It’s a vicious cycle. Many families in this country cannot
afford the skyrocketing cost of higher education without student loans.
But many graduates cannot find a job and cannot pay off the loans. As a
result, they wind up in a much deeper hole (as the interest and
collection fees accrue) with no way out.
Student loan debt in the
U.S. now totals more than $1 trillion. That’s more than all the
outstanding credit card debt in the country.
A recent report by the
National Association of Consumer Bankruptcy Attorneys found that both students and parents are borrowing at record rates.
College
seniors who graduated with student loans in 2010 owed an average of
$25,250, up five percent from the previous year. Parents had an average
of $34,000 in student loans for their children. The report says the
number of these parental loans has jumped 75 percent since 2005-2006.
“These are enormous numbers,” says
Ike Shulman, a bankruptcy
attorney in
San Jose, Calif. “They’re basically setting us up for
having a large number of fellow citizens become economically
non-functional for the rest of their adult lives.”
Growing
numbers of people are being crushed by this debt -- unable to pay and
unable to get relief. A recent nationwide survey of bankruptcy attorneys
by NACBA found that most (81 percent) had seen a spike in the number of
people with student loan debt looking for help. But in most cases,
there is nothing a lawyer can do.
Current law makes it almost
impossible to discharge student loan debt through bankruptcy. And unlike
other unsecured debt, there is no statute of limitations on student
loans. Lenders can pursue borrowers to the grave.
“It’s not fair
and it needs to be corrected,” says NACBA president William Brewer. “It
is a debt bomb that could cripple our society.”
The association’s
report says the country faces a serious economic threat from this
growing mountain of
student debt, one that could be every bit as
devastating as the mortgage meltdown.
“This will be a drag on the economy for the foreseeable future,” warns John Roa, an attorney with the
National Consumer Law Center and NACBA’s vice president.
It’s a problem for students and parents who co-signed loans Dave
Ingham, a disabled Vietnam veteran who lives in Minneapolis, fears he
could lose his savings and his house because he co-signed student loans
-- now in default -- for his son. Ingham is being sued by collectors.
His
son Shannon has been unable to find work since October 2009. He’s now
been diagnosed with acute anxiety disorder and depression. He’s still
looking for work, but his father says the loan defaults keep him from
getting hired.
“It seems that whenever he comes close to a job
interview, they run a credit check, see his loan defaults and the
interview does not proceed,” Ingham said at a recent telephone news
conference arranged by NACBA.
Can something be done? With
student loans backed by the federal government, someone in trouble can
try to get the payments deferred or modified. There are even loan
forgiveness programs. With private loans, it’s pay or end up in
default.
The National Association of Consumer Bankruptcy
Attorneys wants a “safety net” under student loans, just as there is for
other consumer lending.
If you start a business that fails, they
point out, you can file for bankruptcy and go on with your life. But
college students -- or their parents -- don’t have the same protection.
“We
need to make some common sense reforms, something like creating an
escape valve to relieve some of the pressure before the whole thing
blows sky high,” says NACBA vice president John Roa. “There’s no way to
diffuse this bomb if the status quo remains the same.”
NACBA
wants Congress to roll back the bankruptcy code to 1978, when borrowers
who couldn’t pay off their student loans (private or
government-guaranteed) could discharge that debt in bankruptcy.
Rep.
Steve Cohen,
(D-Tennessee), has introduced a bill,
H.R. 2028: Private Student Loan Bankruptcy Fairness Act, which would treat private student loan debt the same as other consumer debt.
Congressman
Cohen says his bill would “restore fair treatment to Americans in
severe financial distress” and give “an honest but unfortunate debtor a
chance for a financial fresh start.”
The bill is supported by the
American Association of Community Colleges, the
American Association of
State Colleges and Universities, the American Council on Education and
the
American Federation of Teachers, as well as various consumer
groups. There is currently no formal opposition.
The idea of
making it easier to discharge student loan debt via bankruptcy will not
sit well with those who backed bankruptcy reforms passed in 2005.
Clearly, getting the law changed is a long-shot.
Dave Ingham says
he doesn’t know how to solve the current situation. But he believes
something should be done before others face the same financial ruin he
does.
“It’s something that’s really out of control,” Ingham says.
“There are thousands and thousands of us out there who need help with
this situation. Please do not give up on us.”
By Herb Weisbaum, The ConsumerMan MSNBC.com
Unforgiven: Inside America’s Student Loan Bubble
by
Ben DeMeter
Rickina Velte was four classes away from earning her bachelor’s
degree before mounting student debt and the difficulty of raising a
family as a student forced her to drop out. “I now am over $65,000 in
debt with payments spiraling towards $400 a month,” she says. “I’ve
consolidated at least twice, but I can’t keep track of where the
payments are going. I can’t see a light at the end of the tunnel. My job
barely pays enough to cover childcare and school expenses for my boys.
I’m considering filing for bankruptcy, but I know that my student debt
won’t be included. And on top of that, my husband is in the military and
a bankruptcy could damage his security clearance. I’m at my wits’ end.”
Rickina’s story is tragic, but it’s just one of many. These days,
tales of suffocating student debt are a dime a dozen. The national
student debt now officially stands just shy of $1 trillion, and default
rates for some loans are as high as 20% in some areas of the country.
It’s easy to see that there’s something wrong with the way we pay for
college.
But while media outlets continue to churn out reports on an impending
student loan crisis, nobody has bothered to stop and wonder how exactly
we got here in the first place. There’s been no talk of where or why
things went wrong. We’d like to fix that. In this article, we’ll review
the history of student lending and explore how unchecked enthusiasm for
college, combined with an unregulated industry, has lead to the biggest
financial crisis we’ve experienced since the housing collapse of 2008.
Sowing the Seeds of Student Aid
Let’s start at the beginning.The idea of financial aid for college students was introduced
by the Indiana General Assembly in 1935.
The assembly awarded college fee remissions to students who scored the
highest on a variety of competitive tests. The pursuit of discounted
college tuition quickly became so popular that the state created the
Indiana State Financial Aid Association to oversee the distribution of
scholarships at state schools like Indiana University.
The program was well-run, and as a result, many colleges in
neighboring states elected to join the ISFAA as well. However, despite
the ISFAA’s success, the program would remain relatively small until
after World War II, when the race against the Soviet Union for global
superiority drove the United States to push for higher education harder
than it ever had before.
The U.S. government started looking for a way to get more of its
citizens into college when the baby boom took off in the years following
World War II. When the USSR successfully launched Sputnik in 1957, the
U.S finally took action. In 1958, Congress passed the
National Defense Education Act.
The act set up a loan specifically designed to help students from
lower-income families pay for college. The loan carried a 5% interest
rate, and students had 10 years to pay if off after graduation. Believe
it or not, this loan still exists today, though it’s now known as the
Federal Perkins Loan.
The National Defense Education Act proved to be a rousing success.
Over the next two decades, the government introduced numerous bills and
programs designed to make the dream of higher education attainable by
any citizen from any social class. These include the College Work-Study
program (which allowed students to take co-ops to help subsidize the
costs of their degrees), the Educational Opportunity Grant Program
(which allowed exceptional students from low-income families to attend
college for free) and the Middle Assistance Act, which removed the
income on limit federal aid programs in order to make loans more
available to America’s emerging middle class.
By 1983, the Department of Education had paid out more than $6
billion in student loans. Thanks to the availability of financial aid,
America’s colleges and universities were enrolling
over 10 million students annually. As a result, the perception of higher education changed.
A college degree was no longer considered an exceptional achievement,
but a mandatory benchmark in a young person’s career. This, in turn,
created an increased demand for graduate degrees, so Congress passed the
Student Loan Consolidation and Technical Amendments Act, which allowed
students pursuing a Master’s or PhD to consolidate their new loans with
their existing ones into a Guaranteed Student Loan with a 10% interest
rate.
At the time, the emphasis on higher education made sense. Between
1984 and 2008, unemployment peaked at 7.5% and was sometimes as low as
4%. People with college degrees were expected to earn 75% to 100% more
in their lifetimes than people who only had a high school diploma. So
where did things go wrong?
A State of Calamity
When we examine the student loan situation today, it looks like the
garden we planted during the Cold War has grown out of control. Tuition
has
risen by 3,400%
since 1972. The average student debt is now sitting at $25,000, up 25%
in 10 years. The interest on loans guaranteed by the
government-sponsored enterprise Sallie Mae is currently 3.4%, but it is
set to double in July 2012. If it does, students will incur an
additional $6.3 billion in debt over the 2012-2013 school year. Overall,
national student debt is expected to exceed $1 trillion by the end of
the year.
And of course there are the horror stories, the
suicides
and the tales of people like Bob Johnson, who took on student debt not
once but twice in order to find work in an ailing market and who are now
struggling just to stay off welfare. After graduating in 1987 with a BA
in journalism, the NYC native struggled to find work. By the time he
got a job that paid about $800 a month, he had already been forced to
defer his loans twice. When he was laid off in the mid-’90s, he decided
to go back to school for his MFA in theatre management, believing that
it would increase his chances for employment. “I went back to school,”
he says, “and foolishly took out more loans.”
Bob was laid off again when the recession struck in 2008. He has
since struggled to find work. He’s managed to stay off of welfare by
picking up odd jobs that run the gamut from photography and video
production to apartment painting and social media coaching. In the
meantime, his student debt has grown from less than $100,000 to several
hundred thousand dollars. “The money coming in is not great,” he says.
“I currently have $700 or so in the bank, $400 in a drawer and $5K in a
retirement account that will probably eventually be seized by the
student loan people. It eats at me every day. I don’t ever see myself
getting out of debt. I worry about my future.”
Young professionals aren’t the only ones struggling with student
debt, either. For every self-made baby boomer who is sick of hearing
kids complain about their debt, there’s another for whom the dream of a
lucrative post-college career turned sour. At the moment, people 60 and
over owe more than $36 billion in student loans, and people aged 40-49
account for 15% of all student debtors.
“I didn’t understand at the time what I was signing or the
consequences,” says Faith, who is still paying off her student loans at
44. “I didn’t understand about compound interest. I’ve tried to
negotiate with them. I’ve begged for help from them. All Sallie Mae says
is, ‘You’ll have to pay it back no matter what.’ But I can’t. I’ll
probably die with this debt, and I’m just about to give up and stop even
trying.”
A college degree was once the key to a brighter future. Now it’s more
like a financial prison sentence for so many Americans. Where did
things go wrong?
A Two-Headed Snake
Many people blame the job market, and on the surface, it makes sense.
According to the Economic Policy Institute, the unemployment rate for
Americans aged 16-24 is the worst it’s been in the 60 years that the
institute has been monitoring the data. This is especially true for
minorities. While the unemployment rate for white college graduates sits
at 8.4%, it pales in comparison to the 13.8% unemployment rate for
Latino college graduates and the 18% rate for black graduates. While the
terrible job market certainly exacerbates the student debt crisis, it
doesn’t explain why so many students have come to struggle with such
significant debt.
When we trace the evolution of the student loan crisis, we see two
major forces at work. The first is the ever-growing importance that we
place on having a college degree, even though the majority of Americans
have their doubts as to what higher education can actually provide for
their children. For example, a study by Pew Research found that 57% of
Americans think that
college is not a good value, and 75% believe that it is too expensive for most people to afford. And yet, in a separate study, Pew discovered that
94% of parents still expect their children to go to college.
In many ways, it seems like a natural expectation. Think about what
your grandfather did for a living, then what your father did, and then
what career your parents expected of you. As a parent, you want your
child to have a better life than the one you were able to provide for
them. Unfortunately, this becomes exponentially harder to do with every
generation, since the number of available “good” jobs is
shrinking and becoming increasingly specialized.
The Bureau of Labor Statistics states that “mid-skill” jobs – jobs that
require less education than a bachelor’s degree – will account for 45%
of the available work in 2014. But the rate of enrollment for trade and
tech schools isn’t trending that way.
College students from middle-class families enter the system
expecting to earn a certain amount of money for a certain career. When
things don’t work out that way, life becomes difficult. Saddled with
debt and in search of meaningful work, they’re forced to move back home
and take a minimum-wage or part-time job that can barely pay for the
grocery bill. And according to a Brookings Institution study, the odds
that they’ll ever get a job related to their degree shrink with every
month that passes.
Thomas J. Fox, the community outreach director at Cambridge Credit
Counseling in Cambridge, MA, has seen this disconnect between
expectations and reality all too often in his line of work. “Like many
people in my generation, I was raised with the advice that securing a
degree is the key to prosperity in America,” he says. “For the better
part of a century, that logic has held true. However, things have
changed. No longer is a degree itself a guarantee of success […]. Many
students I’ve worked with have an unrealistic expectation on earnings.
Many think they’ll enter the workforce making $80,000, with no
experience. More alarmingly, others believe they’ll make a YouTube video
that will go ‘viral’ gaining them fame and fortune, or develop the next
Instagram.”
Lending Left Unchecked Goes Haywire
Many students enroll in expensive four-year universities without
considering their future earning potential, and that certainly
contributes to the student loan crisis. But it’s the unregulated lending
industry itself that bears much of the blame for the skyrocketing debt.
Mitchell D. Weiss, a professor of finance at the University of Hartford
and the author of “Life Happens – A Practical Guide to Personal Finance
from College to Career”
sees the student debt crisis as an example of predatory lending gone out of control.
“I counsel a fair amount of students who are struggling with very
large levels of debt and the stories are disturbingly similar,” he says.
“Many of them were the first in their families to go to college. Mom
and Dad didn’t have a lot of money, and they weren’t well versed when it
came to financial matters. So, they left it up to Junior to figure out
how to make that side of things work.”
Since the typical college student doesn’t know how to get a loan,
Weiss says, they tend to lean on university-appointed loan officers for
help. From there, the lenders are free to sign the student up for any
sort of loan they please and pass it off as a “discounted” rate.
“Not only were the loans pretty easy to get,” Weiss says. “They
didn’t have to be paid back until after Junior was done with school. In
the meantime, though, the college got its money, the lenders – both
government and private – are getting their interest and Junior’s living
in Mom and Dad’s basement because the magnitude of his loan payments
preclude his ability to afford a place of his own. Adding up the pieces,
you have an educational failure that’s compounded by an alignment of
interests between the schools and the lenders that runs contrary to
those of the student borrower.”
The degree to which the lending industry’s interests have
“conflicted” with those of America’s students is staggering. Testifying
before Congress in a 1991 hearing, Senator William Roth stated that the
Department of Education had an “abysmal record” in providing oversight
to university lending policies.
Even that, though, is an understatement. Since the Department of
Education became the officiating body in charge of overseeing university
lending policies, it has given lending agency executives free reign
over the system, and they’ve used their power to squeeze America’s
college students for every penny they’re worth. According to Citizens
for an Educated and Democratic Republic co-founder Peter O’Lalor,
“Predatory lending has been found to be widespread throughout the
industry in both nonprofit and for-profit student loan companies. One
student loan collection company even went so far as to install a
4,000-gallon shark tank in their headquarters.”
Even the nonprofits are getting in on the action. A 2007
investigation into PHEAA, Pennsylvania’s state lending agency, revealed
that executives of the nonprofit had used the income they gained from
jacking up interest rates to 9.5% to reward themselves with luxuries
like a $45,000 Learjet rental, spa treatments, limousine rides
and falconry lessons.
Yes, falconry lessons. Further inquiry revealed that PHEAA had been
using a legal loophole to overbill the government, and therefore the
taxpayers,
for $15 million.
In that same year, an investigation led by New York Attorney General
Andrew Cuomo revealed that the country’s largest lenders had made
illegal arrangements with the loan officers at more than 100 colleges
and universities across the country, including Johns Hopkins, Columbia
and Syracuse. In exchange for lavish vacations and cash bribes, the
officers agreed to put banks like JPMorgan Chase on their school’s list
of “preferred lenders.”
And what has the government done to curb this rampant corruption? The
late Ted Kennedy probably said it best when he addressed Congress in
2004. “A year ago, Senate Democrats proposed legislation to shut both
[lending] loopholes down once and for all. The Senate Republicans did
not act on that proposal, did not introduce their own legislation, and
did not hold a single hearing. They asked no oversight questions of the
Bush Administration. In short, they did nothing.”
Sallie the Jailer
The
most disgusting part about the entire student loan crisis is that the
agency created to keep student loans in check has done more than anyone
else to guarantee that student debt remains a get-rich-quick scheme for
industry executives. Founded in 1972, Sallie Mae is the
government-sponsored enterprise tasked with backing, managing and
collecting student debt. Since it was given that authority, it has
systematically stripped student borrowers of every protection they have
ever enjoyed.
In 1996, Sallie Mae led the charge to get student loans exempted from the
Fair Debt Collection Practices Act.
In 1998, it worked with the Consumers Banking Union to lift the statute
of limitations on student loans in an amendment to the Higher Education
Act. Through these two acts, the heads of Sallie Mae guaranteed that
student loans could never be charged off in bankruptcy and that they
could never expire. Then, in 2003, Sallie Mae bragged to shareholders
that it was able to increase its profit margins by 29% (compared to the
previous year’s profits) thanks to the increased amount of debt money it
was able to collect under the new legislation.
Under Sallie Mae’s guidance, student aid has become one of the most
dangerous loans in the country. These days, when a student takes out a
Sallie Mae-backed loan, they’re stepping into a scary financial
labyrinth. No matter how old the loan is or how few assets a graduate
has, they must still pay their debts – and if they don’t, they’ll be
subjected to relentless harassment by debt collection agencies, not to
mention lawsuits.
To compound the problem, the average default rate for student loans – 80% of which are backed by Sallie Mae – is
8.8% as of last September. In some states like Missouri, that number can be
as high as 20%.
But if you ask any Sallie Mae employee, they’ll tell you things are
just peachy. “The economy poses a significant challenge, but the
overwhelming majority of our customers are successful in managing their
obligations,” Spokesperon Patricia Christel
told the Washington Post
this March. “Only 3.5 percent of our private education loans default
and no one benefits in that situation. That is why we work so diligently
to reach customers and counsel them.”
The For-Profit Sham
But if Sallie Mae is bad, then for-profit colleges are worse. These
schools – which include the Art Institutes, DeVry University and other
online colleges – have been involved in
numerous scandals
over the past few years. Fueled by the renewed interest in trade
careers, many for-profit colleges charge exorbitant fees in exchange for
enrollment in career-specific classes. But often, a student can attend
such classes through a local tech school for far less.
The for-profit industry has gotten so out of control that one former
student loan executive said this to Congress: “In the trade school
system, what you sell are dreams. If the student breathes, can write,
and is over 18, he is qualified to become a student and to get a loan”.
Due to the low quality of the education that many students receive,
the default rate on loans issued by for-profit colleges is disturbingly
high. In an investigation into the industry, Senator Tom Harkin (D-IA)
found that nearly
half of all federal student loan defaults
occur at for-profit colleges, even though these schools only enroll 10%
of the higher-education student population. Currently, the default rate
for all loans issued by for-profit schools is sitting at 15%, much
higher than the national average.
A Bubble, or Something Worse?
Now that student debt is pushing $1 trillion, some experts like Robert Reich have begun to throw around the word “bubble”
in their articles,
likening student loans to the subprime mortgages that collapsed the
housing market and triggered the recession in 2008. In many ways, it’s a
fair comparison to make. College students are the ultimate subprime
borrowers. They have limited, if any, credit history and very little
experience with loans – and in many cases the amount of money they’re
being handed by Sallie Mae and other lenders is on par with a mortgage.
But could the bursting of a student loan bubble really be as
catastrophic as the one that toppled the housing market?
Not quite. While some experts are sold on the idea of a bubble, just
as many are convinced otherwise. According to For Student Power
spokesman Patrick St. John, the structure of student loans inherently
prevents them from exploding the way mortgages did in 2008. “The student
loan bubble will not burst in the same way the housing market’s bubble
burst,” he says. “Federal student loans are fully insured by the federal
government, so if a student refuses or is unable to pay, the private
loan provider is fully compensated. Because of this ‘built-in bailout’
there won’t be a crisis point like there was with housing.”
However, just because student loans might not be subject to a
burst-bubble effect, that doesn’t make them any less problematic. The
de-facto bailout that loan companies enjoy may keep the industry from
collapsing, but it also makes overhauling the system that much harder –
and for every day that passes without reform, our children’s future
grows that much bleaker.
“We’re talking about a generation of young men and women who are
losing hope of attaining anything close to what their parents have
realized for themselves,” says Weiss. “This isn’t only economic in the
form of diminished consumerism and the accumulation of wealth, it’s
social. Take away the hope for a better tomorrow and the unrest that’ll
ensue will, in my opinion, be no less convulsive than what my generation
lived through in the late ’60s.”
Fox agrees. “As more people struggle with debt,” he says, “it will
make the appeal of college less alluring. We already suffer from a lack
of suitable individuals to fill positions. In the end, unchecked student
loan debt will diminish our economic leadership position.”
To Forgive or Not to Forgive
Although awareness over an impending student loan crisis is at an
all-time high, the debate continues to rage over the best way to fix it.
The popular opinion seems to be that we should reinstate student debt
forgiveness. Before Sallie Mae had its way with the legislation, the
statue of limitations on student loans expired after seven years. They
could also be forgiven through bankruptcy. At the moment, the
legislators pushing hardest for loan reform believe that rebuilding
these escape routes is the best way to ease the burden on America’s
students and taxpayers.
Currently, Majority Whip Richard Durbin – creator of the Durbin
amendment – is sponsoring legislation that would reinstate the
borrower’s right to
charge off private student loans in bankruptcy.
Though the borrower would still have to pay their federal loans, the
amendment would give distressed graduates a little more wiggle room than
they currently enjoy. “The student debt crisis in this country is
largely ignored by Congress,” he told Congress in a hearing. “There are a
lot of lives that are being changed.”
However, some experts believe that Durbin isn’t taking reform far
enough. Senator Hansen Clarke (D-MI) is working in conjunction with
Student Loan Justice, a nonprofit organization, to push the
Student Loan Forgiveness Act of 2012.
The act would allow people with student debt to be forgiven of it if
they agree to pay 10% of their discretionary income for a period of 10
years. Furthermore, anyone who takes out student loans after the bill is
passed would be eligible for the same deal, with a cap at $45,520 – the
average cost of obtaining a four-year degree. Currently, an online
petition supporting the bill has more than half a million signatures.
While the debate continues to rage over how much we should forgive
student debt, Weiss says that there are plenty of ways that students can
lessen their debt burden. These include testing out of as many courses
as possible via CLEP and AP exams in order to reduce enrollment fees.
Students can also start out at a community college and then transfer
credits to a four-year university after two years. Another strategy is
to take winter and summer sessions at schools that are less expensive.
Final Thoughts
The student loan crisis is every American’s problem, regardless of
our political leanings. Our unyielding infatuation with the four-year
college degree and an unchecked and unscrupulous lending industry have
together created an abscess on our economy. Every year, student loans
get more expensive. Every year, more and more college graduates are
forced to default on their debt in the face of an uncertain job market.
And every year, scores of retirees are reminded that no matter what they
do, there is no escaping a student loan.
It’s a hard sell, since even loan forgiveness offers no guarantee
that the buck won’t simply be passed on to the next generation. But the
need for change – some change, any change – in the lending industry is
no less dire. Something needs to be done, and both parties can agree on
that. Regulations need to be tighter on for-profit colleges. We must
place an emphasis on making accredited two-year schools just as
attractive as traditional universities. Most of all, students need to be
well-educated about college debt before they apply to school, not after
they graduate from it. Anything at all to get us off this road to
calamity we’re headed down.
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