Burden of College Loans

[chaospaladin]

<p>

@The New York Times

</p>

<p>**Burden of College Loans on Graduates Grows
by Tamar Lewin
Published April 11, 2011
**</p>

<p>Student loan debt outpaced credit card debt for the first time last year and is likely to top a trillion dollars this year as more students go to college and a growing share borrow money to do so.</p>

<p>While many economists say student debt should be seen in a more favorable light, the rising loan bills nevertheless mean that many graduates will be paying them for a longer time.</p>

<p>“In the coming years, a lot of people will still be paying off their student loans when it’s time for their kids to go to college,” said Mark Kantrowitz, the publisher of FinAid.org and Fastweb.com, who has compiled the estimates of student debt, including federal and private loans.</p>

<p>Two-thirds of bachelor’s degree recipients graduated with debt in 2008, compared with less than half in 1993. Last year, graduates who took out loans left college with an average of $24,000 in debt. Default rates are rising, especially among those who attended for-profit colleges.</p>

<p>The mountain of debt is likely to grow more quickly with the coming round of budget-slashing. Pell grants for low-income students are expected to be cut and tuition at public universities will probably increase as states with pinched budgets cut back on the money they give to colleges.</p>

<p>Some education policy experts say the mounting debt has broad implications for the current generation of students.</p>

<p>“If you have a lot of people finishing or leaving school with a lot of debt, their choices may be very different than the generation before them,” said Lauren Asher, president of the Institute for Student Access and Success. “Things like buying a home, starting a family, starting a business, saving for their own kids’ education may not be options for people who are paying off a lot of student debt.”</p>

<p>In some circles, student debt is known as the anti-dowry. As the transition from adolescence to adulthood is being delayed, with young people taking longer to marry, buy a home and have children, large student loans can slow the process further.</p>

<p>“There’s much more awareness about student borrowing than there was 10 years ago,” Ms. Asher said. “People either are in debt or know someone in debt.”</p>

<p>To be sure, many economists and policy experts see student debt as a healthy investment — unlike high-interest credit card debt, which is simply a burden on consumers’ budgets and has been declining in recent years. As recently as 2000, student debt, at less than $200 billion, barely registered as a factor in overall household debt. But now, Mr. Kantrowitz said, student loans are going from a microeconomic factor to a macroeconomic factor.</p>

<p>Susan Dynarski, a professor of education and public policy at the University of Michigan, said student debt could generally be seen as a sensible investment in a lifetime of higher earnings. “When you think about what’s good debt and what’s bad debt, student loans fall into the realm of good debt, like mortgages,” Professor Dynarski said. “It’s an investment that pays off over the whole life cycle.”</p>

<p>According to a College Board report issued last fall, median earnings of bachelor’s degree recipients working full time year-round in 2008 were $55,700, or $21,900 more than the median earnings of high school graduates. And their unemployment rate was far lower.</p>

<p>So Sandy Baum, a higher education policy analyst and senior fellow at George Washington University, a co-author of the report, said she was not concerned, from a broader perspective, that student debt was growing so fast.</p>

<p>Indeed, some economists worry that all the news about unemployed 20-somethings mired in $100,000 of college debt might discourage some young people from attending college.</p>

<p>A decade ago, student debt did not loom so large on the national agenda. Barack and Michelle Obama helped raise awareness when they spoke in the presidential campaign about how their loan payments after graduating from Harvard Law School were more than their mortgage payments.</p>

<p>“We left school with a mountain of debt,” Mr. Obama said in 2008. “Michelle I know had at least $60,000. I had at least $60,000. So when we got together we had a lot of loans to pay. In fact, we did not finish paying them off until probably we’d been married for at least eight years, maybe nine.”</p>

<p>Even then, Mrs. Obama said, it took the royalties from her husband’s best-selling books to help pay off their loans.</p>

<p>In 2009, the Obama administration made it easier for low-earning student borrowers to get out of debt, with income-based repayment that forgives remaining federal student debt for those who pay 15 percent of their income for 25 years — or 10 years, if they work in public service.</p>

<p>But if the Obamas’ experience highlights the long payback periods for student debt, their careers also underscore the benefits of a top-flight education.</p>

<p>“College is still a really good deal,” said Cecilia Rouse, of Princeton, who served on Mr. Obama’s Council of Economic Advisers. “Even if you don’t land a plum job, you’re still going to earn more over your lifetime, and the vast majority of graduates can expect to cover their debts.”</p>

<p>Even believers in student debt like Ms. Rouse, though, concede that hefty college loans carry extra risks in the current economy.</p>

<p>“I am worried about this cohort of young people, because their unemployment rates are much higher and early job changing is how you get those increases over their lifetime,” Ms. Rouse said. “In this economy, it’s a lot harder to go from job to job. We know that there’s some scarring to cohorts who graduate in bad economies, and this is the mother of bad economies.”</p>

<p>And there is widespread concern about those who borrow heavily for college, then drop out, or take extra years to graduate.</p>

<p>Deanne Loonin, a lawyer at the National Consumer Law Center, said education debt was not good debt for the low-income borrowers she works with, most of whom are in default.</p>

<p>Unlike most other debt, student loans generally cannot be discharged in bankruptcy, and the government can garnish wages or take tax refunds or Social Security payments to recover the money owed.</p>

<p>Students who borrow to attend for-profit colleges are especially likely to default. They make up about 12 percent of those enrolled in higher education, but almost half of those defaulting on student loans. According to the Department of Education, about a quarter of students at for-profit institutions defaulted on their student loans within three years of starting to repay them.</p>

<p>“About two-thirds of the people I see attended for-profits; most did not complete their program; and no one I have worked with has ever gotten a job in the field they were supposedly trained for,” Ms. Loonin said.</p>

<p>“For them, the negative mark on their credit report is the No. 1 barrier to moving ahead in their lives,” she added. “It doesn’t just delay their ability to buy a house, it gets in the way of their employment prospects, their finding an apartment, almost anything they try to do.”</p>

<p>A version of this article appeared in print on April 12, 2011, on page A1 of the New York edition.

</p>

<p>Reposting in case article gets deleted. :)</p>

[whydoicare]

<p>@happymomof1 - maybe I’ve been looking too much at the individual school forums. In so many threads, a kid or parent will ask about X vs. Y vs. Z for program A. Then people will give all sorts of hair-splitting arguments about the ranking and importance of X, Y, Z. The poster should pass up a good deal and attend the “best” school they can “afford”. It’s depressing, especially when the rankings are often erroneous or outdated.</p>

[polarscribe]

<p>The one and only solution is for private loans to be made dischargeable. Right now the banks have ZERO INCENTIVE TO BE RESPONSIBLE. In fact, they make profits from being irresponsible lenders! If the student pays back the loan, they make money. If the student defaults, they still make money!</p>

<p>Irresponsible borrowing cannot happen without irresponsible lending. Both sides share responsibility.</p>

[chaospaladin]

<p>

@mom2collegekids

If a change happens in regards to bankruptcy, it would have to be with future loans, not current ones. The current loans were given under the rules that the debt couldn’t be forgiven, so the approval process was different.

</p>

<p>I agree with this.</p>

<p>

@3bm103

I feel I need to ask: If tuition loans were dischargable in bankrupty, how many kids would not hesitate at all to take out loans for their entire pricey private school tuition and then declare bankrupty when they graduate? It’s a disaster waiting to happen!

</p>

<p>I agree with this. A student with a 0 EFC could just take out over $250,000 in loans and then declare bankruptcy afterwards and then essentially get a full ride at pretty much every university that meets full need with the use of loans.</p>

<p>

@whydoicare

The borrowers are supposed to limit these loans to amounts they can repay. I think the main problem is, they are not doing it.

</p>

<p>What if we make a compromise and let loans be discharged after filing bankruptcy, but limit the amount of loans students can take out? This way, the student now has an incentive to borrow responsibly since the reward of getting a free education with all loans may not be worth the risk of having a bankruptcy record for 7 years?</p>

<ol>
<li>What is the BK Act?</li>
<li>What does GM stand for? General Motors?</li>
</ol>

[kayf]

<ol>
<li>Bankruptcy, as in Bankruptcy Act of 2005</li>
<li>General Motors. Yes, a big one in BK world.</li>
</ol>

[chaospaladin]

<p>

@polarscribe

The one and only solution is for private loans to be made dischargeable. Right now the banks have ZERO INCENTIVE TO BE RESPONSIBLE. In fact, they make profits from being irresponsible lenders! If the student pays back the loan, they make money. If the student defaults, they still make money!</p>

<p>Irresponsible borrowing cannot happen without irresponsible lending. Both sides share responsibility.

</p>

<p>I agree with this.</p>

<p>

@kayf

1. Bankruptcy, as in Bankruptcy Act of 2005
2. General Motors. Yes, a big one in BK world.

</p>

<p>Oh I see. Thanks. Why is GM relevant to the BK world?</p>

[kayf]

<p>Chaos, GM filed for BK. They came out, but as part of the process many would say creditor rights were disregarded. Someone here mentioned that if BK rules for student loans were changed, it could only be prospectively, so I mentioned GM.</p>

<p>Polar, I agree, the incentive for excessive lending must be reduced. Now.</p>

[notrichenough]

<p>

A student with a 0 EFC could just take out over $250,000 in loans and then declare bankruptcy afterwards and then essentially get a full ride at pretty much every university that meets full need with the use of loans.

If a lender knew that a $250,000 debt could easily be wiped out in bankruptcy, and the lender would have to eat the loss, maybe they would do some due diligence and not make these loans unless they were very sure they would get paid back.</p>

<p>Why should it be any different than any other type of loan?</p>

[whydoicare]

<p>How do you folks (kayf, chaospaladin, polarscribe) plan to define excessive lending?</p>

<p>First you propose that the loans be dischargeable. In the private market, we would only have unsecured and unguaranteed student loans. Lenders must become more stringent, which seems to be what you want, but it does limit access to higher education. Interest rates on these loans must also rise toward credit-card levels, and that affects even the responsible borrowers.</p>

[kayf]

<p>WhydoIcare - I would submit that after student maximized govt debt, if only unsub stafford, there is just not that much room for more debt. Smart kids/parents already realize this – of course it limits access to some higher education.</p>

[happymomof1]

<p>whydoicare -</p>

<p>I’ve never spent any time in those forums, because Happykid’s interests are completely off those radars. Perhaps the spenders have migrated to the college forums? I can see how the discussion in those locations could get overheated. The individuals involved all have vested interests in either getting in, or justifying their choices about accepting a bad financial aid package. This year’s crop of threads in Parents, Search, and Admissions have been much in favor of saving money.</p>

[whydoicare]

<p>@notrichenough - how large is a kid’s first credit card limit these days? $1000? If the student loan is easily wiped out in bankruptcy, we aren’t going to see amounts much larger than that.</p>

[polarscribe]

<p>Borrowing hundreds of thousands of dollars is not “access to college.” It is indentured servitude.</p>

<p>Perhaps exorbitantly expensive colleges would be forced to lower their costs if they weren’t able to put $200,000 worth of loans in front of everyone who applied, while claiming $1,000-per-month payments are “good debt.”</p>

[kmcmom13]

<p>

Making private loans dischargeable will, imho, cut down on predatory lending.

</p>

<p>Okay, my perspective is a little different on this, because I originally hail from a country with a heavily regulated banking industry (Canada) but now live in the US as a permanent resident. </p>

<p>Canada’s FA system is a little kinder and gentler on students – first of all, tuition is dramatically lower; second of all, really impoverished students have up to 40% of their student loan debt forgiven upon graduation per the govt (and taxpayers – notably NOT forgiven if you don’t graduate…and thirdly, student loans are stringently regulated in terms of how much interest you can charge (3% right now) and how much is authorized – and beyond government subsidy, anything else was unsecured (and required securing).</p>

<p>DESPITE this kinder/gentler/student-centered approach, I will note that in Canada the student loan DOES NOT DISCHARGE with bankruptcy because the Canadian government discovered if they can they will. The government turns student loans in default over to (regulated) private (chartered) lenders who collect via liens on homes, wage garnishment, etc.</p>

<p>I think the problem here is part unrealistic consumer expectation/exploitation coupled with what I view to be a horrifically predatory banking system that operates with virtually no governmental oversight. Perfect combo for a disastrous education lending bubble just like real estate. But I would not try to bring the lending industry in line on the “back end” of the process (allowing bankruptcy). I’d rather just see specific regulation and education designed to protect vulnerable borrowers such as STUDENTS ;)</p>

[notrichenough]

<p>

@notrichenough - how large is a kid’s first credit card limit these days? $1000? If the student loan is easily wiped out in bankruptcy, we aren’t going to see amounts much larger than that.

I think there are ways you can mitigate risk - look at what degree the student is studying for, look at the parents’ credit rating, look at debt ratios based on likely income, etc.</p>

<p>It’s a glib phrase to say “easily dischargeable in bankruptcy” but I don’t think it is all that easy, and there are other ramifications that follow you around for quite a while.</p>

[whydoicare]

<p>I’m not arguing for $200k loans and personally, use the Stafford limits as a guideline. But there is a middle ground. What if somebody wants to borrow $60k in total to attend an “elite” private college? I would not do it, but somebody else might and it’s a plausible choice. If you change the BK rules, private loans will become practically unavailable and we’ll only have the Federal programs.</p>

<p>I don’t think you all really mean to limit access. Maybe this is a backhanded way of trying to control costs, which are indeed exorbitantly expensive. I’m skeptical this would force colleges to lower their costs. I’m also skeptical that state budget cuts will force public schools to lower their costs. In both cases, I think the impact will fall on students and their parents.</p>

[whydoicare]

<p>@kmcmom13 - we also had a lot more Federal and State subsidies, grants, and interest rate limits in this country into the 1980s. Unfortunately that ship has sailed.</p>

[MD_Mom_1]

<p>

The comments to this story include many truly sad ones. It is time to change bankruptcy laws.

</p>

<p>I would argue, as others have said, that it is time for young people to learn to live within their means. If a student has to start at a community college and then go to the dreaded state school to avoid mountains of debt, he or she should. For tuition alone in our county, two years of community college plus two years at the University of Maryland College Park (one of the most expensive ones in Maryland) would be about $37,000. A student could work to pay room and board expenses.</p>

<p>It is ridiculous how students think they can borrow any amount to make their dreams come true and their lives perfect–in their minds. It is sad that parents are sucked in trying to create a perfect world for their little angels.</p>

<p>When DD was accepted to two fairly prestigiuous universities and offered a nice scholarship to a third where she is attending, her college counselor at her school told her that her classmates would be shocked that she would attend the lower ranked school, but that it was a fine school. </p>

<p>Many kids today think that they should attend the highest ranked school that they are accepted to without much thought about cost. I got in. I should go. It will happen. It’s a bummer that so many are so caught up in brand name.</p>

[polarscribe]

<p>MD Mom, the only reason students CAN borrow that amount is that lenders are willing to offer those amount of loans with zero due diligence and zero consideration for the student’s ability to repay those loans (or lack thereof.) The ONLY reason the lenders do this is that they know the loans can’t be discharged in bankruptcy. Take away nondischargeability and the lenders will have to make responsible decisions about their loans.</p>

<p>Students are further encouraged by these ridiculously-expensive universities which offer insane amounts of debt in “financial aid” packages under the claim they’re making college “affordable” without any discussion of the affordability of $1,500 monthly payments.</p>

[kayf]

<p>MDmom, IMHO, its not a fair fight when you pit kids against banks and colleges. Even HSs – one of my friends is absolutely furious that his kid’s GC was recommending an out of state public U that in any rationale person’s opinion had nothing over in state Us. Of course, he has no choice but to kowtow the tenured GC.</p>