Tuesday, January 24, 2006

An Empire built on Lateness

My latest GenDebt column is about Sallie Mae's lending practices. It seems that a lot of people end up owing 2, 3, or 4 times more than they originally borrowed, outlandish amounts that they could never pay off in a million years.
This is a danger that haunts borrowers of all types, but I believe the problem is worse for student loan borrowers, for these reasons:
1) Unlike credit card debtors, students have no choice but to borrow their way through school. It's the acceptable, responsible thing to do.
2) Besides the fees and inflated interest rates that happen if you're a "bad" borrower (making late payments), you can also get in trouble for being a "good" borrower. If you take advantage of deferments so as not to become delinquent, you'll get walloped with even more charges in the end.
3) Because student loans are not dischargeable in bankruptcy, the banks have no incentive to settle. Often, if your credit card debt is "charged-off" (ie, sold to a collection agency) that agency will accept less than the face value, because they acquired your debt for less than face value. With student loans, the banks can turn your debt over to the Department of Education, which can seize your tax returns, your wages, social security, etc etc etc.

5 comments:

letsbhonest said...

You write, "students have no choice but to borrow their way through school."

Isn't "no choice" and "borrow their way through school" a bit of an exageration? Forty percent of students graduate with no student loan debt. A large percentage graduate with a very manageable amount of debt.

Why do you insist on making the "problem," as you define it, seem worse than it really is?

Anonymous said...

You write, "students have no choice but to borrow their way through school."

Isn't "no choice" and "borrow their way through school" a bit of an exageration? Forty percent of students graduate with no student loan debt. A large percentage graduate with a very manageable amount of debt.

Why do you insist on making the "problem," as you define it, seem worse than it really is?

Anonymous said...

I'd venture a guess that most of those who don't borrow for school are very wealthy. The problem is that the middle class and much of the lower class are forced to borrow to attend school. You can say that students should be wise enough to not borrow more than they can afford, but let's not forget that schools, banks, the government, researchers, teachers, parents, and the media all actively encourage students to get a college degree at almost any cost. We can't all encourage students to borrow large amounts of money for school, and then shame and punish them for doing so.

Anya said...

39% of borrowers currently graduate with unmanageable debt. That's 1 out of 4 undergraduates. You may think that's an acceptable size problem, but I don't.

According to a 2003 Republican- sponsored report, financial pressures will keep 2 million college-qualified high school graduates out of college by the end of the decade. You may think that's an acceptable margin of loss, but I don't.

letsbhonest said...

Of course, it's unacceptable that many borrowers graduate with unmanageable debt. The 39 percent figure is only a rough measure of the number of students with unmanageable debt. Many students who make student loan payments representing LESS than 8 percent of gross income find their debt unmanageable. The reverse is true: Many who pay more than 8 percent find it manageable.

The challenge for the nation is to help those with unmanageable debt, whatever amount it may be.

It is a crime that two million or even two qualified high school students are not able to go to college because of financial pressures. What's your point, though? What's your solution?

The conclusion to a recent article indicates that the problem is more complicated than you appear to believe, with all due respect.

The Role of Student Loans in College Access
Sandy Baum, Ph.D., Professor of Economics, Skidmore College

"Any student would prefer to receive grant aid, rather than have to borrow to finance college education. For some potential students, particularly those from low-income and underrepresented groups, the prospect of borrowing likely discourages enrollment.

"More adequate grant funding is clearly necessary for those students whose decision about enrolling and persisting in postsecondary education is most sensitive to price. ...

"This problem should not, however, obscure the very important role that borrowing does and should play in increasing access to postsecondary education. People with college degrees earn 80–90 percent more than those with only a high school education (U.S. Census Bureau, 2001, Table 18). In addition to the other personal benefits from higher education, the earnings premium is, for most people, more than enough to pay back significant amounts of education debt while still enjoying a measurably higher standard of living than would be available without a college education.

"Moreover, however successful advocates for educational opportunity may be in increasing need-based grant aid in the near future, a significant gap will remain that will have to be filled by borrowing. Helping students and their families to understand the benefits of college education and the extent to which education debt is manageable for graduates is a critical part of efforts to increase successful participation in higher education among low-income students. Many students fully intend to borrow $20,000 or more to buy a car when they graduate from college. The $20,000 they borrow to finance college should be viewed as a better investment, not as a greater hardship than consumer debt.

"General resistance to student loans is largely misplaced and may serve to restrict access to higher education. That said, some groups of students are particularly vulnerable to debt and some students do, in fact, borrow more than they can reasonably manage to repay. Policy efforts should focus on protecting these students, rather than on imposing general limits on borrowing. More generous limits on borrowing under subsidized federal loan programs would assure that students with financial need have access to loans with the most favorable terms.

"In addition to access to adequate loan funds and more generous grant aid for low-income students, a low income insurance policy that would protect borrowers whose education does not pay off in the labor market would reduce the barriers to educational access created by the growing reliance on loans. Graduates who choose to enter public service and other relatively low-paying occupations of particular social value should benefit from systematic and readily available loan forgiveness provisions. Policies might also be designed to reduce the payment obligations of those who are unable to find employment that provides them with a reasonable rate of return to their educational investment."