Don't Chase Millennial Assets: Student Loan Debt, Part II

by: John Lohr
Summary

So, you want war stories?  Here are some that you might see on Elvira's late night horror show.

If the root of the problem is lack of adequate education and instruction--on many levels--we should be the ones to provide it.

Student loans do not have to be paid back; interest does not compound and the earth is flat.  Pick none of the above.

In their own words: Stories from the student debtors.

Almost everybody who took out student loans has some horror story. You hear things like: “I didn’t know you had to pay it back”, and “the minimum payment will never pay off the loan”. Of course, there’s the old standby: “I had no idea how much interest they were going to charge me”.

In those cases, there are usually three sources of blame:

  1. Lack of understanding by the student of the jargon thrown at them.
  2. A failure to explain in detail exactly what the student was getting into.
  3. Bad advice by a school or college counselor.

There are other stories that get more complex. Here, from researching previously published sources, are the students’ own words (names protected):

Problem One:

Getting an almost unmarketable degree

It took $100,000 in private and federal loans to get a Jazz guitar degree. Mother consigned and when the student defaulted, her wages were garnished.

Student’s comment: “I wish I had that information: If you have this degree, what generally do people make from it? The (federal) government loan has been cool with deferments and forbearances and looking at my income. I don’t know why I assumed that’s what all the loans would do.”

The fix now: Call lenders. Debt consolidation.

The fix then: Education. Proper explanations. School counselors.

Problem Two

A rapidly changing career creates obsolescence

Student borrowed $45,000 in federal and private loans for a degree in web design. Due to lack of payments, that debt is now $88,000. The degree now is useless.

Student’s comment: “Everything that I had learned from my degree became obsolete even before I graduated because the technology moves so fast.”

The fix now: Government income-driven repayment program. Bankruptcy.

The fix then: Effective career counseling.

Problem Three

The bank made mistakes

Student borrowed $50,000 to pay for his undergrad degree at a major university. Student made on-time monthly payments until one night a call was received from a credit recovery company stating that his private loan was in default.

“I called and said ‘Do you have a mistake here?’ and they were like ‘No. We don’t. You need to figure out how to pay this, and if you don’t, we can garnish your wages and take your tax returns.’”

The fix now: Legal action. A lot of time and finally the bank admitted the mistake. Student sued under the Fair Debt Collections Practices Act, won and applied reward to the debt.

The fix then: Not much, except due diligence on your banks.

Read some more of the war stories in their words, below.

Interest and minimum payments will kill you

The first bill I received for my MFA loans was for $416. I panicked and applied for an income-based repayment plan, which, paired with my habitual under-earning, lowered my payments to $96 a month. After five years of payments, I now owe more than what I originally borrowed because my payments haven’t even scratched the principal. A loan customer service representative explained that my loans were accruing $8.18 in interest every day. To stop this, I would have to pay at least $251.10 every month…. I wish I had known how bad of an idea it would be to take on loans when I started school. I would have just delayed going. $80,000 in debt later and I still don't have a degree? I would rather be without a degree and debt-free than in this boat I'm in now.”

Not a lawyer

My debt consisted of money borrowed for my undergraduate degree, a credit card that yo-yoed between being maxed out and being nearly maxed out, and now, the money borrowed for an MFA. Friends who were lawyers or doctors dismissed my debt, saying they had borrowed double, triple what I owed. The difference was that they were lawyers. I was an overqualified administrative assistant at a nursery school with a master’s degree.”

Expensive schools aren’t worth it unless you have enough money to afford it

From a financial planner. Joseph Orsolini, CFP, was quoted online:

I am working with a young lady who recently graduated from an elite college with $172,000 of student loan debt. She is going to law school in January and will add another $100,000 on to that total...some people never learn! We got her loan payment down to $1,200 per month by having her go back to school at her local community college so she could continue deferral on some of her loans. It was cheaper to pay that tuition than her student loans…I would never have let [her] get in this deep.”

Another Orsolini story:

[A] graduate with $70,000 in student loan debt just started a teaching job. Her take-home pay is $2,000 per month. Her student loan payment when she started her job in August was $685. Nearly 1/3 of her paycheck is going to pay back her student loans. I just got an email from her last week stating that her payment had jumped to $775 per month due to rising rates on the variable private loans. [She] came to me after taking on this debt.”

From Melissa Breau, blogger and freelance writer:

….They decided they couldn't give him any more money...with about 18 months of schooling left to pay for. He had to drop out and look for other job opportunities but still has all that debt over his head. Moral: A better, more expensive school is only a good idea if you can pay for it. [The loans] are a major reason he recently joined the Navy.”

I applied for a loan for grad school, deadline was August 1, and I had it sent in in April. Summer comes and I haven't heard back, so I call them in July, and they say they never got it. So I hurry hurry hurry and get it out to them again on July 18. And then I get a check for $4500 instead of the $5000 I asked for (and needed). Called them immediately. They said, ‘Oh, we show that we did not receive your app until August 6, and the new law passed says that as of August 1 we get to keep 10% right off the top of any loan we make.’ ‘Fine then,’ says I, ‘I only have to pay back $4500.’ ‘Oh, no,’ say they, ‘You owe us $5000 (and the interest that accrues over the entire 6-year repayment period).”’

I have private loans through Sallie Mae, and for my first loan I needed a co-signer since I was just 18 and I asked my mother, naturally. Years later they SWITCHED the Social Security numbers, and wreaked havoc on both of our credit!”

And then, there’s the woman who went to college, and then two graduate schools (without getting that advanced degree) and wound up having her wages attached, 1/12 of her gross pay. She can’t get a credit card (maybe, that’s a good thing), can’t get a car and estimates that she’ll have to work until she’s 89 to pay the loans off.

So what can we all do about this student loan thing?

Let us assume that the biggest problem is a lack of knowledge on the student’s part about personal finance, especially debt. Whose responsibility is that?

Parents? Too many are under-informed themselves.

High school counselors? Sometimes they provide scant or even misleading information on the subject.

Financial aid specialists from the lenders? Unbiased? Not.

Us?

We’re getting closer. What if there were one or more financial planners who volunteered time to counsel college bound students? What is the FPA doing, now that colleges and junior colleges are providing the CFP curriculum?

The SA community is a vast network of financially savvy contributors and readers. Why doesn’t the SA brain trust get behind a national community mission to educate the public?

For that matter, why don’t we all do that? My organization, The MoneyCulture Initiative, is a 501C-3 charity which mentors and coaches (in person) those who need help in personal finance matters. We work with homeless shelters, community organizations, school systems and YMCAs. We use volunteers who are un-conflicted financial professionals. There are others like us. I know many financial professionals will take speaking engagements with schools and community organizations. I commend all of them. I think it should be a national movement, and we are working toward that end. You can also.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.