Senator Dick Durbin on student loans and student debt

Senate Democratic Whip Richard Durbin speaks during a news conference at the U.S. Capitol November 1, 2011 in Washington, D.C. He says the next big credit bubble in this country will come from student loans.

Jeremy Hobson: The amount of outstanding student loan debt in this country has reached $1 trillion. And if you scan the headlines this week, you'll find school after school raising tuition, which will almost certainly send that $1 trillion number up even further.

Democratic Senator Dick Durbin of Illinois is trying to address this issue at the federal level and he joins us now from Washington. Good morning.

Dick Durbin: Good morning.

Hobson: Well, the numbers sound pretty scary. Americans owe now about $1 trillion in student loan debt and people are falling behind on these loans. How serious of a problem is this right now?

Durbin: You know I think this is the next credit bubble, and unfortunately, Congress has virtually ignored it.

Hobson: What are they supposed to do about it?

Durbin: There are several things. First, I think the president was right to call out the institutions of higher learning in his State of the Union address, and tell them that this dramatic increase in the cost of tuition and fees is unsustainable. Secondly, the institutions that are involved in this -- many of them, particularly the for-profit schools -- are luring kids, and many times their parents, into debt obligations which basically they'll never be able to repay.

Hobson: When you say it's the next credit bubble, do you mean that it would have an impact beyond just students who owe this debt -- on the broader economy, the way that the mortgage bubble did?

Durbin: I'm not sure it'll have the same impact, because real estate is such a central part of the economy. But imagine if you will thousands of students across America defaulting on their debts, but being stuck with debts that are not dischargeable in bankruptcy.

Hobson: Who's at fault here? Is it the lender? Is it the school that's charging too much -- what?

Durbin: I think it's a variety of things. But basically, the for-profit school industry is driving this train, and unfortunately, it's not going in the right direction. Ten percent of the students who have graduated from high school are in for-profit schools. Secondly, the for-profit schools receive 25 percent of all the federal aid to education, and almost 50 percent of all student loan defaults come from for-profit schools. So this is a trend line with ought to be frightening, but unfortunately, Congress has really refused to respond.

Hobson: Let's talk about a non for-profit school in your home state -- and my home state, by the way -- the University of Illinois, which is raising tuition about 5 percent this year. It's gone up 25 percent in the last five years. How are people supposed to be able to afford this?

Durbin: That's a very valid question. It reflects the fact that the state of Illinois is in terrible shape financially, and is not providing assistance to education as it did in the past -- particularly higher education. And so these institutions are raising their tuition rates to meet that need. I just think all higher education has spun itself into a level that's unsustainable. I mean, some of the cost here, of $10, $15, $20,000 of debt each year is just considered normal.

Hobson: Senator Dick Durbin of Illinois, that's so much for joining us.

Durbin: Good to be with you.


About the author

Jeremy Hobson is host of Marketplace Morning Report, where he looks at business news from a global perspective to prepare listeners for the day ahead.
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I don't usually agree with President Obama, but he finally got this right: Increases in college costs are unsustainable. Several studies have focused on the number of administrative positions at colleges, both private and public. In the past 2 decades, the ratio of administrators to teachers has risen 200 - 300% depending on the state/study. Anyone who has dealt with college bureacracy can tell you how insane the number of departments are and how crazy the level of job specialization is.

In Tennessee, it is ridiculous. I have a friend who works for a state college, and the number of stories of fraud and waste he can tell you are disturbing. Unfortunately, I don't think Tennessee is much worse than other states.

As long as we provide unlimited funding to higher education, either through additional taxpayer funds, or through allowing constant tuition hikes, and without real oversight, their bloat will continue.

Here's how to fix student loans.

First, survey college graduates, and determine the salaries they received during the first 5 years after graduation, and coorelate that information with their university and major. Use that data to determine a federal loan guarantee cap. Loans in excess of that figure would be dischargeable in bankruptcy, and would not be backed by the DOE. This would have the effect of forcing tuition costs down, since the wide availability of student loans has caused rent seeking behavior by universities, who effectively charge whatever they can get, and students have no choice but to take out loans to meet the university's demand.

Drawing the distinction between "for-profit" and "not-for-profit" schools is misplaced. As the Senator himself stated, "the state of Illinois is in terrible shape financially, and is not providing assistance to education as it did in the past -- particularly higher education. And so these institutions are raising their tuition rates to meet that need."

The issue is not between "profit" and "not for profit" because public institutions are acting like "for-profit" schools in order to meet funding requirements.

The real issue is multifaceted:
1) The interest rates that students must pay for student loans is often around 7.25% (nearly double current interest rates for a home mortgage);
2)Public schools continually raise tuition rates because state governments continue to cut education funding in their budgets (yet some states have trouble attracting industries because they lack an adequately educated workforce);
3) Students often need to obtain private loans to supplement government-backed loans (loans are practically given to any student who applies);
4) Loans are practicably not able to be discharged in bankruptcy, thus lenders really have no incentive to adequately screen an applicant's ability to repay the loan; AND
5)Often the typical standard repayment plan is too high for graduates, thus essentially forcing them to enter an extended payment plan to be able to make payments. This results in accrual of high interest and the student being indentured to student loan payments for nearly three decades.

Let's get real. This is more evidence that college is not the best thing for everyone.

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