The Student Debt Crisis: Meet The Monster

Washington has shown little concern about the destructive potential of its next economic monster, America's ballooning student debt burden. Although the Financial Crisis should have taught the feds a thing or two about the perils of indiscriminate lending, Uncle Sam continues to invigorate his latest Frankenstein by lending to nearly any aspiring student for nearly any degree program (continuing to drive-up the cost of tuition in the process). And he has a perverse incentive to continue his reckless lending policies: he's pocketing tens of billions of dollars annually from financially-strapped student loan holders.

But Washington better start considering the potential economic fury of its latest monster. Nearly half (41%) of student loan holders have been behind on their payments over the last 5 years, and, last year, a full 12% of borrowers were in outright default on their student loans. At the current rate of growth, the student loan default rate will eclipse the historic maximum default rate for home loans, 14%, by mid-2015.

The mortgage crisis, of course, put us in this terrible economic condition in the first place.

As a testament to the insufficiency of this seemingly-endless economic "recovery", the rate of default on student loans has grown steadily since the 2009 economic bottom, even as the default rates on other types of loans have begun to decline. (Article continues after chart.)

Here are some more unsettling facts about the student debt monster from Kyle McCarthy, contributor to the Huffington Post's college section:

Seven Million Defaulted:

Out of the nearly 40 million borrowers, about seven million have defaulted on these student debts. Translation: 7 million (or about 2 percent of the population of the United States) have had their credit trashed as a result of their student loans and can have 25 percent in penalties added onto their total student loan debts. To add insult to injury, about 60 percent of employers run credit checks on applicants before hiring or promoting, making it close to impossible for millions to get a higher paying job to actually repay these debts.

Average Student Debt Increases While Wages Decrease:

Since 1999, student debt has increased more than 500 percent. Unfortunately, average salaries for young people have not. In fact, since 2000, the average salary for young people has decreased by 10 percent. It's no wonder that we are seeing millennials delaying starting families, making car purchases and buying homes.

Delayed life milestones create opportunity costs for the economy.

According to the non-profit American Student Assistance, the origin of student borrowers' repayment difficulties has been the persistently-high unemployment and underemployment caused by the Fed and federal government's last monster, the housing bubble.

As a side note, a buddy of mine recently asked me why student loans aren't dischargeable by bankruptcy like other kinds of loans. I told him that it's because indebted students--unlike investment bankers--have little lobbying power in Dr. Frankenstein's laboratory on the Potomac.

Seth Mason, Charleston SC