The federal lending program designed to make college education available to everyone is creating a pile of debt so large it is fanning worries that it has become too easy to borrow too much.
U.S. student-loan debt rose by $42 billion, or 4.6%, to $956 billion in the third quarter, the Federal Reserve Bank of New York said Tuesday. Overall household borrowing fell during that period.
Payments on 11% of student-loan balances were 90 or more days behind at the end of September, up from 8.9% at the end of June, a rate that now exceeds that for credit cards. Delinquency rates for all other consumer-debt categories fell or were flat.
Nearly all student loans—93% of them last year—are made directly by the government, which asks little or nothing about borrowers' ability to repay, or about what sort of education they intend to pursue.
President Barack Obama championed easy-to-get loans during the campaign, calling higher education "an economic imperative in the 21st century." A spokesman for Education Secretary Arne Duncan said the goal is "to make student loans available to as many people as possible," and requiring minimum credit scores would block many Americans from going to college.
But rising student-debt burdens and stories about students and parents drowning in debt, coming just a few years after aggressive mortgage lending triggered a financial crisis, is focusing attention on risks to the government and borrowers.
"Is there any way the federal government could possibly come out to the good?" Sen. Bob Corker (R., Tenn.) asked at a Senate Banking Committee hearing in July on student loans, noting that the government demands no collateral and has no underwriting requirements. "What we're really doing is piling up debt down the road the same students are going to have to pay off."
Others are asking whether the government is encouraging students to take on too much debt. "The way the system works now…put money on the stump, people come and get it," said Anthony Carnevale, director of Georgetown University's Center on Education and the Workforce. "Can't blame them. It's sitting out there in plain view. It's easy to get."
Unlike most other types of consumer credit, student debt is extremely difficult to discharge in bankruptcy. After falling behind on payments, a borrower typically finds it harder to obtain other types of consumer loans, or can only do so at higher interest rates.
Moody's economist Cristian deRitis earlier this year warned of the prospect of a wave of future student-loan defaults that could have a "crippling effect on the ability of many households to access credit in the future."
So-called Stafford loans account for more than three-fourths of federal student loans. They impose no credit standards and are capped at a total of $57,500 for undergraduates. Some of the money can be used to cover living expenses. For loans to parents and some graduate students, which have no upper limits, the government weeds out borrowers with an "adverse credit history," such as a bankruptcy filing in the previous five years.
The goal is expanding access to higher education for Americans such as Sheila Orcaz-Miller of Las Vegas. A 39-year-old mother of two, she borrowed $50,000 to attend University of Phoenix, a for-profit school, where she earned a bachelor's in business management. That helped her go from being a paralegal to a hotel-management job that she said pays substantially more—between $70,000 and $80,000 a year.
For other borrowers, student debt has added to existing financial problems.
Joanne Smith, 53, of Port Richey, Fla., had filed for bankruptcy three times and was unemployed in 2004 when she started borrowing through the government's Parent Plus program, which enables parents to borrow for their children's tuition. Her mother co-signed the loan, which helped cover her son Tim's education at Embry-Riddle Aeronautical University in Daytona Beach. He graduated in 2010 with a degree in engineering physics. Ms. Smith, who is disabled and unemployed, now owes $184,500 on student loans. Her son owes roughly $45,000.
Ms. Smith said the government allowed her to postpone repaying the loans until this summer, and she is now two months behind. She said the $1,985 monthly tab exceeds the roughly $1,600 a month she receives in disability income. "All I could think about was I got to get my son into college," she said.
Mr. Smith, 26, is about to start a job making about $60,000 a year as a software engineer for an automotive-parts company in Illinois, and said he hopes to help his mother pay off the loans.
Student lending grew rapidly in the 2000s, as did other consumer borrowing. The bulk of the loans were made by private lenders and guaranteed by the federal government. In 2010, in a money-saving effort pushed by Mr. Obama, Congress cut out the private middlemen and had the federal government start making loans directly.
Since the end of 2007, just before the financial crisis hit, total student debt has grown by more than 56%, adjusted for inflation, the new Fed data show. During that time, overall household debt—including mortgages, student loans, auto loans and credit cards—fell by 18%, to $11.31 trillion as of Sept. 30.
Earlier this year, New York Fed researchers said that their reported delinquency figures understate the problem because many borrowers are not yet required to make payments, either because they are still in school or have been granted a postponement. The unemployed, for example, can defer payments for a limited period.
Jackson Toby, a retired Rutgers University sociologist and adjunct scholar at the conservative American Enterprise Institute, said the federal-loan programs are "just putting a millstone around their necks" by saddling borrowers with debt without regard for their ability to repay it.
He proposes that students undergo a comprehensive assessment of credit-worthiness, including how much debt they currently have, their academic history and their expected income upon graduation, given their major, before getting federal student loans.
Imposing tougher standards would exclude some potential borrowers. "You would have loans only going to upper-income students at the best colleges," said Mark Kantrowitz, who publishes Finaid.org, a student-aid website.
In an effort to reduce defaults, the Education Department has tightened standards for loans to parents and grad students, prohibited federal lending to schools if more than a certain percentage of its graduates default over several years, and allowed borrowers to postpone payments during periods of "hardship." The administration also has finalized rules that enable certain borrowers to have their remaining debt forgiven after 20 years, provided that they make monthly payments at 10% of discretionary income—down from the previous standard of 15%.
Loans to students attending for-profit schools have been especially prone to problems. Such students account for 12% of total undergraduate college enrollment and 22% of Stafford loan funds, according to the College Board. Among those whose federal loans came due in the year ended Sept. 30, 2009, 23% defaulted—meaning they went a year without making a payment—within three years, Education Department figures show. That compares with a 13% default rate among students at all institutions.
Josanne Baxter-English, 35, of Roseville, Calif., filed for bankruptcy in 2003, had her car repossessed and amassed several thousand dollars in credit-card debt. In 2010, she visited the University of Phoenix. She said she warned recruiters of her poor credit. "They're just like, 'Don't worry about it. With these federal loans, it will be paid for,'" Ms. Baxter-English said.
Mark Brenner, a spokesman for the university's parent company, Apollo Group, said the school provides every student with detailed information on expected costs after graduation and available financial-aid options. "Students have the opportunity to go in with their eyes wide open," he said. The school, he said, handled Ms. Baxter-English's case appropriately.
Ms. Baxter-English, a mother of two, dropped out after a year and now makes less than $20,000 a year in an entry-level position at a construction company. She estimates she owes $2,900 in student loans. She said she and her husband, a tattoo artist, stopped paying because they couldn't afford it.