Zero Sympathy for Student Loan Borrowers: The Next Subrpime Crisis Brewing Underneath the Radar

An excellent PBS documentary on the reality of the student loan industry today.

Student Loan Sinkhole?

The worst, most burdensome kind of debt in U.S. history!

To carry this kind of monster debt during the worst recession since the Great Depression and the worst job market in decades.

Are we setting ourselves up for trouble?

I look at it this way....

91.8% of 2009 college grads living at home and 80% of 2008 grads jobless... Who do we expect to pay into Social Security and pension funds? Who do we expect to pay these inflated home prices when so many of those graduating from college can't even make ends meet?

This all reminds me of what was warned about in that 1990's book The Retirement Myth.

Well they shouldnt be giving out student loans to everyone, especially the "Cash Back" ones that give kids $$ to pay for "living expenses" which in reality means booze ipods and entertainment.

I know a loser 25yo who just got a $4300 check in the mail today from her student loan. She hasnt paid her rent in 2 months. Think that money will be used responsibly?

Sharp, financially prudent students do not rack up tens of thousands of debt with no prospect of paying it off.

I dont disagree with that...but no one is forcing these loans on them. And I understand not all of them have parents to tell them to only take out the minimum needed, nor would many want to listen to their parents at 18 years old anyway....

But its part of the maturing proceed...if they are financially and mentally incapable of comprehending these loans and their ramifications, they pretty much get whats coming to them...a lifetime of indebtedness.

I am one of those people who simply dont buy the argument that "I was young and made some mistakes" as an excuse. SOOO many people use that excuse for getting into massive debt at a young age....and they pay for that irresponsibility into their late 20s and early 30s. It seems fair to me, and all those who were responsible enough during our early years NOT to "make dumb mistakes" just bc we were young

greling said:

When I borrowed Direct Loans from the federal government, I was given entrance and exit counseling and clearly read my terms and it was understood just how much I owed, at what interest rate, and that I would have to pay them back. When I approached Sallie Mae for a private loan, they wouldn't even tell me the interest rate. They just wanted me to sign and bragged about how much "Cash Back" I'd get. Thank goodness I decided to pass. I later found out they wanted me to pay 16.9%. And with a 710 FICO!
Im showing my age here, bc I dont even remember who told me what about my subsidized loans. But I do remember all the fees were laid out, and thats how I figured I could make money by simply depositing the student loan money into a CD and repaying it after graduation.

If some lenders are not disclosing the APR and origination fees in the docs they sign, and reps are just bragging about the amount of "Cash Back" the student is going to get in their hot little hands, I fully agree with you that those practices must stop.

SUCKISSTAPLES said: greling said:

When I borrowed Direct Loans from the federal government, I was given entrance and exit counseling and clearly read my terms and it was understood just how much I owed, at what interest rate, and that I would have to pay them back. When I approached Sallie Mae for a private loan, they wouldn't even tell me the interest rate. They just wanted me to sign and bragged about how much "Cash Back" I'd get. Thank goodness I decided to pass. I later found out they wanted me to pay 16.9%. And with a 710 FICO!
Im showing my age here, bc I dont even remember who told me what about my subsidized loans. But I do remember all the fees were laid out, and thats how I figured I could make money by simply depositing the student loan money into a CD and repaying it after graduation.

If some lenders are not disclosing the APR and origination fees in the docs they sign, and reps are just bragging about the amount of "Cash Back" the student is going to get in their hot little hands, I fully agree with you that those practices must stop.

That's only the start of the scandal. About a year ago, Sallie Mae and several school financial aid administrators got into trouble by the NY attorney general when it was found out that financial aid officers were getting kick backs and vacation trips for closing deals on borrowers and setting up Sallie Mae as their school's "preferred lender".

I honestly believe that the best and only way to fix the student loan problem and the cost of education is to simply do away with all government financial aid. We need desperately to stop the number of people pursuing further education and all the financial aid system does is further inflate college costs while encouraging young people to basically mortgage their lives for an 'education'.

greling said:


That's only the start of the scandal. About a year ago, Sallie Mae and several school financial aid administrators got into trouble by the NY attorney general when it was found out that financial aid officers were getting kick backs and vacation trips for closing deals on borrowers and setting up Sallie Mae as their school's "preferred lender". I actually see a lot less scandalous about this...CC companies come onto campuses to push credit cards, and presumably they pay the campus a fee for this.

Giving spiffs for pushing loans happens in all loan industries...auto home business etc.

But the part about not disclosing the rate or fees on the docs is ridiculous. You cant get away with that in any industry and I am surprised that is happening.

CapEx said: I honestly believe that the best and only way to fix the student loan problem and the cost of education is to simply do away with all government financial aid. We need desperately to stop the number of people pursuing further education and all the financial aid system does is further inflate college costs while encouraging young people to basically mortgage their lives for an 'education'.

Capex is right even though it's not a populist message. Student loans allow people to make bad financial decisions... like pay $200k for a degree in music.

We read about these posts all the time. That kind of non-sense wouldn't be possible without the government guaranteeing and subsidizing huge loans. Many people would be better off had they never stepped foot inside a university.

• Schools competing to offer arbitrary country club services unrelated with education: luxury dormitories, spas, gourmet foods, top of the line sports complexes, etc. It used to be you went to school to get a 4 year education. Now you go to school to get a 4 year vacation.
  
• Education expenses continue to go up 10% a year even though expected incomes of graduates have flatlined and unemployment is on the rise.
  
• Vast sums of reckless lending are paid out to study useless majors that no rational person would ever borrow.
  
• Colleges frequently mislead students about employment prospects and salary surveys, saying there's huge demand when there isn't
  
• There's no easy way to compare the quality of educations provided, so instead people make decisions based on arbitrary metrics like "Prestige". People fallaciously assume that if a school is expensive, it must provide a superior education. People also assume that if a school rejects a large number of applicants, that it is superior to a school that rejects fewer.
  
• A belief that people without degrees should be looked down upon, much like renters during the housing boom. College is part of the "American Dream" entitlement, like housing.
  
• Large amounts of diploma mills(ITT Tech, DeVry, Phoenix Univ.) devaluing degrees and cashing in on the madness. Developing in demand job skills is second to profit.
  
• Plumbers and Electricians can make more money than a lot of lower paying degrees
  
• Long term trends of college educations paying off lead people to believe the intrinsic value of a college education cannot fall. Housing was a good, stable investment for over 100 years, causing people to believe the value of real estate cannot fall.
  
• 4 year graduates that can't find jobs return to graduate school, rationalizing the reason they couldn't get a job in their field was because they needed more education, not because there is no demand. This further inflates the bubble. Entry level jobs start to require more college educations because they can.
  
• Why should a potential employer trust the financial judgement of someone who spent hundreds of thousands of dollars in debt to go to school?
  
• Massive amounts of government intervention and programs so people can get educations they can't afford: low interest loans, government guarantees, etc. Similar to the government "assistance" to put minorities and low income families in homes they can't afford.
  
• Depending on the degree, the costs (direct costs and lost income) can be equal or higher (in net present value) to the additional lifetime income derived from having a degree.

The article OP linked to is called Student Loan Sinkhole. It details a SOB story of a student that paid over $50,000 to get a masters in social work, an obviously low paying career.

I think "Student loan sinkhole" is an appropriate term because borrowing money just to flush it down the toilet will always be a sinkhole. She borrowed large amounts of money to throw away on a bad investment, just like real estate speculators. All the student loans did was enabled her bad investment and decision making. If her interest rate on the loan was 0%, it still would have been a bad investment.

CapEx said: IcemanPk said: CapEx said: I honestly believe that the best and only way to fix the student loan problem and the cost of education is to simply do away with all government financial aid. We need desperately to stop the number of people pursuing further education and all the financial aid system does is further inflate college costs while encouraging young people to basically mortgage their lives for an 'education'.

#1, you're a complete idiot and your post shows your lack of education.

#2, educate young folks in high school about finances. That's one area where high school does not prepare young adults for life after school.

#3, I just have to remind you that you are an idiot.

I'm not sure when you went to college, but it's complete joke. Bonus point, curving all exams, and weighting good scores more continually push average GPAs up year after year. The fact that people actually even consider it to be worth the cost is laughable. A lot of degrees don't even have a positive NPV anymore. Hell, I work somewhere where all the administrative assistants have college degrees for their 30k/yr jobs.

Educate kids about finances all you want, but that won't reduce the debt load caused by the 'need' for kids to go college. Financial aid makes this problem considerably worse, just like Medicad/Medicare significantly increase health care costs for everyone.

ETA: This isn't necessarily the case for degrees that actually require a formal education (ie. engineering, science, and math), but those are the areas where kids aren't going because the other areas are 'easier'.

Maybe the real question is where did you go to college?

I just think that we're underestimating the impact all of this will have. Most of us figured we'd be insulated from all of those crazy people taking out interest-only subprime loans to buy McMansions, only to see our pensions and 401ks get hit. But, I find this problem to be far more serious. What we're doing here is making an entire generation part of a permanent underclass. It's already a big problem that not enough young people are paying into pensions and Social Security to sustain those Baby boomers ready to retire and keep the system going smoothly. Add this in and I think this deep recession could turn into a depression.

Fewer grads with high enough paying jobs and most of them carrying massive debt means lower tax revenues, a new derivatives problem brewing, and few dollars paid into 401ks and pensions.

I think most people nearing retirement just shrug these conerns off and figure, "We had too had to deal with them student loans. Just grow up and suck it up, kiddo!" But, I think they're in for a little lesson in karma. You see, we're all interconnected, and I don't mean that in some New Age-like way.

SUCKISSTAPLES said: brettdoyle said: Student loans allow people to make bad financial decisions... like pay $200k for a degree in music.
I completely agree, but how do you tell someone it is ok to take on $200k student loans for, say, a medical program ....but not OK for a music program, if their interest is music??

Credit markets can easily determine that by pricing the risk of the loan by probability being repaid and underwriting standards. But when the government guarantees every loan, no one cares if it gets repaid because there's millions of taxpayers to collect from.

I heard a story of someone who's wife took a ton of student loans, and defaulted. She spent the money on a fancy car, clothes, jewelry, and some very expensive cosmetic surgery.

The hubby makes alot of money, and was expecting a big tax refund in the mail.. well the FEDS took the 20k refund to pay down her defaulted student loans. They haven't even been living together for a few years.

nvm;

quoted wrong post

oopsz said: because there's no downward pressure on tuition, because students have access to easy creditHmm, if this kind of credit availability disappears for students like home loans have, maybe tuition rates will crash like home prices.

SUCKISSTAPLES said: brettdoyle said: Student loans allow people to make bad financial decisions... like pay $200k for a degree in music.
I completely agree, but how do you tell someone it is ok to take on $200k student loans for, say, a medical program ....but not OK for a music program, if their interest is music??
it is ok to take on $200k student loans for a medical program ....but not for a music program.

The effect this would have is that music programs suddenly have to only charge what people are willing to pay if they're not willing to pay $200k. The problem now is that most students going into college now are idiots financially and they have always been told "do what makes you happy" so they're not going to stop and think about what happens when the graduate with a music degree and 200k in debt.

If the student dies the student loan debt goes away. But if you're a taxpayer and you die the national debt is passed on to your children and grandchildren etc. That doesn't sound like a very good deal. The government is turning its own citizens into debt slaves.

Bankgeek said: If the student dies the student loan debt goes away. But if you're a taxpayer and you die the national debt is passed on to your children and grandchildren etc. That doesn't sound like a very good deal. The government is turning its own citizens into debt slaves.

Federally guaranteed student loans don't just "go away" on death of the debtor. The government repays the student loan companies.

I agree and disagree with you, nycll. I think there's a happy medium between easy unrestricted loans and free college for everyone.

I think student loans should be available to help kids go to college. But I think the easy availability of loans combined with the (ludicrously high) loan limits you can take out with no documentation doesn't help anyone except for the administrators of university endowments. Private tuition has SKYROCKETED in the past twenty years, fueled by easy loans. We have too many people doing four years at private schools because all they had to do was "sign on the dotted line". They could have received the same education benefits by doing two years at community college or at a state school.

The one thing that most impressed me about Obama during his campaign was his pledge to provide tuition credits to young people who do two years of community, civil or military service. I think more young people should start out in a cheap school, especially because so many young people have NO IDEA what they want to do with their lives.

nycll said: No, it is the best lending program in the US history, because

1. it provides poor students the money for higher education
2. it is secured with appreciating asset
3. deadbeats can't easily walk away from it because it is non bankruptcy dischargeable
4. because of 2, the market clearing rate is far less than that of credit cards

Exactly.

The student loan programs are among the best and most useful debts that one can take, and the various Federal loan guarantees are one of the few successes of a government acting beyond a strict interpretation of the Constitution.

The return for society on these loans is enormous, and they have provided many millions of individuals with access to the opportunity to work hard and build a better life they would not otherwise have had.

The loans should not be faulted because some people chose to misuse them. If you look at the majority of the student loan sob stories, there is usually one of a few common threads:

1. The student borrowed way too much for a degree of little value. I saw one story on CNN about a student who graduated with a Master's in Ceramic Arts, and over $200k in debt. That student has nobody to blame but himself. Students need to be realistic about their career prospects. They should have ample time to consider their course, given that these enormous debts arise from at least 4 years of study.
2. The student chose to live like an employed graduate rather than a broke student. "Getting ready for school" is a nice sounding idea, but it should not involve turning student loan checks into $2000 laptops and new wardrobes. Students need to learn to make do with less. Every campus is full of people who have no jobs, no savings, and no parental support, but always have the money to go have fun. How many of these people have a one-to-two Starbucks a day habit? (no, I'm not exaggerating) It isn't beneath anyone to live like a student, share an apartment, share a car, and hold back on wants.
3. The student chose to waste their free time instead of working part time. Not every major allows for part time work. Some students must spend almost all of their time studying. Not surprisingly, those academic-heavy majors tend to pay well, making full reliance on borrowed money less of an issue. If you have an easy major, and plenty of free time, you should be working part time to help lower the borrowing.
4. The student was not thrifty. Campuses are full of people who throw money away buying things they don't need, abusing cell phones, running up overdraft fees and CC interest, buying tiny quantities, etc. College students are adults and need to learn how to make money go farther. These people also don't know opportunity when they see it, be it bank bonuses, odd jobs, Craigslist postings, plasma donation, etc.
5. The student was not committed. How many of these "victims" were simply poor quality students who quit school?
6. The student used their new found freedom and cash to buy beer, pot, and condoms. Enough said.

The victim mentality needs to stop, because it will either cut back lending at one extreme, to waste taxpayer money on useless majors on the other.

I'd like to see some stories from "victims" who did everything right, but still ended up trapped under hundreds of thousands in debt. Are there any stories like this, or just ones from people who chose to be irresponsible with the opportunity given to them?

One thing is clear: for every sob story, there are tens of people who didn't come from a wealthy family, yet had plentiful opportunity made available through willing lenders. These students shouldn't suffer for the irresponsibility of others.

nycll said:
Let's think for a moment if you don't have student loans, how do you finance college education. Option 1, we make high education free, like France, Germany, UK, China, etc. This will raise everyone's tax, and may lower US universities quality since they are among the top of the world,

Just an FYI, but higher education is definitely not free in China. In fact as a percentage of per capita GDP, I would suspect it is significantly more expensive in China than the US.

Greling said: 91.8% of 2009 college grads living at home and 80% of 2008 grads jobless.
The government keeps saying that if you have a college degree you're less likely to be unemployed.

nycll said:

Also although 85% of people have HS diploma, only 27% of people have post secondary (2y + college) diploma. And college graduates on average make more than twice as much as HS graduates. It is simply a myth to say a college education is not worth it.

It is simply a myth that earnings is the only metric to use when evaluating whether further education makes financial sense. To ignore the cost basis associated with increased education and focus solely on incremental earnings is flawed logic as I'm sure you're aware and will admit to.