Miscellaneous > Not at the Dinner Table

Student loan debt: What's the deal with that?

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Here's a video that says we shouldn't.


Okay, first off, we need to differentiate between federal and private loans. Federal loans are backed up by the government, and usually only amount to a few thousand a year. That few thousand is what is subject to the minor rule changes in the recent executive order, taking the percentage of income they can take from 15% down to 10%, and taking the maximum repayment time from 25 years down to 20. Any other portion of the tuition that is not covered by grants, scholarship, work study, or savings is covered by private loans from Sallie Mae -- an institution that, like Fannie and Freddie, was started by the government, but is independent enough that it's not subject to those rules, and, unlike Fannie and Freddie, has not yet been bought back by the government.

Federal loans have repayment options such as Income-Contingent Repayment and Income-Based Repayment. If you fill out all the paperwork for Income-Based Repayment, your payments will be greatly reduced to an almost certainly manageable level, and if your income is very low, the loans will be somewhat frozen -- they'll basically be in forbearance, but (as best as I can tell) no interest accumulates on them in that time. In contrast, when you get a Sallie Mae loan, until a couple years ago, it would probably be a Signature Student Loan, where your options for repayment are pretty much either two-year interest only or four-year interest only, and where you don't have to make payments until six months after you leave school, but all the interest from that time is added to the capital. Now, the loan you'd probably get is the Smart Option Student Loan, a name that doesn't make much sense seeing as there aren't any options. You make interest-only payments while in school (for me, it was $189 a month for one loan (they stopped offering Signature loans right before my senior year), and then interest+principal payments six months after you leave. You can't change that payment amount, and from what I was told last time I called them, you can't even request to put it into forbearance.

So long story short, if loan payments are actually a problem for you, they're Sallie Mae loans, not federal loans, in which case the tiny vote-buying tweaks in that executive order don't even affect you.

Now I angrily argue against the argument in the video:

--- Quote ---1. These loans are voluntary. All borrowers are excrutiatingly well-informed of how much they’re borrowing and how much they’re going to have to pay back.

About half of all college students take out loans and when they do, every lender clearly spells out exactly how much you’re on the hook for and what your monthly payments are going to be after you leave school.

Critics say that 18-year-olds don’t understand what they’re getting into and shouldn’t be held accountable for their decisions. But that’s an argument against letting kids attend college, not against letting them borrow against future earnings to get a degree that will increase lifetime earnings by somewhere between about $280,000 and $1 million.
--- End quote ---
- No. It's not entirely voluntary. We were constantly told for eighteen years that we needed to go to college if we didn't want to end up dying alone in a ditch. We were coerced. Most of us were not capable of making informed decisions -- not when all the informants at the time were universally telling us (though, I must emphasize, with the best of intentions) that the options were either go to college and get rich, or don't go to college and die alone in a McDonalds' dumpster.
I mean, conservatives believe 18-year-olds are too stupid to make the right voting decisions because they're too brainwashed by Jon Stewart, so why do they think 18-year-olds are smart enough to know just how much of their lives they're signing away when they go to a $25,000-a-year school that they can't afford?

- An extra $280,000 over my lifetime? Great, 'cause by the time I pay back all my loans, I'll have given Sallie Mae over $189,000. Yeah, a net average of about two thousand dollars a year is definitely worth paying over a thousand dollars a month for a decade or two.

- I was 16 when I started college; 15 when I decided to go and where to go. 14 when I said to my mom, "You know, I think I might take a year off instead of starting college right away" and she said I had to go right away or else I wouldn't be eligible to possibly win a couple-thousand-dollar scholarship from my dad's company. (spoiler -- I didn't win it anyway). Should I really have to pay the rest of my life for a mistake I made at 15? A mistake that I was led into by my parents and the entire culture at large? A mistake made with the intentions of bettering myself and society?

--- Quote ---2. The amounts being borrowed are hardly overwhelming. While the cumulative total of all college-related debt is huge – approaching a trillion dollars, it’s bigger than credit-card debt – it’s not so big for individuals. The typical college graduate who borrowed money to attend graduates owing about $25,000. They’ve got a minimum of 10 years to pay back that amount and the repayment schedule can be extended and modified for a wide variety of reasons.

The monthly payment for $25,000 in student loans at going rates comes to around $290 a month. That’s not chump change. But given that the that college grads have unemployment rates that are less than half the national average and that the average salary offer for graduating seniors is almost $50,000, the loan amount isn’t so bad either.
--- End quote ---
Yeah, $25,000 hanging over your head right when you start out in life isn't big at all. Do you know what average means, by the way? It means there's a buttload of us with six figures of debt. My monthly payments right now are $820 a month. It'd be about a hundred more if the federal loans were still in repayment (income-based repayment FTW), and it'll be over $900 a month in March because I just put them into forbearance for three months because I'm out of money, and the interest from those three months gets capitalized when they come back. I'm working part-time for minimum wage, and I make about $850 a month. Just under $850, actually. Oh, and three out of the four loans that make up that $820 are currently on interest-only payments. That means two things:

- I'm making zero progress on actually paying them off.

- They'll be a lot higher in about two years.

With loan payments already 97% of my income, and soon to be over 100% (as previously mentioned, Sallie Mae is still technically private, and therefore not the slightest bit subject to that 10% of income requirement), how the heck am I supposed to save up money so I can move out to somewhere with better prospects so I can get a halfway decent job?
Right now I'm just on a treadmill, going nowhere, except I'm also being force-fed Big Macs while on the treadmill so I'm not even losing weight. I get $800, I give $800, my principal stays the same, and every day is just a day closer to the payments going up.

--- Quote ---3. Bailouts are never a good idea. Like Tea Party activists, Occupy Wall Street protesters are right to rail against bailouts for big banks and financial institutions that are politically connected. But student loan forgiveness advocates are wrong to perpetuate yet another cycle of bailouts. It’s never right to socialize losses while privatizing gains. That’s what the banks did – they risked their money on stupid investments and then got made whole at the expense of taxpayers. Student loan forgiveness is simply another version of the same swindle. And it offloads the costs of other people’s decisions onto taxpayers, who guarantee federally backed student loans.
--- End quote ---
I don't know what the right decision is now, but I've got a good feeling that if we'd spent a trillion dollars on this instead of on the stimulus, most people of all ages would be better off by now. If I'd graduated with no loans to pay off, I would've taken the few thousand dollars I'd saved up, moved to Philadelphia or New York City, and gotten a job in my major. And if I didn't find anything, I'd go back home, get the job I have now, save up for a while (while also buying a PS3, stimulating the economy), and go try again in a few months. With that six-figure cloud hanging over my head, though, I can't do much of anything.

The education bubble is popping. We got stuck for so long on the idea that everyone needs to go to college, just like everyone needs to own a house -- whether or not they can afford it, whether or not they can afford the loans, whether or not their major will ever get them a job that pays that kind of money, whether or not there's any demand in those fields. We kept subsidizing it, thinking we could level the playing field by lifting the whole thing up on pillars, but all it did was make it a farther way down for the ones who fall off it. Every time we all got another couple thousand dollars from the government to go to school, schools knew they'd be getting another couple thousand dollars from each student, raised tuition by a couple thousand dollars, and started new programs dependent on that money.

(Incidentally, I didn't get any financial aid from the government for college, because, since my dad makes $70,000 a year, they figured I wasn't poor enough to need help paying for a $30,000-a-year school. Even though my dad has seven kids, a wife, an ex-wife, and a mortgage, and we're a thirty-mile drive away from everything, and he drives from New York to New Jersey three times a week to go to work because they wouldn't let him transfer his seniority to a closer place, and also his company's stock is currently trading at like five cents and will probably go bankrupt before he retires. So anyway, when the idea is that we keep giving "everyone" more money to go to college, all it does is push the price of college up at the same rate, and the more we push it up, the more people won't be included in "everyone" and will have enormous tuitions to pay. Also, I know I definitely should have gone to community college, and I probably would have if I hadn't been fifteen and stupid when I made that decision.)

We can't afford to keep extending this out, to where next generation sees a master's degree the same way this generation sees a bachelor's, the same way the previous generation saw a high school diploma. Everyone goes to school, then everyone goes to high school, then everyone goes to college, and now we're learning stuff in college that would've been taught in high school a few generations ago, because we have to keep pushing it back so everyone can get in.

The failure was not in our decision to go to college. The failure was that the previous generation thought they should send us all there (why are we being punished for obeying?). A noble effort, and one that I genuinely do respect them for, but we now clearly see that the "everyone gets a bachelor's" model doesn't work -- certainly not in the middle of a depression. A college degree meant something last generation, when only a few people went on to that level, but when it's the default position, it loses a lot of its value. And now we're all graduating into the worst economy in decades -- which, again, is the fault of the older generations, not us -- and we're finding that employers either want masters'es or experience. Bachelors'es are... well, certainly not a dime a dozen, but you know what I mean. Everyone's got one. Less scarcity = less value. Though they still cost the same, for now.

If not universal loan forgiveness, then at least force Sallie Mae by an act of Congress to abide by the 10% rule -- or, heck, just some percentage under 90 -- so we can get our blasted lives together already, and the 20-year rule, or maybe 15 years would be better, so we're at least not still paying this crap off when our own kids are going to college (if we let them).

Or at the very very least, make student loans dischargeable through bankruptcy again. Right now, they're pretty much the only debt that bankruptcy can't discharge, which only serves to inflate the bubble faster. See, right now, getting in on student loan action is, theoretically, pretty close to a zero-risk venture, because no matter how hard up we are, we can never get rid of the payments (also because the people you're selling to are 17 and impressionable). Sallie Mae knows it can always scrape back every penny, and that you have no recourse. With that kind of setup, why would they ever show any restraint in lending? What interest does Sallie Mae have in making sure they lend responsibly -- that loan recipients will realistically be able to afford the payments?

And there actually is a conservative argument for it: Don't look at bankruptcy as just a bailout for people who were irresponsible and got themselves into debt. Look at it from the other perspective: It's the natural negative consequence of a lender taking a bad risk. Sallie Mae got greedy, overreached, and made a risk that didn't pay off. Shouldn't they have to suffer the consequences of that? If we continue to keep bankruptcy off the table as an option for student borrowers, we are, in essence, bailing out Sallie Mae. We're telling Sallie Mae, "It doesn't matter that you made horrible decisions and lost big; you're going to get your money back on those investments anyway." By not allowing bankruptcy, we are saying Sallie Mae is too big to fail.

The intention of taking bankruptcy off the table was, I'm sure, to make more kids able to go to college by encouraging more lending. But the only way they could make Sallie Mae so willing to lend to all of us was by stacking the deck entirely in their favor.

From Sallie Mae's perspective, student loans are investments. They put tens of thousands of dollars into each student with the expectation that in five years, they'd start seeing a return on their investment -- that if they spend $30,000 or $50,000 or $100,000 to buy this kid a degree, he'll get a better job than he would have otherwise, and they would share in the kid's profits. Right now, they're finding that a buttload of those investments are not giving the returns they expected, but they still want to collect the amount they were promised. If Sallie Mae had gone into these investments knowing that bankruptcy was a possibility, or that they could only take up to 10% of their income and there was a possibility that that could end up being less than $90 a month, they would have been more judicious about who they gave their loans out to. They would have thought twice about giving someone $100,000 to get an art degree. And yeah, fewer people would have gone to big expensive private colleges, especially those from less privileged backgrounds. But they could still get into community colleges, so... yeah. Overall, that probably would've been better.

(The Department of Education does give out loans knowing that they run a real risk of not getting back the full amount, but, being a not-for-profit governmental institution, they absorb those losses, to an extent, for the common good, as they should.)

Here's the situation we're in: Things are messed up. The borrowers (the Millennials who are graduating college now) and the lenders (Sallie Mae, and to a lesser extent the Department of Education) both made mistakes. Right now, no matter what we do, someone is going to get bailed out of their mistake, and someone is going to pay the trillion-dollar pricetag on both mistakes.

Option One: We keep things the way we are -- bailing out Sallie Mae, making millions of twenty-somethings pay the price for mistakes they made when they were teenagers (as well as for mistakes made by Gen Xers and Baby Boomers, many before they were born), crippling the new generation of innovators and businesspeople and workers (and voters), and continuing to inflate the college bubble.

Option Two: We drastically restructure the student loan system -- bailing out students, forgiving a lot of debt, making Sallie Mae pay for its mistakes (and the mistakes that teenagers made while under the whelming influence of the college culture that Sallie Mae was largely responsible for fostering), and start making steps toward a more sustainable system than the one-size-fits-all throw-money-at-it education approach that's been failing us for decades.

(One more thing -- let's stop pretending that these two options are a dichotomy between making taxpayers bear the burden, and making students bear their own burden. Middle-class middle-aged taxpayers will feel the impact of this either way. They're feeling it now when their kids are moving back in with them (taking all their food and depriving them of grandkids) because there's no jobs that pay well enough to cover the cost of both loan payments and existence. They'll feel it when they need a new kidney and there's not enough doctors to go around because we're still trying to pay off our loans. They'll feel it when the economy stagnates because a whole generation has no disposable income. They'll feel it when the government has to step in to bail out Sallie Mae with a half-trillion dollars that would have been better spent years earlier on the students. And if nothing else, the middle-class middle-aged taxpayers will be feeling it fifteen years from now when the Millennials make up that demographic, and they're still on the hook for $1,000 a month.)

While total forgiveness would be nice, it's quite unlikely, would have a lot of unintended consequences, and demanding it does make us look kind of selfish. I think that, along with allowing bankruptcy, applying the 10% and 20-year rule to private loans is probably the best option. I'll take a page out of Herman Cain's book and call it the 20-Over-20 Plan: federal loans can take up to 10% and private loans can take up to 10%, so lenders get [up to] 20% for [up to] 20 years, and if there's no return on the investment in that time, too bad (And it's not like I'm going to intentionally work for minimum wage for twenty years just to screw with them. If the 20-Over-20 Plan were enacted, I would be able to move out of my parents' house and get a real job within a year, and Sallie Mae could start seeing some real money from me, in a sustainable fashion.).

(15-over-15 would be nice too, but that doesn't roll off the tongue quite as well.)

I don't want my student loan debt to be the defining characteristic of the rest of my life. I don't want to have a mortgage before I have a house. I don't want my parents' house to be repossessed because my dad's the cosigner. And... I'd prefer not to have to spend ten years in the military to get past this (if they'd even take me, considering I have a heart murmur (not to mention i'm also fat and lazy)).

I'm actually subscribed to Reason.tv but I more or less agree with your sentiments. I read the whole post by the way. Tremendous job as always.

To you and anyone else who's already read it, I just went back and expanded on some things a bit more, mostly starting at the part about bankruptcy.

It's not just the banks's fault, tho. The schools should be punished too for what they did with tuition prices and spending. They were about as irresponsible as the banks. Maybe more.


--- Quote from: A on November 23, 2011, 04:11:03 AM ---It's not just the banks's fault, tho. The schools should be punished too for what they did with tuition prices and spending. They were about as irresponsible as the banks. Maybe more.

--- End quote ---
It's not just the bank and school's fault, tho.  The government should be punished too for what they did with student loans and grants.  They were about as irresponsible as the schools.  Maybe more. 

That's right.  It's the governments fault for helping support the school's high tuition with low interest deferred payment student loans and grants.  Forgiving the loans will actually make the tuition go up even more. 

When I went to college (Fall 1991- Spring 1997) my wife and I could have borrowed over four times what we actually needed for college, meals, books, etc.  Most students took all the loans they were offered for the full amount and even took the high interest credit cards just to get a free t-shirt.  My wife and I only borrowed less than a fourth of what was offered and did our research to get a credit card with single digit interest.  We also invested in mutual funds and doubled our money during college.  My wife didn't work during college, but I made about $5 per hour plus a little from janitorial and construction contracts.  It wasn't much money even then, but it was enough to pay our few bills and to invest. 

I know tuition has greatly increased since then, and admit my generation's loans helped support the college and universities raise their tuition.  If such money wasn't readily available there would have been less demand. 


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