9/12/2012 4:53 PM ET|
The growing student-loan crisis
Financing an education often means debt -- lots of it. Struggling grads should get more support, and private lenders should get less.
The mortgage mess might have been over by now if we'd done just one, sensible thing. We should have given bankruptcy judges the power to restructure home loans.
Bankruptcy judges can alter mortgages for commercial, rental and vacation properties to make them more affordable. But they can't touch home loans. So mortgage lenders had no incentive to help people when loans that never should have been made started to blow up. Instead, lenders lost people's paperwork, gave contradictory advice and promised modifications even as they proceeded with foreclosures.
If bankruptcy judges could fix home loans, far fewer lenders would have given homeowners the runaround. Knowing they could lose big-time in court, those lenders would have properly staffed their mortgage-modification divisions and started offering deals. The threat of bankruptcy would have been the leverage homeowners needed to get real help.
It's too late now. But we have a chance to fix another mess by allowing bankruptcy judges to modify private student loans, which never should have had bankruptcy protection in the first place.
Federal vs. private student loans
Private student loans are different from the federal loans that make up the vast majority of education debt. Federal loans:
- Are made or guaranteed by the U.S. government.
- Have relatively low fixed rates that aren't based on credit scores.
- Offer generous deferment and forbearance options, which temporarily suspend the obligation to repay the debt when the borrower is experiencing financial hardship.
- Offer flexible repayment options, including income-based plans that limit payments to 15% of disposable income. That generally works out to less than 10% of gross income, according to financial aid expert Mark Kantrowitz of FinAid.org. The required payments can drop to zero for very-low-income borrowers.
- Include the possibility of forgiveness with certain kinds of service and after 10 to 25 years of payments.
Private student loans, by contrast:
- Don't include government guarantees or use taxpayer funds.
- Are often made by for-profit lenders.
- Usually require co-signers.
- Typically have variable interest rates that are based on the borrower's (or co-signer's) perceived credit risk.
- Have limited repayment options and virtually no possibility of forgiveness. Many lenders don't offer forbearance or income-based payments in case of financial hardship; a big complaint from borrowers is that lenders refuse to offer affordable payment plans.
- May require the borrower to make payments while the student is still in school.
Federal student loans are made to enable people to get a higher education. Private student loans are typically made to earn a profit.
Private student loan volume was pretty negligible until the past decade, when so-called "asset-backed securities" became hugely popular with investors. Lenders learned they could make big profits by bundling mortgages, auto loans, credit card debt and yes, student loans, and selling them to investors. The volume of private student loans quadrupled between 2001 and 2008 to more than $20 billion, according to the Consumer Financial Protection Bureau.
The problem was that in their haste to make money, lenders stopped paying attention to whether the loans made sense. Which is how people earning $40,000 got $300,000 mortgages, and how undergraduates wound up with six-figure student loan debts.
The rules are different now
Once upon a time, borrowers could get some relief, since student loans could be erased in bankruptcy court. Starting in 1976, the rules began to tighten. Borrowers were required to pay their loans for at least five years; later, that was extended to seven. Then in 1998, Congress changed the law to make it all but impossible to discharge federal student loans in bankruptcy court. Many private lenders got protection as well by affiliating with nonprofit guarantors to make the loans. But in 2005, the bankruptcy reform law extended the protection to private student loans regardless of whether a nonprofit or government agency was involved.
With that kind of legal protection, private student loans joined a short list of debts that can't be erased. That list includes child support, alimony, tax liens and claims arising out of wrongful conduct, such as a judgment against a drunk driver who kills or injures somebody.
Tax liens and federal student loans are money owed to the government. Child support and alimony are obligations that can keep people off the public dole. Prohibitions on erasing judgments from wrongful conduct just make sense.
Protecting private student lenders? Not so much.
- Calculator: How much do I need to save for college?
I'm not suggesting we allow student borrowers to dance away from obligations they voluntarily took on (even if they were teenagers with little idea of what they were getting into). Just dialing the rules back to 1997, when student loan borrowers had to make at least seven years of payments before discharge, could make a big difference. Even better would be returning to the days prior to 1989, when only five years of payment were required before borrowers could get a discharge of their education debt.
Because what troubled borrowers need isn't necessarily erasure of their debt. What they really need are lenders willing to play ball -- to offer sensible payment options to people who are struggling. Taking away the bankruptcy exemption would give borrowers a pretty big bat to bring to the game.
Liz Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "The 10 Commandments of Money: Survive and Thrive in the New Economy" (find it on Bing). Weston's award-winning columns appear every Monday and Thursday, exclusively on MSN Money. Join the conversation and send in your financial questions on Liz Weston's Facebook fan page.
VIDEO ON MSN MONEY
Ahh, the good old days of the 1970's.
I got in at a Ford Motor Comany engine foundry and assembly plant in Cleveland, Ohio for summer work. 3 summers there, working for 10 weeks each summer, I grabbed all the overtime I could (60 hrs min., 70 hrs max. per week). At that time you had to work 12 weeks before you could join the union. So no union protections. I worked the furnace line, casting furnace pit doing cleanup, assembly lines, ran tow motors supplying assembly lines with bins of parts,and the loading docks too. Essentially I covered for guys going on summer vacation. I caught onto each job within the first full day (or night). Cleaning the slag from below the casting furnace was the toughest. That physically drained me each day. The furnace line was the 2nd toughest. Those furnaces were HOT! All that work was in mid summer. We had to take salt pills and drink lots of water for the furnace line and casting furnace pit work. Work clothes consisted of hard hat, safety glasses, ear plugs, gloves, coveralls, underwear, socks, and shoes. No pants or shirt...way too hot. Lost the hair on my arms working the furnace line when I decided to roll my sleeves up. My arms, 35+ yrs later, are still hairless.
Would I do it again? Hell yes. Those 3 summers paid for 5 years at Ohio State. Back then, OSU cost about $275 a quarter for tuition and $275 for room/board. I walked away w/ 2 - B.S. degrees...debt free and money in my pocket. Yeah I lost out on hanging with my friends, but the money was worth it.
Also working in the engine plant and foundry was the best incentive to stay in school. To see how some of those guys acted and lived, no way was I going to work there for a living.
This is a tough one. First, I would like to point out that if you take out a loan you are morally responsible for paying it back--no gray area here. So you have to have a plan to finance your education. It should never enter your mind that the calverly are going to come and rescue you.
Here is what I did and trust me, it was tougher than it sounds: I come from a very uneducated family who never even thought of the concept of attending college. I desperately wanted an education in a field that was expected to have a good job outlook.
I did not marry or have children because my focus was on getting an education. I joined the military for a 3 year term. Since the military provides food, clothing, and shelter, I had every dime over $50 per paycheck direct deposited into 2 savings accounts, one for a car when I got out and one for college expenses. When I finished the 3 years, I bought a new, used car. That coupled with the GI bill, a part-time job, plus the work-study program, and a few scholarships along the way for excellent grades allowed me to graduate from pharmacy school with only 1K in student loans.
Yes, I ate a lot of Ramen during my college days. Sometimes I was so tired I could barely finsh my shift at my part time job, but I stuck with it. People laughed at me for wearing old clothes, working in the cafeteria, and buying Suave shampoo, but it paid off. You can do, it just have to really, really want it. Good luck!
The reason why the student loans have gotten crazy is because colleges know that they can raise their tuition fees pretty much at will and the students will still pay it because the govt doles out the money like its water. So you get a loan for $5000, and the school raises the tuition to $4995. Then the next year they give the students an extra $2500 (now $7500) to help the students pay tuition and live, and then the school raises again to that $7495.
There is no incentive for the schools to cut fees, and look for deductions anywhere in their budgets. There is also no incentive for them to help the estimated 30-50% of students that either dont finish in 6 years, or NEVER FINISH college. The drop our rates of American college students are outragously high. I have had college professors treat me and other students as if they didnt care if we knew the subject, let alone pass their class. If we got an "F" they still got paid their salary!
The college system is broken because of the way the money debt is thrown upon the students with no reprecussions against the colleges if the students dont get a degree.
Actually what I see, is that many are taking in student loans, with the hope that future salaries will cover the costs they accumulated in obtaining their education. Many who are looking to have student loan debt forgiven or even just reduced, want to bring their debt/monthly payments within a reasonable range for the salary they are now getting. So many invested in an education, and now are underemployed, underpaid, or unemployed completely. I also suspect that if these individuals have lower student loan burdens, they would be out spending that money, thus stimulating the economy - having children, buying homes, cars, goods and services would all benefit the economy. A 30-year old having a $100,000 student loan balance with a payment plan extended over 25 years to afford the monthly payments, and even making a fairly decent salary of $75,000/yr, barely has hope to have the debt plus massive interest paid off before retirement, much less owning home, saving for retirement (thus increasing the burdens placed on Social Security), or saving for a child's education. As some have mentioned, a government stimulus to help those saddled with high student loan debt, would be more useful than the bank bailouts, where that money has not necessarily "trickled" back into the economy, and big banks are still leery of lending. I don't believe people are trying to shirk responsibility; they're just looking to break even at this point, and hoping for assistance, possibly from banks and government to get there. It's ridiculous that some borrowed only $20,000, have paid in that $20,000, and still owe almost $20,000 more from the interest. Imagine the scale if the amount borrowed was $100,000 instead. How can anyone get ahead at that rate? Even just forgiving further capitalization of interest, and fixing the amount owed at little to no interest, would likely be a huge help. Most people aren't looking for a handout, but rather a useful solution to the current situation, no matter how they came to be there. It's enough to stifle not only that person's spirit, but also stifling to the economy in lost dollars to pay interest instead of spending. It makes more sense to help borrowers pay what they can, rather than default altogether.
This is an aweful article..supporting students and homeowners to skip out of their payment obligations.
It's this type of mindset that is destroying this country.
"Federal student loans are made to enable people to get a higher education. Private student loans are typically made to earn a profit."
Give me a friggin break. Federal student loans ARE THE SOLE REASON a college education costs so much. Since the gov made it easy to get a loan in 1965 the cost of a college education has increased at 4 TIMES the rate of inflation. To make the Fed loans out to be a positive just shows the utter naivety of the author.
I have an unimaginable amount of student debt I am paying down as I've earned my Master's degree... I took the loan, so I am going to pay for it... but my major problem is the overall cost of college. It is absolutely ridiculous, and my loan debt has kept me from being able to purchase a home.
I took out a student loan with the Federal Government and have been paying on time ever since. I have never expected special treatment, I did expect to pay back the loan as agreed. In May, 2012, my loan was sold by the Dept of Education to a private servicing company called MOHELA. Monthly payments are skyrocketing and interest rates are rising. It is unbelievable. Go to the MOHELA page on Facebook, etc, to see what I mean. The information listed in this article regarding federal loans is accurate.......until your loan is sold out to the private sector. There is no way I can make the payments MOHELA is expecting. I had been paying $350-$450 per month on the Federal plan...will now be over $800 by this time next year. I could seriously end up in financial crisis over this even working two-three jobs to try to keep up. I don't want a BAIL OUT...I do want to know why I was SOLD OUT and am working to find out why that happened. The American people need to know taking out a Federal loan doesn't mean you will always have a Federal loan.....
Liz, you bleeding heart liberal you. You make me sick. Really, I just want to puke after reading drivel like this. So you want to let all those "struggling" ex-students just completely erase their student loans after making payments for a whopping 5 years !!!! Do you even have half a clue what the implications for this would look like? Seriously. With the cost of college what it is now days, students would rush to finance every last dime of their education that they could with student loans. May as well take enough out for some nice trips to Mexico and the Caribbean during spring break and for that car. (Not that they don't already do that now...) Get a low-level entry job with that Under Water Basket Weaving degree or other liberal nonsense, rack up loads more debt on the old credit cards, pay the minimum for 5 years, and then POOF, make it alll go away! How completely convenient that would be. And don't think for a split second that this isn't how it would play out.
What about those students who actually have morals that work 2 plus jobs to pay their way? What about the parents who sacrifice those nice vacations everyone else seems to take, the newer cars and SUVS, the cabin, the nice threads, the big house, the toys, and on and on, so they can actually SAVE for the children's college education. Yeah that's right, once again they get a slap in the face for doing the right thing. Same with all the people who responsibly keep paying their mortgage, even if their home is underwater or they have lost loads of value.
I now work in a small private for profit school. Ours is not as predatory as some but some of the students are really gaming the system. We have students we've refused to accept as a transfer or refused to allow to return who have flunked out several times or at several schools. They keep changing course of study to get loans. They live off the loans and are very verbal with other students that they do not intend to pay them back. I think if a student fails to keep a reasonable GPA for several semesters, the loans need to stop or they need start paying some of the cost themselves. Since they consider it "free" money, they don't care if they pass or fail.
There is also a mindset that "everyone" should go to college. No it is not for everyone and neither are the loans. Students are allowed to take out more loan than is needed for tuition. We cannot stop them. I appreciate that many of our students are hard working and want a better life for themselves and their families. Some want this but lack the skills from high school to succeed. Others simply want to milk the system and many schools milk the system.
Education cannot be "free" Schools still have to pay for their staff and other costs. I make far less teaching than I used to in the field, but I love teaching. If it was "free" it simply means we taxpayers are footing the bill. We need better loans for education that teach people how to do a job, fewer loans for degrees in art.
My husband I went to school with minimal loans and repaid them, grateful for the opportunity. We both worked through school, slept and ate little. I now see students amassing huge loans they can never repay and not even concerned. It scares me.
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