The federal student loan program seemed like a great idea back in 1965: Borrow to go to college now, pay it back later when you have a job.
But many borrowers these days are close to flunking out, tripped up by painful real-life lessons in math and economics.
Surging above $1 trillion, U.S. student loan debt has surpassed credit card and auto-loan debt. This debt explosion jeopardizes the fragile recovery, increases the burden on taxpayers and possibly sets the stage for a new economic crisis.
With a still-wobbly jobs market, these loans are increasingly hard to pay off.
Unable to find work, many students have returned to school, further driving up their debt total.
Average student loan debt recently topped $25,000, up 25 percent in 10 years. In Wisconsin, students graduating from a four-year college in 2010 had an average debt of more than $24,600, according to a report from the Project on Student Debt.
The average includes public, private nonprofit and for-profit schools, and only counts students who took out loans during their studies, not the entire student population.
The mushrooming debt has direct implications for taxpayers, since eight in 10 of these loans are government-issued or guaranteed.
School costs outpace inflation
Lifting student debt higher and higher is the escalating cost of attending schools, with tuition increasing far faster than the rate of inflation. And enrollment has been rising for years, a trend that accelerated through the recent recession, fueling even more borrowing.
Mark Zandi, chief economist at Moody's Analytics, argues that government loans and subsidies are not particularly cost-effective for taxpayers because "universities and colleges just raise their tuition. It doesn't improve affordability and it doesn't make it easier to go to college."
"Of course, it's very hard on the kids who have gone through this, because they're on the hook," Zandi added. "And they're not going to be able to get off the hook."
Ryan Gebler, assistant director of financial aid at Lawrence University in Appleton, said officials in the school's financial aid office work with the families of prospective students to make sure they won't have trouble paying off their debt in the future.
"We try to do a lot of work talking to families of prospective students so they understand what these loans will look like in four years," he said.
Others also saddled with debt
Working with a student's family is important because it's not just young adults who are saddled with student loans.
"Parents and the federal government shoulder a substantial part of the postsecondary education bill," said a new report by the Federal Reserve Bank of New York. And some of the borrowers are baby boomers, near or at retirement age. The Fed research found that Americans 60 and older still owe about $36 billion in student loans.
Overall, nearly three in 10 of all student loans have past-due balances of 30 days or more, the report said. Complicating the picture further: Like child support and income taxes, student loans usually can't be discharged or reduced in bankruptcy proceedings, as can most other delinquent debt. This restriction was extended in 2005 to also include student loans made by banks and other private financial institutions.
"This could very well be the next debt bomb for the U.S. economy," said William Brewer, president of the National Association of Consumer Bankruptcy Attorneys.
"As bankruptcy lawyers, we're the first to see the cracks in the foundation," Brewer said. "We were warning of mortgage problems in 2006 and 2007. The industry was saying we've got it under control. Nobody had it under control. Now we're seeing the same signs of distress. We're seeing huge defaults on student loans and people driven into financial difficulties because of them."
A report by his group noted that missing just one student loan payment puts a borrower in delinquent status. After nine months, the borrower is in default. Once a default occurs, the full amount of the loan is due immediately.
For those with federal student loans, the government has vast collection powers, including the ability to garnish a borrower's wages and to seize tax refunds and Social Security and other federal benefit payments.
Student debt not new
Outrage over increases in college tuition has skyrocketed, and politicians have adopted the issue as a political platform.
The Occupy Wall Street movement has shown a light on the effects of living under thousands of dollars in debt, and each presidential hopeful has touted a new way to address the borrowing problem.
But students and college officials don't see large student debts as a new development.
"It just seems to be gaining momentum as people become more aware about the cost of college," said Gebler. "People are more uneasy about borrowing money. It's nothing new. It's just a different environment economically."