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What JPMorgan CEO Dimon gets wrong about the student debt crisis

JPMorgan Chase CEO Jamie Dimon, in his annual letter to investors, blamed the federal government for the rise in default rates for student loans.

Since 2010, when the government took over student lending, direct government lending to students has gone from approximately $200 billion to more than $900 billion – creating dramatically increased student defaults and a population that is rightfully angry about how much money they owe, particularly since it reduces their ability to get other credit.

Student loan experts disagree with Dimon's analysis. The bank-based Federal Family Education Loan (FFEL) program was phased out and replaced with the current Direct Loan program as part of the Health Care and Education Reconciliation Act of 2010 signed into law by former President Barack Obama.

"It is inaccurate to suggest that the federal government has managed the Direct Loan program any better or any worse than the FFEL lenders did," said Mark Kantrowitz, vice president of strategy for college and scholarship search site Cappex.com. "The percentage of Direct Loan dollars in default is similar to what it was under the FFEL program prior to 2010."

Jamie Dimon, chief executive officer of JPMorgan Chase & Co.
Christophe Morin | Bloomberg | Getty Images
Jamie Dimon, chief executive officer of JPMorgan Chase & Co.

For the 2016 fiscal year, which ended Sept. 30, there were $68 billion in Direct Loans for 4 million borrowers and $97 billion in FFEL loans to 6.9 million borrowers in default, according to the Department of Education. That means 7.2 percent of the outstanding Direct Loan portfolio and 29 percent of the outstanding FFEL portfolio were in default.

A comparison between Direct Loan and FFEL portfolios is not appropriate, Kantrowitz said, since most defaults occur within the first five years of a loan entering repayment. That means the FFEL portfolio is almost entirely in repayment, while the Direct Loan portfolio continues to have loans added as new students go to college. And more of those loans could default.

"We do not currently have a student debt problem so much as a college completion problem." -Mark Kantrowitz, Cappex.com

"Growth in loan volume is largely due to growth in college costs and anemic increases in the federal Pell grants," Kantrowitz said. "Although milestones like a trillion dollars in student loan debt are impressive, what matters more is the impact on individual borrowers."

Students who drop out of college are four times more likely to default than students who graduate, and college dropouts represent nearly two-thirds of the defaults. "We do not currently have a student debt problem so much as a college completion problem," Kantrowitz said.

However, student loan experts do agree with Dimon's larger point that the debt is a drag on the American economy.

"The banking industry is right to be worried about heavy debt burdens of young consumers," said Rohit Chopra , a senior fellow at the Consumer Federation of America and a former student loan ombudsman at the Consumer Financial Protection Bureau. The high debt loads mean that young workers will delay buying a home, saving for retirement or starting a business, Chopra said.

"But the answer is not hand the keys back to Wall Street," Chopra said. "We tried that before and it failed miserably."