In New York state, collegians have defaulted on almost $2 billion

ALBANY -- At New York's colleges and universities, the arrival of a new school year brings anticipation tinged with anxiety. For many students, the second emotion is prompted by one nagging question: How am I going to pay for this?

Many of them won't be able to find an answer. The Higher Education Services Corp., which services and collects federally backed college loans in New York, has almost $2 billion worth of defaulted debt on its hands.

As of July 1, HESC listed 145,437 accounts with $1,983,922,931 in college loans that had gone into default. That's up from last year, when there were 144,216 borrowers for a total of $1,895,211,727 by the end of July.

In 1991, the defaulted sum was just $230 million.

HESC, a state-operated agency, was in the news last month when Inspector General Joseph Fisch reported that some of its employees, including Assistant Vice President of Collection and Default Management Joseph Catalano, had given preferential treatment to a handful of friends and acquaintances. Additionally, Fisch's office found that in an effort to save state jobs. HESC personnel tried to obstruct the turning over of $1.25 million in accounts to private collectors. Six HESC employees were subsequently suspended.

Despite the IG's findings, some observers say the rising defaults simply reflect tough economic times and rising college costs.

"Students are graduating and they don't have jobs," said state Sen. Toby Stavisky, D-Queens, who chairs the Senate Higher Education Committee.

"Are people being encouraged to take on more debt than they can reasonably be expected to repay?" asked Assemblywoman Deborah Glick, D-Manhattan, who chairs the Assembly's Higher Education Committee.

Along with the lack of jobs, college prices have been rising at rates two and three times that of inflation, said Barmak Nassirian, associate executive director for the American Association of Collegiate Registrars and Admissions Officers.

As many as 540,000 students may default on their student loans

Carmen Gardiner, 25, a 2007 graduate of Louisiana State University, is weighed down by her private student loans. Her debt is now about $80,000, and her monthly payments are more than $600. Gardiner's undergraduate degree is in psychology. She lives with her husband, who is still in college, and earns $13 an hour at a call center in Atlanta. They have a 6-month-old daughter.

She hasn't defaulted on her student loan. But she doesn't see much hope. Bankruptcy would not discharge her debt.

"I'm completely sour about the whole idea of going to college," she says. "My future is gone before I have a chance to make one. But if I could discharge this using bankruptcy, it would be better than winning the lottery."

There is little information about unregulated private student loan debt. But during an investor meeting, Sallie Mae, the USA's largest private student lender, recently projected that 40% of $6 billion in subprime private student loans will default, according to Student Lending Analytics, an independent research company. That means 360,000 to 540,000 borrowers are likely to default on their loans, SLA said.

The only way that people with private student loans can get help in bankruptcy is if they can prove undue hardship. And to do that they have to go through a separate trial, which is an extra cost, involves witnesses, legal assistance and extra expertise, says Deanne Loonin, staff attorney at the National Consumer Law Center. It is a huge barrier.

But in April, both the Senate and House introduced legislation to allow for private student loans to be dischargeable in bankruptcy. Before the bankruptcy law changed in 2005, only government-issued-or-guaranteed student loans were protected during bankruptcy.

"The high interest rates on private student loans have made them incredibly profitable for loan companies and saddled students with crushing debt," said Sen. Dick Durbin, D-Ill., who first introduced this legislation in June 2007.

Gingrich: This is a government bubble soon to burst

We have been in a long cycle of government employee unions, bureaucracies, and politicians building systems that are more and more expensive, more and more inflexible and more and more incapable of meeting the challenges of the modern world. This process has affected Europe and Japan as well as America.

Its final, collapsing phase is being signaled by the Greek debt crisis, the Japanese 21 year cycle of deflation and slow growth and the financial crises in many of our state capitals, of which Sacramento and Albany are the biggest examples.

The Obama-Pelosi-Reid Secular-Socialist Machine is making the bubble problem bigger and more dangerous, but this is simply the last phase of a long process of unionization, bureaucratization and steadily rising costs of government.

Today government has become the fourth recent bubble.

The first three bubbles were information technology in 1999, housing in 2007 and Wall Street in 2008.

Looking back everyone wonders why we didn’t see those three bubbles coming.

The failure to anticipate them and to take appropriate, corrective steps before it was too late has caused enormous pain in the American economy and for the American people.

This fourth bubble is even bigger and more dangerous. If we don’t get state, federal and local spending under control we will have a wave of crises that will shatter our economy with higher interest rates and a series of state and local defaults.