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.
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First of all making college more affordable by enabling easier debt will only add to the inflation of the price of higher education: this is econ 101 so please use the education you supposedly bled to obtain! Also, I just went to college for engineering because I KNOW that there are jobs for engineers. Psych, anthroplogy and such should be hobbies not a degree for most of us.
Finally, we need to change the education system so I can graduate in 2 years instead of four! we are in school for only 7 months out of the year and I have to study basket weaving in the process to fulfill general education. On top of it, the first 4 semesters of maths could have been done in high school!
Why don't high schools nationwide make seniors take a required college prep course?
I don't mean academics, I mean what it REALLY takes for college. The bulk of the class should deal with career choices, choosing a college and especially HOW LOANS WORK.
There's no reason anyone old enough to sign on the dotted line should not be as informed as possible and can't make a smart decision.
We would have had the normal, regular V shaped recovery. Fast drop in prices till they get so low that people who couldn't afford them before, now can, and then straight up from there.
Instead we've had the U shaped recovery. We sorta kind slow down the pain on the way down, but then it sorta kinda takes forever to hit bottom, and then sorta kinda takes forever to get back to where we were.
If you signed on the line, whether you put the money to good use or wasted it on a Women Studies degree, you owe it back. So, pay up!
I don't think student loans should be forgiven with the exception of extreme cases. Ie. someone is in an accident or something and is not able to work.
Otherwise, teenagers or not, we all know what we're getting into. My wife and I graduated from college last year with BA in Markeitng. We both got decent jobs a few months after graduation grossing a little over $75k per year. However, we had about $70k in student loan debt. We live in South FL where rent is not cheap, but we made a plan and we're sticking to it.
DON"T BUY A HOUSE! Getting a mortgage is the worst thing you could do after graduating from college. Mortgage literally translates to "death grip". Look it up.
We pay the minimums on Federal loans and medium interest Personal loans. We have one specific loan with Over 10% interest so we tackeled it first. It's been a little over a year since we graduated and we've paid well over $20,000 on that loan. It's actually paid through 2016 if we didn't want to make a payment on it we don't have to. But the sooner you can pay them off the better. You don't pay the HUGE amount of interest that comes along with paying over the traditional 20 or 30 years.
Live below your means. We eat out every day for dinner. I've found it's cheaper fo buy dinner for 2 vs. buying groceries and cooking every night. It saves A LOT of time also... no cooking, not as many dishes to do, etc, etc. We both are working on replacing our JOB incomes by building our own businesses so we have to fund our ventures through our salaries as well.
I just don't get it when people say they make over $50k per year and can't make their $500/month student loan payments. Get your proirities straight and make a plan. Stick to it and see it through.
Wake up and smell the "American Dream". Financial servitude folks. From the top down. China is holding America hostage and politicians hold us. They way it is. Try and stop it and all hell will break loose.
Did not like that one ha! Spooks are real scunbags
The problem with saying "I don't feel bad for you because you made your choice" is that a MAJORITY of the people who take out loans for school are making this serious decision at 18 years old. At 18 years old you have no concept of how long a 30 year repayment is, or how much your payments will be. If you had told 18 year old me that I'd be paying as much per month in student loans as I do for my rent I'd think you were crazy. If you had also told me that it would take me almost 10 years (with significant breaks between) to finish college, and over 3 years to even get a job with my degree (which was dumb luck more or less) I'd probably laugh.
Yet here I am, fortunate enough to have the job but shackled with debt that by the time I decided it probably wasn't worth it in the first place it was too late to stop. You sink 30-40k into it then you might as well finish because if you quit you don't even get the piece of paper you were after. The sickest thing is for Computer Science, which was my major, you don't even learn anything in school. It's all so elementary and changes so quickly you get literally all your real education on the job. I won't even go into how poorly the Loan companies manage the loans, my credit has been ruined and will be ruined for another 5 years because they didn't properly apply deferrment while I was a full time student and again when I was in the "economic hardship" category. Thanks for that Iowa Student Loan, I appreciate I can't buy a house because you screwed me when I did everything to the letter that I was asked and you still screwed me.
We need to seriously sit down with our kids and help them figure out whether college is right. There are plenty of ways to continue education without having to obtain a degree. There are also plenty of decent paying/rewarding career paths that don't require college education. I truly believe everyone should be required to work for 1-2 years before enrolling in college, put them in the real world with their own bills before you ship them off because you are "supposed to". It's ridiculous. I am the person I am today partly because of my own choices, but also partly because of the societal influences present in the time I grew up. I was told I *HAD* to go to college, not that it was optional. Explain to 18 year old me how my diploma is worth 165k dollars and just how much per month until I'm 50+ years old that really is...
Okay people read teh closing remarks. The spirit of the article was that if the bank would not play ball they would need the Bankruptcy option. The whole idea is that the banks are not offering options. People don't walk out of school and automatically make big money and need to make reasonable payments and the private loan sector is not doing that. There should be options for this type of financing. There should be limitations on interest. There should be a five to seven year wait to discharge so that kids can get a chance to get a real job but cannot bail on the debt without putting a real effort. College costs for non community collegs is insane and out of control. Book alone can cost 2-3 thousand dollars. They charge kids twenty cents a page for papers they have to turn in. I am an adult learner and paid 500 dollars for books at a community college, another 150.00 in software that was required and another 1200 in tuition for one semester. so it is costing 4-5 thousand per year to go to a 2 year college. State collegs are 10-15 thousand dollars and private is costing almost 20-25 thousand a year. How can a middle class family support that
After the educational loan crisis, I think the next financial crisis will be when baby-boomers realize they don't have enough money to retire on. Now, my daughter wants me to co-sign on her college loan, but I'm worried it may jeopardise my retirement plans. Should I encourage her take more expensive high interest loans with the anticipation that they will be forgiven? What do you think?
My husband and I both graduated from a state university in 2007 & 2008 with a BS and BA. We both have been told since elementary school that we all need to go to college and that it is the only way to have a better life. So we went. He worked and took out minimal federal loans. I took out the maximum $10,000 I was allowed every year for 3 years in federal and private loans, banking on the future job I would have. He studied anthropology and history, while I studied french and sociology - because "you can do anything with a degree in liberal arts". Ha. Yeah, right.
Fastforward to now. He has a good job that has nothing to do with his major, making $50k/yr. I also have a job that hasn't a thing to do with my major, making $20k/yr. We have no credit cards, we only buy what we can afford. We pay $500/month in student loans, plus a (used) car payment, utilities, internet, groceries, and gas, etc. Add a new baby to the mix (diapers and $500/month in childcare), and we're barely making it, even living rent-free, thanks to family.
While it would be amazing to wake up tomorrow and not owe a dime in student loans, we know it is our responsability to pay this debt off. We just wish the payments were smaller so we could make other purchases (new shoes & pants because ours are falling apart), buy a house, or even actually build our savings account. We live in Texas, which purportedly hasn't been hit as hard as the rest of the US during this recession. So if it's hard for us, how bad is it for the rest of the US' college graduates?
We graduated right as the economy was going down, and we, like many of our peers, were faced with a job market that had no room for all of our shiny new degrees. Now we are all trying to live with the debt we have and not many of us are making the purchases that would really help the economy. For many of us, our lack of spending power is a direct consequence of our student debt. Whether it is right or wrong that we all took out the debt is somewhat immaterial. The question at this point is what will we as a country do if the growing student debt bubble implodes? What will happen to our economy? Many of us owe federal loans and if we can't pay the government, how will that decline in expected income affect the rest of the government?
No, college shouldn't be free because nothing is ever free, someone always winds up paying for it. College is a choice, but for many of us it has been preached to us since childhood that we MUST go to college. So when we graduate high school many of us go to college because it has been drilled into our heads that we MUST. And then we wonder how to pay for it, and somewhere along the way most of us learn about FAFSFA and we take a loan out, and yes, we read the fine print but most of us at that young age have no idea, no true understanding of how the cost for a college education can truly haunt you for the rest of your life.
How we think about higher education has to change. Yes we can all go to college, but should we?
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