July 7, 2012

The horrors of student loans

From Occupy Student Loan Debt:

1. We knew what we were doing when we took out these loans. What we didn’t realize was that the system was rigged.

    Lenders carry little risk when distributing student loans, thanks to federal laws insuring student debt. Due to the lack of bankruptcy protections and the profitability of collection costs, there are no incentives for lenders to help students avoid defaulting.

    Defaulting on student debt can have serious financial consequences for one’s lifelong financial future, and this can happen after only several months of missed payments.

    With 53% of new graduates facing unemployment, the default rate is clearly bound to skyrocket – it is already estimated at 1 in 5.

    America’s largest lender, Sallie Mae, acts as both a lender and collector, servicing federal and private loans while making $700 million yearly in fees from students in default. This is predatory lending, plain and simple.

    There has been record of unethical profiteering by those involved with the student loan industry, including but not limited to lenders bribing school officials to promote their loans, and Department of Education officials profiting off of student loan company stock.

    Unfortunately, much of the dialogue surrounding the student debt crisis has blamed students themselves as opposed to lenders, college administrators, and government officials.

2. “Why take out student debt to begin with? Why not turn to grants and scholarships, or work while going to school?”

    Federal financial aid has shifted from a grant-based system to a loan-based system. Last year, student loan debt surpassed credit card debt for the first time in American history – at over $1 trillion total.

    36 million Americans have student loan debt, and 2/3rds of all college students take out student loans.

    In 1980, grants covered approximately 69% of total public college costs; today, they cover only 34%. Meanwhile, Pell Grants, which go to the students in most need, continue to face cuts.

    Since 1978, the average price of tuition at US colleges has increased over 900 percent, 650 points above inflation.

    In comparison, housing prices – which led to a toxic bubble - increased only fifty points above the Consumer Price Index during those years.

    As for real wages, they’ve declined significantly since 1978, making it increasingly difficult to cover tuition by simply working.

    Almost 2 million people at least 60 years old are still paying down student loans, and over 1/3rd of all student loans are held by borrowers over age 40.

    Federal programs such as income-based repaymentare not available to borrowers who’ve already defaulted on their loans.

3. The difference between federal and private student loans, and why it matters:

    Federal loans provide certain “safety nets” such as income-based repayment  in order to help students avoid defaulting; private loans do not.

    Private lenders such as Sallie Mae, Chase, CitiBank, Wells Fargo, Key Bank are exempt from federal fair debt collection requirements.

    Sallie Mae assigns low-income students variable interest rates of up to 25%. These high rates can send total debt snowballing out of control within a short amount of time.

    If you have loans through Sallie Mae, there is no way to refinance your debt, or work out an income-based payment plan according to your household budget. These are options that are available for credit card debt, but student debt is subject to unique double standards.

4. Bankruptcy isn’t an option.

    Neither federal nor private loans can be discharged in bankruptcy, even for disabled individuals – whose Social Security checks can be garnished even if living below poverty level.

    Prior to the 2005 law that banned any discharge of student debt in bankruptcy, less than 1% of all total federal student debt was discharged in court. There was not an epidemic of new graduates running directly to bankruptcy lawyers.

    It is entirely possible to lose one’s home and belongings in bankruptcy while retaining student debt.

    Meanwhile, credit card, gambling, and child support debt can all be discharged in bankruptcy – so this isn’t a moral issue.

5. What happens if I default on a student loan?

    There are no limits on how much a private student lender can charge for interest, penalties and fees once a debtor falls into default.

    Additionally, there are no statutes of limitations on student debt; the default will remain on your credit report for life until settled.

    Depending on your state, you may have your professional license taken away (i.e. teaching, nursing) or even your driver’s license revoked.

    The Department of Education can now garnish wages, unemployment benefits, disability payments, tax refunds and Social Security payments without a court order.

    60% of employers check credit when hiring, and if you default on a student loan and are employed in a public position, you may be terminated.

    You may be denied entrance to the military, and cannot obtain a security clearance for military advancement or federal employment.     

    These barriers to steady employment for those who’ve defaulted on their student loans keep them in a catch-22 that prevents them from making payments and getting back on their feet.

    The Department of Education and Sallie Mae continue to profit from defaults and as long as they both hold direct influence over Congress via lobbying efforts, there may not be any meaningful reforms until it is too late.

    It should be noted that Sallie Mae has a close relationship with House Speaker John Boehner (R-OH), whose daughter Tricia is a Sallie Mae collections executive.

6. Even if you’re able to make payments and don’t default, you’re still affected.

The New York Times writes:

“A study of recent college graduates conducted by researchers at Rutgers University found that 40 percent of the participants had delayed making a major purchase, like a home or car, because of college debt, while slightly more than a quarter had put off continuing their education or had moved in with relatives to save money. Roughly half of the surveyed graduates had a full-time job.”

    Student debt is delaying the steps of adulthood that are considered crucial to following the American dream, and withholding vital consumer spending that can stimulate the economy.

    The similarities between the ongoing student debt crisis and the 2008 housing crisis are apparent. Action must be taken immediately before the economy faces even further damage.


Garima said...

Great post!! very informative.
Thank you very much for such a lovely and informative post.
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Jill Rooney, Ph.D. said...

Good answers. I am really fed up with the criticism of students who take out loans. Do these critics really think they have another choice? Without a college degree, it's nearly impossible to get a job that will pay living expenses. Without financial aid, college is too expensive. But too many still continue to blame it on students themselves.

Anonymous said...

As Dr Galbraith (James, not his father) said: The leisure class are predators. Predation is what they do.

Liz said...

Applying for a student loan is quite scary but the fact that it can help you out in making your educational career successful. The borrower should at least take full responsibility in paying it also.

Stewart said...
This comment has been removed by a blog administrator.
Anonymous said...

Why does an A student at MIT in EE or computer science pay the same student loan rate as a C student in Art History at some no name college ? Our government has created an education bubble much like they did the housing bubble.