The insanity of the private loan market is part of the excesses of the entire credit industry in the past few years. Understanding one means understanding the other.
On March 30, President Obama signed a historic student loan reform first attempted by President Clinton back in 1993. By cutting banks out of the lending program, he saved a projected $40 billion in subsidies that will be redirected to the Pell Grant, making college more affordable for millions of students. The bill also expands access to Income-Contingent Repayment, which allows graduates to limit their student loan payments to 10 percent of income, a standard rule in other countries.
The student loan beast is bloodied, certainly. But it’s not yet on its knees. More changes to the federal student-aid system are required to relieve thousands of people already saddled with unaffordable debt, to calm the growth of private loans, and to tame tuition increases.
The liftoff of college tuition into the stratosphere in the past thirty years, and especially the past decade, is concurrent with, first, the rise of student loans, and later the secondary market for loans that saw them repackaged into attractive, government-backed securities for investors. Student-loan volume more than doubled in the past ten years, from $44.6 billion to $94.5 billion annually. Student loans now make up the majority of all tuition aid. More than two-thirds of undergraduates take out student loans, and the ability to finance tuition through loans and home-equity lines of credit has made families less sensitive to tuition increases -- a vicious cycle that leads from rising tuition to increased debt loads back to rising tuition, and so on.
http://www.alternet.org/books/146349/how_a_new_generation_can_avoid_getting_bankrupted_by_student_loan_payments/
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