The Student Loan Crisis: How Bad Is It?

The student loan industry is a giant scam if you ask me. Parents and students alike don’t realize the slanted arrangement they are about to take on when applying for these loans. Society places such a strong emphasis on education (for good reason) that the education industry and especially the lenders behind it stand to benefit tremendously. It’s a shame that so many of these organizations view a young person’s desire to better educate themselves as an opportunity to rip them off, but I can’t say I’m surprised, not after listening to the news for the past six months. The only way to come out on top and not cost oneself a fortune in interest and penalties over the years is to never miss payments on student loans and, when possible, pay considerably more than the minimums. This can be hard to do at a time when jobs are scarce and higher education is wildly expensive.

At the root of the problem are big banks which have lobbied Congress successfully to remove bankruptcy protection on both federal and private loans. What does that mean? For starters, lenders can charge steep penalties on late and missed payments with the reassurance that they’ll eventually get their money back, even if the borrower files for bankruptcy. The lenders can also be more amenable to deferment and forbearance options for students who can’t make payments immediately upon graduation. This makes the lenders look like good guys who offer extended grace periods but the reality is quite the opposite. Deferring your loans is perhaps the worst thing a borrower can do for their future. All the interest gets tacked on to the back of the loan most likely with added penalties and fees. Deferring a private loan is like paying the minimum on a maxed out credit card: ultimately the lender wins. Hopefully Obama can do something sooner than later about this system which cripples young workers and saddles them with debt.

I’m getting off topic here. My original goal for this article was to discuss the potentially negative effects the credit crisis may have on the student loan industry this year. Even with the one-sided loan agreements which currently exist, lenders will have no choice but to tighten their belts even more during 2009. Regardless of bankruptcy protection and the advantages to the lender of having some students default, there are major costs and headaches involved with excessive default rates. For that reason, lenders will continue to toughen up their borrowing standards and increase interest rates to offset an increase in risk. This effect will probably be most obvious in the less regulated and more risky private loan industry, rather than through federal loans programs such as Stafford and Perkins.

Rumors of private student loan providers asking for ‘government bailouts’ has already caused plenty of chatter. Do we want to support an industry that is poorly regulated and rips off students? Some say yes because at least they afford people the chance to get more education who don’t qualify for federal loans. If they do get help from the government, borrower protection clauses will likely be part of the bargain. Plenty of graduate students, particularly in the legal and medical professions have maxed out their ability to borrow federally subsidized loans. If private loan providers tighten their belts too much, it could dramatically limit access to funds or make them too expensive. It’s an unfortunate situation because many of these students can’t afford to get higher educations without these loans. Even so, lenders have to compensate for increased default risk by charging higher rates of interest. That’s not a great solution in my eyes because it saddles new workers with higher debts and monthly payments, resulting in lower rates of home ownership and, obviously, more stress in general.

On a positive note, federal loan programs have, for the most part, been successful over the last decade. Popular student loan programs such as Stafford, Perkins, and PLUS (Parent Loans for Undergraduate Students) have continued to increase higher education rates and often subsidize interest while students are in school. Even as the cost of borrowing from the government eventually rises, the strength of the programs has been a huge step in the right direction. While credit has dried up in most sectors of the shrinking economy, federally backed student loans actually grew 18.6% year over year in 2008.* The gloomy economy has encouraged a lot of people to go back to school, get more degrees, and hit the job market at a time when the opportunities are a little better.

I had to get all of this off my chest today. I keep reading articles about the effects of the credit crisis on the student loan industry. It just seems like any way you cut it, loans or no loans, high rates or low rates, the student gets the short end of the stick. While the government is busy bailing out the losses created by years of fraud and deception on Wall Street, how about we do something good for the people who will eventually control the economy of tomorrow.

Comments

[axelrod608:]

Student loan programs have morphed from student aid to corporate profit driver. Add to that the lack of corporate money available for loans and you have a totally dysfunctional program, just as your article portrays. Good article.

I'm stuck paying my kid's tuition at an elite school that her mother, my ex, promised her. Now the ex can't get student loans and I either pay or the kid can't graduate. The enveloping tentacles of this financial meltdown are everywhere and the tab always gets handed to the responsible party that saved and invested wisely.

The blame for the dysfunctional student loan system can be handed to the usual culprit - Congress. When they changed it from government to corporate, the interest rates, fees and penalties went up, and the borrowers' protections vanished. Why ? Congress let the credit grantors write the legislation. They further protected the creditors at the debtors' expense when they adopted the new Bankruptcy legislation, again written by MBNA - a credit card company.

The US Congress is a body that serves the interests of corporations and big business at the expense of "the people". And when corporations and big business screw up and lose Trillions of dollars, the Congress does not hold them responsible or make them pay for their stupidity. No, Congress bails out the perps and hands "the people" the bill.

And there are still people who honestly believe that Congress can and will fix the current financial mess we're in. And that documents the failure of the American public school system - people who can't think critically graduate anyway. And that's my rant for the day and I feel better.

Jan 29 10:19 AM

[Al-USA:]

Good article. I'm sure alot of people can relate.

Jan 29 01:26 PM

[Leftfield:]

Good article and comments. Don't forget, Biden was a main driver of the '05 bankruptcy act which made it far more onerous and expensive to file for bankruptcy. I'm sure it went far beyond real reform and into satisfying corporate greed.

Higher ed is so corrupt, business side and research side. Their costs have ballooned into bubble proportions with the easy money (for them).

UConn was once tuition-free. Now it costs plenty but state workers' families get that free. For our enormous tax increases, this is a huge loss for the average person.

I think WAKEUP is right, sad to say.

Jan 29 02:05 PM

[Gtarras:]

dont forget about schools... they have been ramping up tuition costs dramatically as well... much faster vs. the average salary growth...

Jan 29 02:25 PM

[Russell Bailyn:]

Glad you guys can appreciate the article. I'm a financial advisor in New York and some of my clients have 50K+ in debt from college and grad school. By studying the amortization of these loans (especially the private ones) I'm sick to my stomach. A 50K loan mean 100K will ultimately be paid back.

Jan 29 02:42 PM

[Did U Think...:]

The problems with loans is that they drive up the cost of education. They also entice people to take out loans for a "full ride" including food and shelter costs on top of tuition. These loans have turned education into a luxury event. Students whose parents can't or won't give them a full ride need to work to pay off living expenses instead of charging them up for later. This is how we did it back in the day, and that is how it can work again in the future.

Credit in any form is evil. Neither a borrow or a lender be. It feels good for a short time but sooner or later it all catches up with you.

Jan 29 06:05 PM

[kagame:]

US citizens still have it amazingly well compared to most of the world. Sometimes I think we are just huge crybabies. There are plenty of high quality state schools for reasonably individuals. However, we like to overspend as a culture and everyone wants to plunk down $30k a year for some insane reason.

I just graduated from the University of Kansas, debt free on a full ride academic scholarship. I probably could be going to a top tier law school right now. Guess what I'm going to do instead! Go to Texas State for free to get a solid graduate degree, then work and save some money, and then perhaps if I have good grades, a soid research background, and excellent recommendations, perhaps I'll be able to get a full ride scholarship to law school, perhaps pledging to do non-profit work for a few years for the State after I finish school to get any loans I might have forgiven.

People who cant make college inexpensive for themselves should just go get a quick certification program in an in demand sector, and start saving money. Do some night classes at a community college and better themselves. There is no reason to take on 50k or more of debt. I call shenanigans on the usefulness and utility of those expensive educations from liberal arts colleges. MIT or a highly rated tech school is one thing. A top ivy league is maybe worth it. Thats about it.

The more people that insist on paying these ridiculously high tuition fees and taking on loans, the more its going to cost everyone. This is a tragedy of the commons. You know whos supposed to fix these sorts of issues where there is conflict between personal interests and the groups wellbeing? The government! HAHAHAHAHAHA!

Jan 29 07:59 PM

[SierraMadre:]

Kagame, wow...aren't your perfect! You boast of your fantastic education but you missed the lesson regarding rattling on about subjects you know nothing about. You don't have student loans and, judging by your post, you obviously have no idea what the Mr. Bailyn is talking about. Those of us with loans know that the laws pertaining to student loans make "payday" loans look fair and reasonable.

Jan 30 12:00 AM

[VMili:]

Hey guys:

Does anyone have ay advice for me. Unfortunately, my parents could not afford for me to go to college and thought that student loans were the answer since (in thier minds )I would have had a great paying job by the time I graduated and interest rates would be so low that it wouldn’t feel like large loans! Now im a little more then $60K in debt, thanks to a private school here in South Florida I attended, and it’s driving me out of my mind! I have consolidated all my loans and have my govt loans with an institution and the rest of my private loans along with some gov’t loans with Sallie Mae. I cannot consolidate my reaming govt loans because Sallie Mae doesn’t consolidate anymore, so I recently consolidated ALL my govt loans with the Dept of Education…. In the meantime, I have been paying off the interest within the last 2 years, and I cant believe the mess im in. At first I didn’t feel the $300/month payment because I have a good paying job with commission as an Accounting and Finance recruiter, but now things have took a dramatic turn with less jobs out there and my own workweek (along with pay), cut by 20%!
I don’t know what payment plan I should choose for since I will have repay by may 2009. it seems like the interests rates keep accumulating no matter what I do. Plus, I don’t want to over pay if my job is not even secure! Without getting into specifics, should I talk to a financial advisor about this? I can’t even call sallie me for help because no one knows what there talking about or I get transferred ten times. It’s a guessing game what country I’m talking to. Only once did I speak with someone who could help me, they were in México!
Does anyone know what Obama plans to do for someone in my situation, which seems more common then I thought. Are there plans for stopping the interst fromaccumulating? Seems like ill be 80 when my loan paid off which went from 60K to 120K,

Please help; advice needed….vanessa

Jan 30 11:26 AM

[kagame:]

Why dont you take out a life insurance policy on your parents? Theyre the ones who got you into this mess. Or maybe flee the country. Even declaring bankruptcy wont help you out according to the article. Was your education worth it?

Sorry to be a jerk, but this is exactly what Im talking about. At what point did we decide that EVERYONE would have to go to college at a cost of 50k minimum? Insanity.

Jan 31 07:55 AM

[hinchey:]

Great Article. Tell the truth about the student loan industry and the education industry. Good JOB! Finally someone is writing the truth.

Jan 31 01:54 PM

[Better Off ...:]

I borrowed $40K and attended state universities where I earned a bachelor's and master's degree in Psychology. My first job out of grad school was as a therapist and the pay was $21K per year in the state of Alabama. This was in 1996 right after I completed my master's. I will warn anyone who reads this that a master's degree is not very useful in most southern states. A degree in social work is what will land you a job. A terminal master's in psychology is about as marketable as a degree in art history.

I faced quite a bit of personal life difficulties around this time. I was taking antidepressants, had to declare bankruptcy and eventually my wife divorced me. I was expected to pay $750 per month as a minimum, and at the time, I was working part time on a contractual basis for a Ph.D. who only paid me if the clients showed up for their sessions I was also.living with my father in a small 2 bedroom trailer because I simply could not afford my own apartment.

I had no choice but to go into default. I was refused the chance to consolidate the loans by one lender. My life never really improved and I admit that I contributed to my problems. My depression left me with no desire to think of my own long term survival and I intentionally avoided my financial responsibilites due to a complete sense of hopelessness.

I wound up moving in with friends and living in weekly hotels for a couple of years. All of this contributed to my overwhelming sense of hopelessness and I quit caring whether I lived, much less whether I made choices to secure my future. I had a job with a national mental health hospital in 1999 but believe it or not, I had a very unethical boss and I quit the job with no notice. I then began working lower paying jobs and changing jobs often. Eventually I had been out of mental health so long and had such a shabby resume and employment history, I turned away from any hope of returning to work in social services.

Given my frequent address changes and job changes, it was impossible for the student loan collectors to locate me. So, the problem was out of sight and out of mind.

Two years ago, I began working as a over the road truck driver for a large national company and the student loans caught up with me. I was bullyied into signing a loan rehab agreement requiring I pay $750 per month for 9 months. My original $40K amount has been increased to an amount between $120-160K due to penalties. This loan rehab program is adminstered by a collection agency in Indianapolis and they provide me with only the info they want me to know.

Yesterday I was called by two of their debt collectors and I will admit, I have very critical opinions of this whole student loan abomination. I pushed their buttons with my sarcasm and they wound up screaming at me and attacking my character over the phone. They also were very threatening and I am inclined to believe their actions were illegal.

Because of their complete unwillingness to listen to my plea and to understand that I have been paying about 30% of my gross pay each month in this "rehab" program, I have decided to stop any further automatic account withdrawals from my checking. Today I will notify them I am opting out of the loan rehab program and the checking account will be closed.

I sat out as a young man with the best of intentions. I wanted to go to college and better myself so I would have a middle class life. I had no idea of the predatory nature of the student loan industry. All of the things I had hoped for, a white collar job, the chance to own my own home, a family to spend time with, are all impossibilites at this point.

I spend 3 weeks at a time on the road in a very dangerous job that I do not enjoy. The trucking company I work for is a decent company and they have not disappointed me, but trucking is not the lifestyle I want to live. I cannot tolerate being away from my love and the persistent fear of wrecking a 40 ton truck on icy roads. I have a wonderful girlfriend and she has a five year old son. I enjoy spending time with them, but I only get to see them 3 days every 3 weeks. I look back over my life and weep. I am now 42 years old and cannot even afford my own apartment, much less a home. I will never be able to return to academia, my likelihood of having a child of my own is negligible. I would not want to father a child and have him grow up in the abject poverty of my childhood. I set out to improve my life and I have ruined it with student loans.

Feb 03 07:23 AM

[studentloan...:]

I would like to add one more thing. At my university (it is a major one) it is common practice to offer foreign students full rides to school. They do this in the name of diversity and becoming an "international" school. In order to attract these students they must offer full rides because they do not qualify for student loans since the lenders fear the students will move back to their country and never pay.

In the meantime, citizens and permanent residents, are offer (I am talking about graduate school) the wonderful world of debt (or no school)! Moreover, as I mentioned, it is a debt that one cannot get rid of even in bankruptcy.

At my school and in my program, it would be impossible to work a full-time job or even a part-time job and do well in school. The professors do not give a dam that the student is taking out loans. They only care about academic rigor. The classes are too difficult to work and do well. In fact, they highly encourage students to not work at least in the first year. I had a GA, which helped, but it wasn't the free ride that foreign students got.

One more thing. The professors in my department are known for not allowing a graduate student to gradate early. If one works their butt off to finish a dissertation in 6 months, they purpose find things wrong with the dissertation to extend the time limit. There is an unwritten rule that a dissertation should take at least 1-2 years. Hence, every time a student goes to their committee the committee finds more stuff to do.

I have one friend so frustrated that he just stopped going to school. Keep on mind that each extra semester in graduate school could easily run 20k. Add two years because your professors decided to bust your chops in the name of academic rigor and you just added 80k to a debt that one cannot even discharge in bankruptcy.

Are you guys starting to see how one can easily graduate with well over 100k through no fault of their own? The system is rigged. All I am asking is for the ability to allow people to include student loans in bankruptcy should they qualify for a bankruptcy.

Again, this should be retroactive so that people that filed 2 years ago do not get screwed!

Feb 22 12:37 AM

[studentloan...:]

Obama should, at the very least, allow those who qualify for chapter 7 bankruptcy (which under current standards means that one has nothing to include ALL their student loan debt. The same way one can include all their credit card debt.

For those that qualify for chapter 13, they should be allowed to have the Mafia like interest and fees charged by organizations like Sallie Mae to be removed. What happens is that a person filing bankruptcy has probably put their student loans on deferral. In the meantime, Sallie Mae bombards the account with fees and interest. I speak from personal experience. In the two years I had mine in deferral, ny balance went up by nearly 30k. Think about that for a sec!

Obama should simply allow for anyone who has filed bankruptcy since the laws changed to go back to the courts and amend their bankruptcy to include student loans.

For those of you who think this is wrong keep in mind that generations before had that privilege. If someone got a degree in the 60s, 70s, 80s and life threw them a curve ball they could file bk on their loans and get a fresh start. That money was used to buy a home, buy a car, send children to school etc. THEREFORE, this would not be anything more than restoring what previous students had.

Also, keep in mind that if one went to school in the 60 or 70s they actually had a degree worth something and it cost much less. Today, school is overpriced ad the value of a 4-year degree is about what a high school degree use to be.

In the US, one should be an indentured servant. The current bankruptcy laws make those with student loan debt, in essence, indentured servants.

Feb 22 12:38 AM

[ken ohis:]

We offer loan of different kind like Xmas loan,insurance loan e.t.c.And if you are interested please content us
at: luciano.loaninvestment... And you have to fill the following things
CONTACT CLAIM AGENT:
Fill the below processing form and return it to MR Ken Ohis
FULL NAMES OF BENEFICIARY:
Country:
SEX:
AGE:
MARITAL STATUS:
TEL NO:
Duration:
NEXT OF KIN:
OCCUPATION:
AMOUNT

Thanks...

Oct 22 06:20 PM