the TARP program and the bank bailouts, "too big to fail."

The statement reads in part: "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."

One of those consequences relates to the rebound of the real estate market in the country. According to Bloomberg Businessweek, the first-time buyer market remains depressed, despite home prices that became more affordable after the serious collapse of the real estate market.

First-time buyers lift construction numbers for new housing as well as encourage existing homeowners to move up said Ben Bernanke, Chairman of the Federal Reserve. It is estimated that first -time owners make up the smallest percentage of homeowners in general, than at any time in the past decade.

Many prospective buyers saddled with student loan debt are not even living on their own. Almost 6 million 25 to 34year-olds now live with their families, up 26 percent from when the recession started in 2007, according to one real estate news site. The age range is said to be the most "prized" for the housing sector.

Mr. Chopra promises some help to student burdened with loans and to those shopping for a way to pay for college costs.

"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." The full text of his statement, can be found here.

Image credit: Wikimedia Commons/Dragonfire 1024

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