Crushing student debt is not only killing dreams, it’s hurting the broader economy.

The Consumer Financial Protection Bureau (CFPB) is warning of the “potential domino effects” to the economy of high student debt.  A just-released report from the consumer watchdog highlights the ways this debt can deplete savings, limit spending, and shape choices about a graduate’s career path and where to live.

“College can open up many opportunities, and we do not want that college degree to become more of a burden than a blessing for those saddled with unmanageable debt in a tough employment market,” said CFPB director Richard Cordray in a statement. “So we are concerned that unmanageable student loan debt may be harmful to recovering consumer markets and may be dragging down borrowers’ lives.”

The average amount of student loan debt for the Class of 2011 was $26,600, a 5 percent increase from approximately $25,350 in 2010, according to The Project on Student Debt.

In February, the consumer bureau asked for suggestions on ways to encourage affordable repayment options for those with existing student loans.  It received more than 28,000 comments from borrowers, lenders, businesses and government officials.

An analysis of these comments found several major areas of concern.

• Housing: Student debt may reduce home ownership by limiting the borrower’s ability to qualify for a mortgage or even save for a down payment. This is troubling because first-time home ownership stimulates the economy and makes it possible for existing homeowners to “move-up” to another house.
• Small Business Development: Outstanding student loans can limit a graduate’s ability to save enough capital to start a small business or access small business loans.
•  Retirement Savings: Student loan payments can divert cash from retirement savings. The CFPB cites recent research that shows only half the workers under age 30 have enrolled in their employer’s 401(k) plan and barely 40 percent contribute enough to receive a full employer match. Graduates may need to rely on their parents, who are nearing retirement age, to help pay their debt.

Rohit Chopra, the CFPB’s student loan ombudsman, told NBC News the comments show student loan debt is having a negative effect on how millions of people live their lives.

“Many borrowers expected their college education to be a vehicle to a better life,” Chopra said. “College graduates do earn more money than those who do not have a college degree, but for those with heavy levels of student loan debt it might mean a more difficult time buying a car, simply to get to work. If their credit is hurt, it might mean they won’t pass employment verification checks to get that job in the first place.”

Hopefully, things will get better as the economy recovers and graduates are able to get better-paying jobs that let them pay off debt. But right now, Chopra said, “many borrowers, particular those with private student loans, are struggling.”

So what can be done about this?
The report outlines a number of options suggested in the public comments. Some are market-based solutions; others would require a public policy change. Here are a few of the possibilities:

•  Create refinance options for those who pay on time: Borrowers who graduate, find a job and make their payments on time will typically pay back their loan in full. And yet, they may not be able to refinance their high-rate private student loans with a lower rate that reflects their lower risk to the lender. With some type of “refi relief” these borrowers could potentially save thousands of dollars.

• Help for those in distress: There aren’t many options for borrowers who are trapped in private loans and unable to make the payments. Last year, the CFPB reported that lenders and loan servicers are often unwilling to negotiate affordable terms. The proposed “road to recovery” program would be a negotiable, transparent, step-by-step process where the lender lowers monthly payments to match a reasonable debt-to-income ratio. 

• A fresh start for those who default:  What if lenders worked with these borrowers to design a payment plan that would let them get out of default and repair their credit?  This “clean slate” payment option could have a ripple effect; making it possible for borrowers who default to get a good job and get back on their feet.

At a public hearing in Miami Wednesday night, CFPB director Cordray said the future of this country is linked to the growing burden of student loan debt

“What is at stake is whether some of our most motivated and ambitious citizens – who have the talent to make something of themselves, and lack only the means – will be able to rise and form part of the future leadership of this nation,” Cordray said in prepared remarks. “If instead their hopes and dreams are diverted, discouraged, and defeated by the crushing burdens of a debt that ruins their prospects, we all will be poorer as a result. So this problem should be sounding an alarm bell for all Americans.”

You can read the complete report  or get a factsheet on the Consumer Financial Protection Bureau’s website.

Herb Weisbaum is The ConsumerMan. Follow him on Facebook and Twitter or visit The ConsumerMan website.

Paul Hellstern for NBC News Digital

Karla Gourley, a nurse, has put further studies on hold because the interest rate on Stafford loans are set to increase to 6.8 percent this summer. She and her son, Clayton McEwen, live in Oklahoma.

She loves her job as a nurse and makes a pretty good living at it, but Karla Gourley’s dream is to become a nurse practitioner.

It’s a step up that Gourley figures would increase her current salary of $55,000 by as much as $30,000, while giving her more freedom to pursue the kind of health care work she loves.

She’s putting that dream on hold, for now.

Gourley, 36, is worried that interest rates on the subsidized Stafford loans that she had planned to rely on for her bachelor’s degree in nursing will double unless Congress intervenes. That would add to the already daunting cost of going back to school.

“I’m going to wait until they decide what they’re going to do,” said Gourley, who currently works with lung cancer patients at a hospital in Oklahoma City.

The news this week that interest rates on newly issued government-subsidized Stafford loans could rise to 6.8 percent, from 3.4 percent, is just the latest worry for many Americans who are already weighing the burden of debt against the expected payoff of a higher education. 

“It’s the one major student loan-related issue that’s risen up,” said Mark Kantrowitz, publisher of FinAid.org, a subsidiary of jobs site Monster.com that lays out options for tuition aid.

For now, raising the interest rates is just one option on the table. In his budget released this week, President Barack Obama also proposed having the interest rates tied to market rates.

Any change in those student loans - currently among the most affordable available - would affect a wide swath of students, including some of the most financially strapped.

About 31 percent of undergraduates relied on government-subsidized Stafford loans to fund at least part of their education in 2011-2012, according to the College Board. About 69 percent of those loan recipients (or their families) had adjusted gross income of under $50,000 a year in 2008 according to Kantrowitz’s latest data.

Related: Hey 2013 college grads, we want to hear from you!

The stress over the Stafford loans also is a symptom of broader, growing unease about student loans in general.

Private and government-backed student loan debt has ballooned to around $1 trillion by some measures, as the cost of going to college has risen steadily.

 Meanwhile, easy access to student loans, combined with the weak job market, has left many former students unable to pay off their debt.

The high levels of student debt were even cited this week by Federal Reserve members as one potential threat to household spending.

Despite the high costs, the percentage of Americans enrolling in higher education has continued to rise. Experts say that makes sense, since there’s also plenty of evidence that it’s still worth it to get a college degree.

A batch of government data released earlier this month showed that people with college degrees are still earning more than their less-educated peers.

A separate analysis of government data, released by the Economic Policy Institute earlier this week, also found that unemployment rates for young college grads are much lower than for young high school graduates who are furthering their education. Still, both groups are facing higher rates of joblessness than before the economy soured in late 2007.

Gourley said the uncertainty over interest rates is another example of how little control she feels she will have over education costs.

That’s got her wondering if she should just try to pay for her training out of pocket. To do that, the mother of three would probably have to take nine years – instead of three – to complete her training. That would mean she’d have to delay her goal of retiring by age 62.

 “That puts me closer to 70,” she said.

Gourley also has to consider how much student loan debt she and her husband may have to take on for her 17-year-old son, who is currently a junior in high school. The family has saved $8,200 for his education, but unless he gets a scholarship or other grants she may need to take out as much as $30,000 in loans for him.

Gourley already is setting aside money for her three-year-old and four-year-old daughters. Like many Americans, she thinks an education will be key to their success, despite the daunting cost.

“With my kids, I feel they most absolutely will have to have a degree, or have some sort of vocational technical training or have some sort of skilled trade,” she said. “The days of our fathers or grandfathers are gone.”

The interest rate on new government-subsidized Stafford loans is set to double on July 1 – to 6.8 percent from 3.4 percent – unless Congress acts to stop it. And there’s no guarantee it will.

In his budget plan released on Wednesday, President Obama proposed having the interest rates on new Stafford loans tied to market rates.

Christian Walker, an economics and political science major at Northern Arizona University, needs Stafford loans to stay in school next year. He already expects to graduate with $50,000 in debt.

“Raising the interest rate on those loans just compounds the problem and increases the amount of money I’ll have to pay back after I graduate,” he said. 

It’s truly déjà vu for families who rely on Stafford loans to help pay for college. The interest rate hike was going to take effect last year, but faced with a nationwide backlash, Congress agreed to delay the increase for one year. So here we are again.

Student groups and college educators across the country have called on Congress to stop the rate hike, which would affect more than 7 million students. The consumer advocacy group U.S. PIRG estimates that doubling the interest rate on Stafford loans would add another $1,000 to the cost of each loan – and many students need one loan for each year of school.

Related: Will you be affected by an increase in student loan interest rates?

“The argument against it is the same as it was last year: The interest rate is way too high,” said Ethan Senack, U.S. PIRG’s higher education associate. “At a time when students and their families are already facing massive debt, this is a cost increase they simply cannot afford.”

The average student in this country already graduates with $26,600 in loan debt, according to the Project for Student Debt at the Institute for College Access & Success.

“It’s scaring everyone on campus,” said 19-year old Tori Uyehara, a freshman at Southern Oregon University. “We can’t afford the amount of interest we’re paying right now. Doubling the interest rate is just too much.”

What if the rate doesn’t go up as planned?
The non-partisan Congressional Budget office estimates the loss to the U.S. treasury would be nearly $6 billion a year.

But Terry Hartle, senior vice president of the American Council on Education (ACE) believes lawmakers should consider the interest rate spread when deciding what to do.

“The government is borrowing the money at about 2 percent and lending it at 3.4 percent," Hartle said. "They don’t need to get a 6.8 percent return."

The council, a trade association of about 2,000 public and private colleges and universities, wants Congress to keep the current interest rate and prevent student debt from increasing.

What can we expect?
As you might expect, Congress remains divided on this issue along political lines. Republicans think the rate should go up, Democrats don’t.

The Senate budget resolution, authored by Sen. Patty Murray (D-Wash.) would keep the interest at 3.4 percent.

"The cost of a college education has never been higher, and students across our country can't afford higher interest rates for Stafford loans," Sen. Murray said in an email to NBC News.  

Republicans in the House are talking about a long-term solution that would change the way the interest rates on Stafford loans are calculated.

At a recent hearing on student loans, Rep. John Kline (R-Minn.), chairman of the House Committee on Education and the Workforce, said he wanted to see government “move away from a system that allows Washington politicians to use student loan interest rates as bargaining chips, creating uncertainty and confusion for borrowers.”

One idea being discussed is to replace the fixed rate arbitrarily set by Congress with a variable rate tied to some market indicator, such as Treasury notes.

Supporters of this idea, including some educators, believe a floating rate would make more families eligible for these popular loans.

In his budget plan released on Wednesday, President Obama proposed having the interest rates on new Stafford loans tied to market rates. Because those rates would not be capped under the President's proposal, consumer advocates are not happy with it.

In a joint news release, a number of consumer groups said: "While the President’s budget keeps rates low in the near term, we’re disappointed that it risks sky-high interest rates in the long term."

A final word
T.J. Legacy Cole, a political science major at Florida Agricultural and Mechanical University, needs a Stafford loan to finish his last semester. He knows how important it is to balance the budget, but he hopes Congress will consider the big picture.

“They need to understand that education is the key to our future, not debt,” he said.

What do you think? Share your thoughts with me on Facebook.

Herb Weisbaum is The ConsumerMan. Follow him on Facebook and Twitter or visit The ConsumerMan website. 

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Meet your new professor: Transient, poorly paid

Here’s the good news: Bankers seem pretty confident that most Americans will continue to pay off most of their consumer debt on time.

Here’s the bad news: They’re not nearly as optimistic about Americans’ ability to deal with ballooning student loan debt.

A new quarterly survey of U.S. banks’ risk managers finds that more than six in 10 expect student loan debt delinquencies to increase in the next six months. Only about 13 percent expect delinquencies to decrease.

The survey of 215 risk managers, released Tuesday by the credit risk analysis firm FICO, shows that student loan delinquencies have been worrying bankers for most of the year. Nearly 64 percent of the bankers surveyed in the previous quarter had predicted an increase in student loan delinquencies, and about half were expecting such a rise when the survey was conducted in the first three months of the year.

The survey found that bankers were much more optimistic about Americans’ ability to pay off other types of debt.

About two-thirds of the bankers surveyed said they expected delinquency rates on credit card debt to stay the same or go down in the next six months. About three-fourths were expecting delinquency rates for car loans and residential mortgages to stay flat or go down.

Despite worries about rising student loan debt, it appears Americans are continuing to borrow heavily to fund their education. On Friday, the Federal Reserve reported that consumer credit for things like car and student loans rose by nearly $14 billion in August from July. In total, U.S. consumer credit rose by more than $18 billion in August.

Financial experts have traditionally said that it’s OK to borrow some money to pay for college because the investment should pay off with higher earnings and more stable employment. In recent years, many adults also have flocked back to school in the hopes that more education would give them an edge up in a tight job market that increasingly prizes specialized skills.

But the high cost of college and easy access to student loans have left some Americans deeply burdened by debt.

According to the College Board, for students who received a bachelor's degree in the 2007-08 academic year, the median debt load was about $7,960 for public institutions, $17,040 for private, not-for-profit institutions and $31,190 for-profit institutions. The figures include students who graduated with no debt.

Related:

Student loans, backed by government, crushing families 

 Economy leaves many returning students disappointed, deep in debt

Loving the job, but hating the student loan debt

Photo courtesy Frank Ferko

Sister Mary Joseph of the Sisters of the Holy Family of Nazareth, left, and aspiring nun Nicole Ferko.

Nicole Ferko’s $60,000 in student loans made her put off her dream of becoming a nun for a decade.

Ferko, who lives in Grand Prairie, Texas, graduated from a private Ohio Catholic university in 2002 and walked away with a huge loan burden.

“I knew I wanted to give my life to God, but I expected after college I’d go right in and work toward becoming a sister,” she said. But she discovered that individuals looking to become priests or nuns need to be debt free.

It took her until late last year to pay off her loans because she was unable to find many good-paying jobs and ended up racking up $20,000 in credit card debt. With the loans and credit cards paid off, Ferko, 32, is now on track to become a sister with The Sisters of the Holy Family of Nazareth, but she won’t reach her ultimate goal of donning a nun's habit until she’s 39 because the process takes that long.

“I thought I’d be a sister by almost 30 -- not almost 40,” she said. “If I had to do it all over again, I would have been smarter to have saved a lot more money.”

Hefty student loan debt is hampering the career dreams of many graduates whether they’re looking to enter religious vocations or work for corporate America. And with the rising cost of college tuition and increases in student loan default rates, the problem of graduates saddled with debt and unable to fulfill their work aspirations is expected to get worse.

Indeed, the average student-loan debt for graduates jumped 25 percent from 2000 to 2010 to nearly $17,000 in inflation-adjusted dollars, while average wages for workers 25 to 34 with bachelor's degrees dropped by 15 percent over the same time period, according to the Progressive Policy Institute.

Many students can’t afford to go into work that doesn’t pay well because sometimes they have hundreds, even thousands of dollars in monthly loan payments. Others who want jobs in offices or factories are being turned away because they have developed bad credit histories due to their student-loan debt, said Steven Rothberg, founder of CollegeRecruiter.com, which helps connect students and recent graduates with entry-level jobs.

In some cases where students have federally subsidized loans, Rothberg said, it’s better not to even take a low-paying job, because if you’re unemployed you don’t have to make loan payments.

A large number of corporations now do credit background checks on job candidates, and that spells trouble for graduates who have been late or have defaulted on their student loans. 

According to a Department of Education report released late last year, student loan defaults are on the rise, increasing to 8.8 percent in fiscal year 2009, up from 7 percent the previous year. And 27 percent of student-loan borrowers are more than 30 days past due on payment, according to a recent report by the Federal Reserve Bank of New York.

And with more employers relying on credit checks, that's bad news for grads looking for work.

“An employer may not appreciate that a student loan was the cause of that, and even if they do they still may be very concerned about hiring somebody who is messed up financially,” said Rothberg.

Credit background checks -- now used by 13 percent of employers for all job candidates and 47 percent of the time for certain jobs, such as in financial services, according to the Society of Human Resource Management -- have come under fire in recent years because they may run afoul of the nation’s labor laws by impacting minority candidates disproportionately. Some states have moved to ban credit reviews for job candidates, but for now it’s an issue job seekers with credit problems must deal with.

When it comes to vocations within certain Christian orders, the issue of student loan debt, or any debt, won’t be going anywhere because it’s part of religious law, said Brother Paul Bednarczyk, executive director of the Chicago-based National Religious Vocation Conference, which commissioned a study that looked at the issue of debt-laden students looking to go into religious life.

The study by the Center for Applied Research in the Apostolate at Georgetown University, released this year, found 69 percent of religious orders “turned away at least one person because of student loans. In addition, many religious communities ask young people to delay their applications to enter because of educational debt.”

With tuition rising at a rate of 5 percent annually, Bednarczyk said, “the problem will only get worse in the future.”

As a result of the report, he said, his group is putting together guidelines to deal with candidates with debt. In some cases, religious orders have paid off applicant student debt but it’s becoming more financially stressful for these communities to pick up the tab, he explained.

“Since 1978, college tuition has increased by 900 percent,” he noted. “The president is trying to pass legislation to assist with that but that applies to people in college today -- not graduates.”

He referred to legislation that would keep interest rates from doubling to 6.8 percent on certain subsidized student loans. 

At a time when the nation needs more individuals entering religious vocations, Bednarczyk said: “We have to turn people away because they’re too poor to take the vow of poverty.”  

Student loans are now the No.1 debt burden that Americans carry, eclipsing credit card debt for the first time last year, The New York Times reports. The total is expected to hit $1 trillion this year.

Two-thirds of graduates who earned bachelor's degrees left college with debt in 2008, the Times reports, compared with less than half in 1993. The average student owes $24,000, which is usually repaid over 20 years.

Mark Kantrowitz, the publisher of FinAid.org and Fastweb.com, who compiled the estimates of student debt, told the Times a large number of Americans "will still be paying off their student loans when it's time for their kids to go to college."

Wondering how close America is to that $1 trillion? FinAid.org has a handy clock that tallies the number. According to the site, the "clock is intended for entertainment purposes only."

America's student loan debt is more than $870 billion and on a pace to surpass a trillion dollars by 2012. In financial terms, the amount is staggering. In personal terms, the impact is widespread.

People are defaulting on their student loans at an alarming rate; the total doubled over the last five years. And it begs the question: Are we witnessing this country's next economic crisis?

In this video, CNBC correspondent Scott Cohn shares the story of a Midwest couple - both unemployed at the time of his interview - that has more than $250,000 in unpaid student loans. With the accrued interest, they are facing a total bill that's more than twice the original loan. It's a heartbreaking tale from a family - with three small kids - trying to survive.

Cohn hosts a documentary tonight on CNBC called "Price of Admission" and could be worth a watch.