The Student Loan Mess
| Sat Dec. 27, 2008 9:47 AM PST
THE STUDENT LOAN MESS....The student loan market is a mess, and it's mainly a mess because the federal student loan program is woefully inadequate. Natalie Hickey learned the hard way:
Hickey got caught in an increasingly common trap in the nation's $85-billion student loan market. She borrowed heavily, presuming that all her debt was part of the federal student loan program.
But most of the money she borrowed was actually in private loans, the fastest-growing segment of the student loan market....Whereas federally guaranteed loans have fixed interest rates, currently either 6% or 6.8%, private loans are more like credit card debt. Interest rates aren't fixed and often run 15% or more, not counting fees.
....Hickey ended up with $20,000 in low-interest federally guaranteed loans issued by Sallie Mae, and $120,000 in higher-interest private loans issued by Sallie Mae. Hickey said no one explained the difference to her.
There's really no excuse for this. At the very least disclosure practices need to be tightened up, but what really needs to happen is a substantial increase in the current limit for federal student loans. It's not even close to the amount needed to get through school these days.
What's more, there's really no reason that the feds should be guaranteeing private loans instead of just originating the loans themselves anyway. Bank origination may have been the only practical option 40 years ago, but that ceased to be the case long ago, and the private student loan market has since become a cesspool of graft, corruption, and abusive practices. Today, federal origination is cheaper and more efficient for both taxpayers and students, and there's really no reason why the Direct Loan Program shouldn't be expanded to the point of putting the private market out of business.
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Comments
Even worse is once you graduate...if you're not well connected or don't peruse a professional career like law, medicine, engineering, accounting, physical therapy, teaching...etc...you're likely going have a lot of trouble finding a job to pay back those loans...and if you're lucky enough to find a job, it isn't going to pay all that much
There is no way the Federal government should get into loaning money to students who attend hack schools like Brooks Institute. It's not even regionally accredited.
She could of had a zero percent interest rate and she still wouldn't be able to afford to pay back the $25K a year tuition.
That's not to say that the student loan program doesn't need drastic reform, it's just that this is a poor poor example.
This story seems to mix two issues. I fully support the notion of more federally subsidized debt and less private lending to students. Fine.
But call me a cad. I don't believe no one explained this to the woman in the story. Ive gone through this three times now (undergrad, grad school and law school). Each time, the student loan office makes you sit through hours of painful sessions explanation. The difference between subsidized loans and private loans is always painfully spelled out.
That still is a separate issue of whether private loans at higher rates should be the vehicle for paying for school.
Submitted by Maynard Handley (not verified) on Sat Dec. 27, 2008 10:01 AM PST.
"
but what really needs to happen is a substantial increase in the current limit for federal student loans. It's not even close to the amount needed to get through school these days.
"
I can't help but think that this is basically the same thinking that led us into the housing mess. Basically, if you expand the amount of money available to pay for a fixed resource, what will happen is that the cost of the resource will rise in line with the amount of money available, and everyone will be just as badly off as before. This, after all, has been the primary effect of the mortgage interest deduction and FrannieMac guaranteed loans.
Before I got on board with this I'd have to be convinced of two things:
(1) How many of these people trying to get to college should be there? The US has made college a fetish object, the place where all one's life problems are solved. No matter how ignorant you are graduating from school, no matter how pathetic your study habits, college will make it all alright.
But, given limited amounts of federal cash (and with our current population, current amounts of such cash is the reality --- speculating about our glorious Finnish style future social democracy is a waste of everyone's time), I can't help but believe that this cash is much better spent (both in net effect ie economic terms, and in social justice terms) by spending at the school and pre-school level.
(2) How much of the rising cost of colleges is essential, as opposed to optional? I understand the basic logic that is offered up, that colleges are labor intensive places, more so than, say, manufacturing, and that as a result you'd expect their costs to rise at higher than inflation. But then you read the stories of the gorgeous new swimming stadium, or the new arts center designed by I M Pei or whatever.
And it's not just a question of those sorts of architectural luxuries. To what extent is the current way of doing things (professor lecturing 300 passive students) actually valuable, as measured by objective metrics? Would you get just as much value from the students seeing a lecture, with a graduate student in place to keep control? Is the real value (as Carl Weiman claims, through such experiments) in HEAVY-DUTY interaction in the lecture, constant asking questions (which the students answer via clickers), or the socratic method of places like HLS and HBS, and anything less is a waste of students' and professors' time? Is the real value not in the lectures per se, but in the chance to ask one-on-one questions, either of TAs or the prof in office hours? Is the real value simply in having a group of peers interested in the same material who discuss it which each other outside class?
And isn't it pretty pathetic that I, in 2008, in the US, in an industry that spends billions every year, can ask these questions and honestly not have a clue to their answer --- and I am pretty damn sure no-one else does either?
Now, if we simply keep providing more ways for colleges to get money from students, will we get improvements, or will we get more of the same?
[And I say this as someone who loves universities, and is one hundred percent behind research, where I think the evidence is that, as much as is humanly possible, money is spent well and usefully. I support the teaching mandate just as much, but I don't think anything near as much care has been put into ensuring that it is done as well and as efficiently as possible.]
There's really no reason why the Direct Loan Program shouldn't be expanded to the point of putting the private market out of business.
It's yet another Thing That Can't Be Done Because Clinton (or Tried To Do) It.
We haven't (barely) survived eight years of the Bush Administration so much as eight years of the !Clinton administration.
There are a 1001 (well, maybe not precisely that number, but you get the point) student loan programs with different names. Some are legit, many are not.
Certain "schools" are little more than loan processing programs, with a minimal education as a byproduct. They have departments whose size outnumbers the (usually) part-time teaching faculty, set up to "sell" student loans to applicants.
These "loan agents", complete with business cards (when was the last time a loan processor at a University gave you "thier card"), minimize the risk & maximize the "no problem". These things start out with low "teaser" rates & then jack up to outrageous rates at the first uptick in the LIBOR (or whatever indicator they're pegged to).
How long these things have been around I don't know.
My guess would be - 8 years or so.
How many of these people trying to get to college should be there? The US has made college a fetish object, the place where all one's life problems are solved. No matter how ignorant you are graduating from school, no matter how pathetic your study habits, college will make it all alright.
If you're suggesting that the answer is that less people need to go to college, I disagree...in fact, all forms of higher ed need to be subsidized, not just the bachelor's...as the world is becoming more competitive everyday. There's a reason why universities have become so wasteful...its because they've turned into businesses.
"but what really needs to happen is a substantial increase in the current limit for federal student loans. It's not even close to the amount needed to get through school these days."
"I can't help but think that this is basically the same thinking that led us into the housing mess. Basically, if you expand the amount of money available to pay for a fixed resource, what will happen is that the cost of the resource will rise in line with the amount of money available, and everyone will be just as badly off as before. This, after all, has been the primary effect of the mortgage interest deduction and FrannieMac guaranteed loans."
I agree with Maynard Handley. If you increase the federal loan limits, the schools will just jack up their prices accordingly. Outside of a few majors and a group of elite schools, college doesn't pass the cost/benefits test for an increasing amount of students.
I agree however, that private loan companies like Sallie Mae are a tool of Satan and should die a painful, agonizing death. They have no defensible reason to exist.
You expressed my opinions so well. Where is the ROI? not everyone should go to college and by making it the norm, the expectation and "a right" we have lowered the value. As one who considers herself a lifelong learner there are numerous other ways to educate oneself and to satisfy intellectual curiosity.
Well, to agree somewhat with Scott, I think this business of massively going into debt for a sheepskin is crazy. Do you mean to tell me there's no cheaper alternative in California (or Ohio where the poor woman is from) than Brooks Institute? I've never even heard of the place -- it can't be that prestigious. It's a shame that college costs are so consistently rising higher than inflation (and little you can do about it, either, given the labor intensive nature of post-secondary education), but, my God, $140k in debt for a freaking bachelor's degree -- that's just nuts. Even at federally-subsidized low interest rates, that's just nuts. Not saying, mind you, that the economics of this kind of debt can't work for graduate school, but there's not just a lack of federal money problem in existence -- there's a lack of common sense and parental guidance problem in existence, too.
For the record, although I favor more federal money for subsidized loans as much as the next liberal -- and although I also agree that the heavy involvement of usurious private lenders is a big problem that needs to be dealt with harshly -- I also think much of the solution lies in reinvigorating and increasing funding for the nation's superb system of state-supported universities. No reason a hard-working middle class kid can't get high GPA at Big State U -- do so with minimal debt -- and then splurge on a prestigious graduate degree. Now, if a rich, private university wants to let you attend on their dime that's another story: my sister's uberbrillant stepson is apparently deciding between Ohio State (where he'll get instate tuition) and Princeton (where he'll go only if they give him a full boat, but apparently they've come courtin' him). The point is, I hope if the full boat doesn't materialize the kid doesn't opt for the Ivy League -- and a $250k debt loand in 2013. No amount of "following your dream" is worth that kind of ball and chain around your future when plenty of employers and graduate schools respect the heck out of a high GPA from an institution that just happens to be supported by the taxpayers.
Submitted by Legacy on Sat Dec. 27, 2008 10:57 AM PST.
The Brooks Institute is obviously not my idea of the most worthwhile target of federal student loans. But the problem is the same for regular four-year universities too. Government guarantees are less efficient than direct government loans, and the amount the feds cover hasn't kept up with college costs. I'd like to see Obama and the Dems address this now that the Republican defenders of the current program (whose main beneficiary is banks, not students) can be safely ignored.
Many of the private loan companies are also highly suspect. I consolidated my student loans in 2004, and one private lender tried to prevent me from consolidating through the government because apparently, if you only borrow money from one private lender, you can only consolidate your loans through that lender. My undergraduate loans were a mix of stafford, perkins, and private. My graduate loans were all from the same private lender (which was not the same as the private undergrad lender).
This grad school lender told me that I couldn't consolidate their loan with the others because they were the only "lender" from whom I had borrowed for grad school. They claimed that the fact that I had multiple lenders for my undergraduate loans didn't "count," because undergrad and grad are totally separate as far as loan consolidation is concerned. This is flatly untrue -- the applicable regulations make no distinction between undergrad and graduate borrowing -- and I basically had to threaten to sue before they would release my loan for consolidation.
In contrast, I received nothing but excellent customer service from the federal consolidation service, and they warned me that many borrowers with whom they dealt reported similarly shady practices on the parts of private lenders.
Interesting discussion so far I really didn't think there'd be nearly as much (reasonable) pushback to Kevin's post as there's been.
I am fervently opposed to the idea of college as a club you have to join in order to get a professional job. Most of the dumb, lazy people I meet have college degrees. It tells you nothing.
At the same time, that's what we have in America. Institutions not set up for cutting edge eduction but social organizations that have become necessary for advancement in professional society. A thing strikingly similar to the mafia, actually. To then fail to make a college education an affordable proposition for a significant population in our society, especially if they're smart but poor, is just to make the game even more stacked against the US's long term viability.
I'd love to see major higher education reform, but giving everyone a fighting chance is where you've got to start.
In addition ... I went to a state university in the south and was never informed of the practical differences between private and federal loans; upon graduation, I had to watch a video explaining that student loans never go away, even with bankruptcy, and that was the extent of it. I never had any problems with my undergrad private lender, but I attribute that to luck rather than knowledge.
I largely with KM here. Although to be honest, my own experience with private lenders as actually been better than with the government here in Canada. With a big exception - some of my older government loans were eligible for forgiveness. But this sort of generous approach has long been set aside in favour of having the government act like an aggreesive collection agency unfortunately.
Part of the equation has to be getting a handle on tuition costs btw.
Also, a bit of a tangent - I feel that loan balanced should be extinguished after a period of best effort repayment. Maybe 5 years? Otherwise, you have the perverse situation where poorer students end up paying way more for schooling than wealthier ones.
Submitted by Chris Brown (not verified) on Sat Dec. 27, 2008 11:52 AM PST.
While I think a college education should be available to everyone who desire one at a reasonable cost, I am unable to work up outrage at Ms. Hickey's situation.
Consumers have a responsibility, or should have at least, to educate themselves as to the details of financial arrangements into which they enter.
Perhaps school children should be instructed early and consistently to not trust those who are offering to lend them money.
Submitted by Christopher (not verified) on Sat Dec. 27, 2008 1:05 PM PST.
Right off the bat I have to say this woman is crazy. Not only did I have to go through painfully long sessions on what student loans are and mean -- before I even got a single disbursement -- I was required to go through them again to even get my diploma. And I had to take and pass a, admittedly simple, multiple choice test on said material. Although, it's not like its rocket science. And this is required by the Feds. Either she bribed someone out of it, or she's as dumb dirt, chose not to pay attention. And then whined at the end of it all. Hey it got her through high school!
Not only did I have to go through painfully long sessions on what student loans are and mean -- before I even got a single disbursement -- I was required to go through them again to even get my diploma. And I had to take and pass a, admittedly simple, multiple choice test on said material.
Really? I hadn't heard this at all. Times have certainly changes since the pre-civil war days when I was a college student...
three perhaps random thoughts: 1) there have been some structural benefits (I think) from having many/most of a generational cohort kept in "higher education" for a few (or five or six) years instead of on the "real life" job market. That this delay imposes private debt hasn't been a concern; perhaps now it will be.
2) I know that tuitions/fees etc have been going up. BUT, it's also true that student life-style expectations have also gone up. Until July, I worked at a state university. The graduate students expected their stipends to provide a family wage -- on the one hand, I can see why people of grad school age want to start families, buy homes etc, on the other hand, it's called a half-time appointment for a reason... Similarly, the undergraduate life style is replete with expectations for cell phones, cable tv, cars, weekly binge drinking, etc etc -- most of the students work and take out loans; few seem interested in any delayed gratification and living at a lesser standard of living for even a few years.
3) M. Handley seems to think that paying the professoriate is the cause of higher tuition. Wouldn't that be nice! But it seems more likely that costs increase because of administrative salaries (which rise at a higher rate than professorial salaries, see especially the salaries of college/university presidents, the number of lower-level administrators and the size of their office staffs); huge costs for athletics (and, no, football does not pay for itself or other teams) and costs for constant new building to satisfy students and parents that their money is being well spent.
The William Ford program of direct lending worked great but since banks weren't making a killing on government guaranteed debt the Republicans killed it.
The current direct loan program has only about .5 billion of money and schools have to choose participating in it or the non direct program which has all the money.
Several universities were under investigation a few years ago because their financial aid offices had incentives to steer students to particular loan providers.
Student loans, whether private or government guaranteed are subject to the same"truth-in-lending" provisions as are all loans. To complete the application, one must sign a form acknowledging receipt of the "truth-in-lending" statement. Unless the lender is engaging in fraud, anyone borrowing to pay costs of higher education will know--or will have deliberately failed to know--what the interest rate is and how it can be adjusted.
I will second the comments about anyone clueless enough to attend an unaccredited institution charging $25K a year in tuition. For $25K, one can attend the institution at which I teach full-time for four years.
Unfortunately, borrowing heavily to get through college is a symptom of the "winner take all" economy that our nation has embraced- You must be at the top of the "good schools" to have a chance of the good paying jobs, otherwise it's the low-paying service sector for you, where you can spend the next decade or two trying to pay back all the money you borrowed to get that degree. But since we are a nation of optimists, and we believe in the the myth that in America, it just takes a little hard work to make it to the top, my bet is that this trend will continue until we are all minimum wage slaves in the corporate dystopia George Bush and the radical Republicans created for us.
I am inclined to agree with Maynard Hendley, except that the last 8 years have so distorted the student loan program that I am not sure it's right not to try to reform it, just to see if it could be done correctly. When you have financial aid officers on the take from private student loan companies I would say that you have officially hit some kind of bottom. And yet, that is what has happened. Along with the proliferation of for-profit degree factories that provide fitful if any real education (I am assuming that Brooks fits within this niche). And none of this has been policed for the benefit of students, families, or taxpayers (before Andrew Cuomo came along). It was just another outlet for rewarding banks and banking clones.
Maynard Handley gets the economics involved correct.
Kevin's proposed "solution" to the problem will not help students, it will HARM students - it will lead to colleges continuing to raise the cost of degrees faster than inflation. Students will end up MORE in debt than before, not less. The winners Under Kevin's "solution", the winner will continue to be the higher education industry, not students.
Kevin, predicably, completely ignores the point. Sigh.
Submitted by serial catowner (not verified) on Sun Dec. 28, 2008 11:46 AM PST.
Well, it used to be that state schools had low or no tuition. You didn't need a loan to attend.
Then legislatures began to raise the tuition "to adjust for inflation". Then they raised it a little more to pay for stuff the undergrad never sees, like research and super professors- "because the prestige of the university makes the programs better".
Where it all goes off the rails is when you start charging tuition. If you need to restrict admission, do it on gradepoints. As for a glut of perfect 4-point students, no society is so rich they can tell perfect students to look elsewhere.
Students with big loans to pay naturally feel that society owes them "a return on their investment". In the long run this can't be a healthy thing.
My brother is seriously mentally ill (Bipolar). After quite a long time without effective treatment, he is now stable, and has a reasonable but low-paying job. About three months after he was in his better situation, a collection agency popped up with demands for payment on his student loans from TWENTY FIVE YEARS AGO.
It turns out that most bad debts expire, but student loans do not, they are always live. He's agreed to pay down the loans.
In terms of public policy, I do not know what is right to do here. In terms of my brother's life, this seems utterly wrong-headed.
It seems to me that the real problem is that it takes someone $140,000. to get through college. When I attended, I took out a couple student loans, but they were for well under $10,000 in total. I made use of the much more affordable local community college for undergrad credits transferable to the university I eventually attended, and also took advantage of work-study funding. There needs to be some serious reform at colleges and universities regarding tuition costs and budget structures if tuition and other costs create a debt burden of such proportions.
Regarding the forgiveness of student loans:
1. It can be done -- the person has to demonstrate extreme hardship in the realm of completely changed life circumstances. Bipolar disorder might qualify, depending.
2. The current state of the law is the result of an overreaction by Congress to graduating professional (mostly medical) students who declared bankruptcy as soon as they graduated and were enabled by too forgiving bankruptcy courts. One downside to the extreme state of the current law is that institutions -- both schools and lenders -- feel no need to engage in a reality check on the economics of the proposition of lending to students. All the risks and costs are on the party with the least ability to gauge the cost benefits of what he or she is embarking on.
While there may be real problems with disclosure of whether a loan is federally subsidized or not, the case in this article does nothing to illustrate that point.
I am sorry, but I cannot feel much sympathy for someone who takes out $140,000 in student loans to get a bachelors degree in photography. It wouldn't matter what interest rate she was paying, that is a stupid move.
Having done something so idiotic, I cannot possibly believe her when she claims she didn't realize she was getting unsubsidized loans. The point is that it wouldn't matter what kind of loans she was getting. $140,000 for a photography degree. My God.
... private loan companies like Sallie Mae are a tool of Satan and should die a painful, agonizing death. They have no defensible reason to exist.
Posted by: Waingro on 12/27/08
There are times when we need more educated kids and there isn't sufficient financial industry monies for them. Is this one of those times?
Unless there's some pressing national need then why is government competing with private industry?
The Conservative view is probably that private industry should rule (in this field of loaning money at exorbitant rates). The Socialist view is government should own and run the banks and all the loaning. The Liberal view is private industry should do it's part and then if there's additional need the government should be activist to ensure we get smarter kids.
Well, we aren't taking over banks and that bring us to the question of whether there's a need for Liberal activism. I leave that to others who know the issue better.
No reason private lenders should be making federal student loans, you say.
How about the fact that the national debt now stands at $10 trillion and if the ever-competent, financial wizards at the U.S. Department of Education took over all federal loans tomorrow, direct loans would add a trillion dollars to the national debt within ten years.
The Education Department would be the largest bank in the world, according to the department.
The way you deal with bad behavior by lenders is to regulate them, not nationalize all student loans.
Finally, no one seriously beleives that the direct loan program is as efficient as the federal guaranteed student loan program. According to the FY 209 Budget, direct loans now cost taxpayers more than guaranteed loans.
Nice post. College is
Submitted by Loan Modification (not verified) on Wed Feb. 18, 2009 11:13 PM PST.
Nice post. College is becoming increasingly difficult to afford.
Borrowing money for college is a big responsibility but college remains a smart investment for obtaining a satisfying career that earns a competitive salary.
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Submitted by mortgage loan modification help (not verified) on Wed May. 6, 2009 11:42 AM PDT.
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I am glad I had a full athletic scholarship from Nebraska. Otherwise I would have never graduated with a BSBA.
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Submitted by Russell Owen (not verified) on Tue May. 26, 2009 1:19 AM PDT.
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Payment Protection.
Submitted by Mortgage payment Protection (not verified) on Tue May. 26, 2009 1:23 AM PDT.
Before you co-sign for a loan, be sure you can afford to pay the debt if the borrower defaults on the loan. You may feel confident that this won't happen, but consider the unexpected: people lose their jobs, become ill or disabled, or die unexpectedly. Others are just irresponsible.
vagyonvédelem
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Loans for education have always yielded high returns for students who invest even with 12 percent interest.
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Submitted by Loan Modification Expert (not verified) on Sat May. 30, 2009 10:47 AM PDT.
The trade of mortgage-backed securities have a lot to do with this crises. The main issue is evaluating these investments which has derailed the system. Students should be more careful about this.
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