Schools Pass Debt to the Next Generation

The following is an excerpt from an article in 

The New York Times
Friday, August 17, 2012

Schools Pass Debt to the Next Generation

By FLOYD NORRIS

The deleveraging of America is well under way, as individuals and companies recover from the excess borrowing that helped to produce the boom and left many people vulnerable when the bust arrived. Household debt is down nearly $900 billion over the last four years, partly from repayments and partly from defaults.

During the crazy times, homeowners could get mortgages that allowed them to pay less than the full amount of interest being charged, with the rest added to the principal. Commercial property owners generally paid the full amount of interest, but did not have to repay any principal until the loan matured in five or 10 years. For both homes and commercial properties, lenders were willing to rely on extremely optimistic appraisals.

For property buyers, those days are gone,

But for some borrowers, it is still possible to borrow now and pay nothing for decades.

There is a furor in California because the Poway Unified School District, in San Diego County, borrowed money last year on terms that even Countrywide would have laughed at during the boom. It will not pay a dime of interest or principal for more than two decades. Only then will it begin to service the bonds.

It is paying a high price. Although it has a good credit rating — Aa2 at Moody’s and AA– at Standard & Poor’s — it will eventually pay tax-exempt interest of up to 6.8 percent for the borrowings. When it issued more conventional bonds last year, it paid rates that were much lower, ranging up to just 4.1 percent.

For borrowing $105 million in 2011, taxpayers — or perhaps it would be more accurate to say the children and grandchildren of today’s taxpayers — will pay $877 million in interest between 2033 and 2051.

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