The Student Loan BOOM

Over the last few weeks, college students have attended commencement exercises to celebrate their graduation. Four years of hard work, term papers, late-night cramming for midterms and finals, all finally coming to an end, with a great job on the horizon.

Not this year.

For the last several years, going back to 2006, prospects for the great job, commensurate with the student's education, has been elusive at best. So many of our kids have found disappointment on the employment line and have taken anything at all just so they don't sit around vegging out on their parents' couches, wasting their life in front of a TV.

I have seen, as I am sure you have, young adults working at Home Depot, Lowes, the grocery store checkout, Mickey D's and other places in order to earn money to begin paying back the enormous debt they accrued either in undergraduate or graduate levels of study. I know a young lady who graduated last year who studied to be an elementary school teacher, was an honor student and took a job as a teacher's assistant just to have a job in her field of study. And she is not alone.

Even Senator Marco Rubio reported recently that after 20 years, he finally made his last payment on his student loans. He is 42 years old, folks, so that is what our kids have to look forward to.

Many students have contacted Sallie Mae, the banks, the credit unions, and whoever else is in the loop as a guarantor or lender to renegotiate the outstanding balance of their loans. Unfortunately, the answer most given is a big fat "NO!"

As a retired banker, I can tell you from my own experience that my bank sold our student loans to the now defunct Wachovia Bank and kept the servicing rights. This means that while the student still paid us, we forwarded the principle and some of the interest to Wachovia and kept the remaining interest as a fee for servicing the loan. In return, Wachovia took on the risk in the event of default by the student.

A good gimmick, right? The same thing was done in the housing market and we all know what happened there.

So now, nobody wants to renegotiate the monthly payment, the interest or any part else of the student loan. And the student can't afford it because the salary, if any, isn't enough to make even the minimum. I know a young lady  who must pay $2,500 a month on her teller's salary. That's a mortgage payment for most of us. And she will probably default if she gets too far behind.

So, what's my point?

Since 2003, tuitions have exploded, even for community colleges and trade schools. That's a fact and we can't reverse that. Schools are not in business to lose money and the outlay of expenses for salaries, benefits and other costs has gone up for colleges as it has done in other areas of the economy.

This is also true for banks and other lenders or guarantors. But there is a difference. Banks will get their money back, either from the guarantor or from the student. It behooves the banks to renegotiate the loans for their customers. That's right. These students are also customers. And if they act in a sensible way toward these young people, loyalty to the financial institution generally is the long-term payback. The problem is that banks have become beholden to the stockholders and have forgotten their roots in customer service.

If banks and guarantors continue to hold a rigid line and refuse to work with the student-debtor, with the amount of outstanding student loan debt over $1 trillion, the resulting default that is coming will be far worse than what happened in the housing market just over five years ago. The economy will never recover from such a disaster. The reason? The debtors will NEVER get the job they were educated to do. And the lenders will never get paid back. Even Sallie Mae  won't be able to cover the guarantees made over the years. Remember, Sallie Mae is a government agency, which relies on taxpayers for its existence.

What to do?

We all need to contact our Senators and Representatives in the Congress to advise them of this problem, that up until now, has meandered along just under the surface. We need to insist that they advise the banks that as part of their receipt of TARP money several years ago, they need  work with this large group of debtors so that the potential for a disaster doesn't cripple the American economy far worse than anything that has occurred in the past.

Otherwise, the boom that's coming won't be the creation of jobs, but rather the crash of our economy.