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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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?
How many times are you going to recycle this uber liberal drivel Liz?
NO ! Student loans should NOT be dischargeable in bankruptcy after only 5 years of minimal payments. If that was the case, students would finance every last dime they could with student loans, graduate, make the lowest possible monthly payments, run up the credit cards full tilt, and then simply declare bankruptcy, and POOF...it would all go away. !!! Sweet! Practically free education and lots of stuff to go with it. ARE YOU INSANE LIZ??? Do you have half a clue what the implications for this would look like? No, you really don't, do you.
The government scumbags decide that they see a potential for "VOTER BUYING", and proclaim: " EVERYONE SHOULD BE ABLE TO OWN THEIR OWN HOME", grand, and spectacular but THOSE THOUGHTS WERE PURCHASED WITH TAXPAYER DOLLARS AND THE BAD PART IS ............... YOU WOULD HAVE TO BE RETARDED TO BELIEVE THERE IS ANY LOGICAL MERIT TO THEM!
Now, "we the people" first, subsidize the universities (supposedly to keep tuition down), then we "tax free" them, then we supply grants, then we subsidize government guaranteed student loans ...................... and the cherry on the top comes from, guess who, politicians declaring that "everyone needs and should go to college" ........... this is how "we the people" get 81% on student
GRANTS and less than 30% graduating .................. meaning that "we the people" pay for about 50% of college aged students (NOT NECESSARILY AMERICAN) to have a two year party session!
I and all of my friends attended college in the 70's and none of us
took out college loans. We went to various colleges, U.C., Cal States
and Private colleges. The cost was less than today but not adjusted
for inflation. We had two advantages. Some of our parents had
actually taken heed of financial advice and had saved for college for
their children and or used current income. They actually sacrificed for
their children instead of getting the new SUV or Mercedes. All of us
went to school full time and worked at least half days, many of us at
minimum wage. We all graduated from college not only without debt,
most of us had savings and we were not a special group of spoiled
rich kids. The government came out with all the student load programs
which seemed an easier way to finance college. It's easy to sign that paper
and parents didn't bother to get the legal advice in regards to their liability
of co-signing. Students stopped working, parents stopped saving.
Now the President is the one saying how unfair it is to have those students
have all the debt. But it's the government debt that will follow you forever
and enforced by his IRS. I do feel sorry for you, but it was your choice.
There are too many people who are willing to borrow huge sums for the "college life experience" , i.e. room, board, laptop, parties, car, sorority, etc. but then complain about paying it back. We live 20 minutes from the state university. One daughter graduated with no debt because she lived at home for those 4 years. Not as much fun, but $10,000 a year cheaper. The other daughter is doing the same, yet so many of her local friends are staying in dorms (20 minutes from home) on borrowed money because they don't want to live at home. Sorry, kids, that's all on you. You want to act like a rich kid, you get to pay it back like a rich kid.
P.S. Did anyone see the president recently say that no family should ever reject an acceptance letter because of the cost? Seriously? Does he live under a rock? The white middle class has been choosing universities based on cost for years. No one is giving us anything. You make school decisions based on where you can reasonably afford to go. There's no blank check sitting in my mailbox. We can't afford $30,000 a year tuition and borrowing it for a BA would be insane.
The issue here is not federal student loans, but private student loans and the for profit schools that use them to churn out students with sometimes useless degrees. I looked at getting a second bachelor's degree online. When I talked to the "counselor" (aka salesperson), the first thing out of her mouth was " we can get you a loan". They're really no better than used car sales people. Ability to repay is not a consideration, just sign. At least on the federal end, the amount you can borrow is capped. 5000, 5500, 6000 and 6500 for four years of college. My numbers are not exact, but close enough. If you can't payback 23K, then you probably should not be going to college.
In my opinion, these practices are far worse than some of the "exotic" loans during the mortgage boom.
I know this won't be a popular post--but there are cost effective ways to get a college education. I am having a difficult time feeling sorry for students who take out thousands of dollars in loans and then complain about how they can't pay them back.
I attended a community college and then went to a 4 year public college. I did not attend an overpriced private school because I wasn't comfortable with the tuition they charged. I did not participate in a "study abroad program". I worked my way through school. And I was able to find a job to pay my loans back.
I think who is more at fault are the kids parents. It appears everyone was asleep at the wheel here.
Federal student loans allowed colleges to raise their fees to exhorbitant rates. There was a time when students could earn enough working summers to pay tuition during the college year, along with part-time jobs during that school year. Then the loans became available - easily available. So the colleges felt free to charge more. The students are caught in a loop. Loan availability goes up - college costs go up. Community college, you say? Have you looked at their tuitions lately? I hate that our kids are incurring a lifetime of debt by the time they are 21. Help from the government is very expensive!
I live near a major university and talk with a lot of students. They tell me about all the freebees they get along with the student loans they took. Hardly any talk of scraping by and working while they are inschool. They have a lot of time for partying and dating though. If you want an education you can do it. If you think it should be free or painless then grow up. Plenty of us NOT RICH kids went thru college and did it in 4 years because we were paying our own way. No time to just drag it out and party. This is just once again the ones who want something for nothing blaming the rich. Aren't you whiney bastards getting tired of blaming some one else?
If the liberal arts part of college wasnt required school would be mutch more affordable.
My son has around 60K worth of student loans that he is trying to pay them back. Fresh out of college and only making 11 dollars an hour,,, HE CAN NOT afford to make the loan payments.. I pay 1 of the loans to help him out. But he has NOTHING left at the end of the month. Rent, utlities and car payment, gasoline,, oh and FOOD. The poor boy is broke. He tried to get his loans modified, but they said he makes to much... REALLY??? $11.00 per hour? He will eventually be making more money,, but not right yet. So, whats he to do.. The government will NOT help him,, But they will help Abdu get his free education... SHAME!!!!
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