The Student Loan Bubble Goes Bust?

Good synopsis of the current culture surrounding student loans. I disagree with you about the value of a degree versus the cost of the education. As with any loan, you need to think it through and be certain that the decision you make is a sound one. In my opinion, the biggest problem these days is that kids are choosing schools which are way to expensive and degrees which have proven to be mostly worthless. Going to Syracuse University for a degree in Art History is likely to be something you will regret later in life. The same way you would regret buying a Ferrari at age 18 with a high interest car loan.
I realize that the new American way is to blame anyone and everyone, but to say that student loan companies or over-priced colleges are to blame is a really sad view of our society. Why aren't parents sitting down with their children and working out a better plan? There are so many wonderful state schools that are affordable for everyone. Why don't these students think about what life will be like after college before they sign papers which put them in debt?
Let's stop blaming the system, because it is the same system that has worked amazingly well for so many people throughout the years. I received no help from my parents for college, I have an undergrad and graduate degree and $35k in loan debt. I make a payment every month, and while i'd rather spend my money differently, I realize that I have a responsibility to pay them back and that most likely I would have a much worse job right now had I never gone to college.
Please take the time to educate yourself and your kids before it's too late.
Check out my blog at
StudentLoanWatcher
for more helpful information about finanacial aid.

I agree with the last post - I have almost $30k in student loan debt, but wouldn't trade my graduate degree! the graduate degree found a $50k/year raise in salary for me in just two years. My ROI took two years to find the right job and applying the skills. I maybe paying back my loan for quite a while, but the payoff was really worth it.

At lease one of the commenters above make money from the student loan industry.

Fact is, student loans are astonishingly absent of standard consumer protections such as bankruptcy protections, refinancing rights, statutes of limitations just to name a few. No other type of loan in our nation's history is as absent of standard consumer protections.

Can you imagine borrowing $40,000 for school,not getting that dream job out of college, and winding up with a loan balance that triples with penalties and fees, with no recourse? Well, That's precisely what happens. Defaulted loans are a HUGE money maker for the industry- This suthor rightly points out that the true number of defaults is MUCH, MUCH higher than the industry would have us believe, and count on the shame and embarassment of the borrowers to keep them quiet.

Come to StudentLoanJustice.Org to see how this game works, and the decent citizens whose lives have been ruined as a result.

We have people who have been forced off the grid, who have fled the country, whose family members have even committed suicide because of their defaulted student loan debt- a debt that barely existed 30 years ago, but which now threatens to wreck our nationa's graduating youth as they struggle to enter adulthood.

College Loans of up to $40,000

Watching the football playoffs last weekend, I saw several ads from a single company that touted the ability to borrow up to $40,000 per year for education. That is crazy.
This was preceded just a bit earlier, when I listened to a chiropractic physician complain about having $100,000 in student loans and at the salary she was pulling down never being able to pay her loans off.
Sometimes I think there is too much naivete in education. We need to explain ROI to students at younger ages. Trade schools are much more likely to provide practical educations for jobs of the future that will be in America.

Thanks for reading if you made it this far.

What other loan is provided to an 18-year old with absolutely no collateral and no guarantee of payback. Sure, the lenders are "guaranteed" repayment if a student defaults but only at 95% and only after high costs associated with due diligence, tracking, etc. For every $1 invested in students loans, approximately $7 comes bsck to the economy. Looks like a pretty good investment to me. Quit complaining about not being able to pay off your loan and start making intelligent decisions about where you can afford to go to school and what your potential income will be when you finish. Going to a 4-year private school at a cost of $30,000 per year to be an art teacher is not the wisest decision anyone ever made. Take some responsibility for your own position in life.

Well I should have known Alan would chime in here. Without getting into a back and forth with him, I would just like to say that loans do NOT just triple for no reason. They only triple when you ignore them. I deferred my loans for years when I didn't have that dream job after graduation. I didn't make my first payment until many years later but I filled out the proper paperwork and kept up on the status of them to make sure they didn't go into default. It took me a really long time and another degree to find the job I was looking for, and I did that without the luxury of three engineering degrees.
I don't want to get into that discussion, the point of my post here and my own site is to educate as many people as possible. Student loans are what they are, and while many people may not like that, they have the choice NOT to take them. For those of us who value a degree and see the long-term benefits, the student loan industry is not some horrible monster, it is an opportunity for people like me to get a degree I otherwise would not have. I guess I just think people should have the right to make their own decisions, and I try to write about as many topics as I can that might help students make good ones.
The overall theme to my writing remains unchanged. I believe that students should get the cheapest, most usable degree available to them. They should attempt to pay for it with no loans; however this is simply impossible for many. If they need loans, max out the federal funds available by filling out a FAFSA. Don't overextend yourself, don't waste your time or money if you aren't 100% committed, and whatever you do, don't back out of your loans once you graduate.
Thanks to Caitlin for agreeing with me here. I truly believe that StudentLoanJustice is the exception, not the rule. I understand that most people who end up at that site have had some unavoidable tragic event happen that has left them at the mercy of the loans they can't afford. Whether or not Alan wants to believe it, I truly do feel for these people and would like nothing more than to have some legislation to protect those certain instances when tragedy ruins lives. I just don't think that restoring bankruptcy as an option is the answer.

First of all, colleges are infusing more money from their endowments into their need-based aid programs to avoid an investigation from Congress about the escalating costs of higher education. Do you realize that the additional funding at Yale for example equals about $22 million? Their endowment is the second largest in the country, in excess of $30 billion. $22 million? That's interest income. As far as Alan's comments, read between the lines, he wants to declare bankruptcy, get his loans forgiven and move on with his life. He has 3 degrees from Southern California, including a masters. Do you realize that when you defaulted on your loans who paid the bill? Taxpayers. Some people who do not even have a degree. Sure the student loan lender already received their money from the federal government years ago. Now the federal government, through the lender or a collection agency is trying to recoup that money. Taxpayers.

And it's an 800-pound gorilla (guerilla is a type of warfare or a revolutionary, of which Sallie Mae is neither).

"In my opinion, the biggest problem these days is that kids are choosing schools which are way to expensive and degrees which have proven to be mostly worthless. Going to Syracuse University for a degree in Art History is likely to be something you will regret later in life. ... Why aren't parents sitting down with their children and working out a better plan? There are so many wonderful state schools that are affordable for everyone. Why don't these students think about what life will be like after college before they sign papers which put them in debt?"

In other words, why are those uppity poor kids getting ideas above their stations? The elitist subtext is clear through your comments, StudentLoanWatcher: Poor kids should go state schools instead of the best schools that accept them. Oh, and an art history degree (or perhaps any art degree) is worthless. Damn these kids that want to go to great schools and pursue an area of study that they love! They should get business degrees at state schools and manage their local Wal Mart, like good, lower class Americans!

Yes, many state schools are good schools. But if a kid gets into a better school than his local state school, why on earth shouldn't he go for the best education he can? And why shouldn't he pursue a degree in an area in which he's interested? Maybe he won't end up curator of the Met, but he'll hopefully find something that will work for him, and will never lose those years of study of a subject that he loves.

The other problems with your comments are:

1) Your assumption that every 18 year old is perfectly rational about the cost of college and borrowing money. It's nice that you were a debt expert at 18, but most kids aren't. They just know they want to go to college to better themselves, and all the lenders tell them that they should have no trouble paying the debt back when they graduate, whether that's likely to be the truth or not.

2) Your assumption that the student loan industry works today like it did when you went to school, or even when the industry started. Read Generation Debt by Anya Kamenetz to see why the student loan industry, and indeed the debt industry as a whole, is set up for borrower failure.

Finally, note that most borrowers know that they have to pay back the money they owe, and most make a good faith effort to do so. They'd just like it to be a bit easier, and less usurious. Student loan lenders have been making profits off the backs off poor students hand over fist for years. Sallie Mae CEO Al Lord gets bonuses that the rest of us only dream of, and flies our legislators around in his private jet to curry favor. So no need to cry for the lenders, they know what they're doing all too well.

Good article. If a student has to take out student loans it is really important to complete the government FAFSA form first. It is a complicated form but it is free and will make you eligible for state grants and federal loans. Beyond that students should be sure to check out free scholarship websites such as Mapping-Your-Future ScholarshipHunter and FastWeb. Private student loans like we see advertised on TV should be a last resort only.

Troubled Parent

I am troubled by Chris Ferrell's claim that male college grads in the mid-nineties earned only $350 a year more than high school grads (for female grads the difference is only $100).

That statistic seems at odds with those provided by US Census Bureau's Current Population Survey of 2002 which reports that of adults ages of 25-64 who graduated from high school alone had average yearly earnings of $25,900 while graduates of 4 year colleges had average yearly earning of $45,400. That is a 57% difference!

The same study reported that on average workers who completed high school could expect to earn one million dollars over a 40 year work like, while those who earned a bachelor's degree over those same 40 years would average 2.1 million dollars. That is a 100% difference.

What explains the discrepancy here?

One answer may be factors that reduce the actual economic benefit of a college education according to Boston University Economist Lawrence Kotlikoff a former member of the president's council of economic advisors, He notes that when one earns more money, one pays more taxes and at higher rates. One consequence is that the cost of repaying college loans rises because more of one's earnings are needed to pay a dollar of original borrowing.
 Other losses occur in medicare and social security payments.

He developed a computer software program dubbed Economic Security Planner (ESPlanner) to estimate not only the increased salary benefits of a college education but also the increased costs associated with salary increase. A specific result he discovered is that an 18-year-old who elected to borrow about $40,000 a year for college would have a lifetime consumption standard of $21,033 a year. If the same 18-year-old decided to go straight to work from high school, her lifetime consumption standard was about 10 percent lower, $19,068 (reported in Dallas News 9-23-07 by Scott Burns). That is only a 10% difference, A far cry from the 100% difference the US Census Bureau reports.

While the education and experience of college has worth independently of its economic benefits, (Koltikoff encourages people should get college educations), we parents thought we were also giving good financial advice to our children to get a college education even if big loans accompany the experience.

What is the "straight story" here?

Is it that students should get a college education but with debts far smaller than 40 grand a year? But how much smaller?

While zero debt is the optimal way to go, is there a rule of thumb about expected job salary for student given a specific major field and debt owed that can help parents more accurately assess their children's debt risk for college education?

I look forward to a reply from Chris and others.

Oh Alan,

I work in the student loan industry, and have huge loan debt. I know that my company is not reaping profits from defaulted loan, far from it.

I blame myself for my debt but have financed it to make it manageable. I was one of those students that took out loans because I was being self-centered. I remember grad school and working in the financial aid office at the same time. It was my irresponsibility in taking out the "extra loan" to pay for things, because I thought I earned the "reward" of the loan. I knew I had to pay it back, but at the time I felt entitled.

I saw hundreds of students while working in financial aid over the years that thought student loans and financial aid should cover all their living expenses, especially the grad students. They would be taking out tens of thousands of dollars for their dissertation and thesis work for years and years (while being unemployed and "studying" a couple hours a day) with full knowledge that when they finally leave college and get their job, they would be earning $35,000. Yes, these students were dreaming of private practice or tenure without having worked in their field and establishing a work history (and work ethic) that would allow them to even consider the salary they think they deserve (wrongfully based on the degree that they have earned). And you blame this whhole problem on the lenders- you're irresponsible, and a whiner.

The Stafford loan program was developed to assist students in their academic endeavors, with the emphasis on "assist.". I would easily wager that the vast, vast majority of defaulted borrowers (especially the ones with high loan balances), understood that they were taking out loans, but were fueled by their own sense of entitlement while in school and borrower irresponsibly with the bad end result.

But don't shame the students, or the colleges on top of that. It is the lenders fault.

Well I should have known Alan would chime in here. It is just like him to try to make an issue out of who works for who. He always has trouble just speaking about the issue. Without getting into a back and forth with him, I would just like to say that loans do NOT just triple for no reason. I deferred my loans for years when I didn't have that dream job after graduation. I didn't make my first payment until many years later but I filled out the proper paperwork and kept up on the status of them to make sure they didn't go into default. It took me a really long time and another degree to find the job I was looking for, and I did that without the luxury of three engineering degrees.
I don't want to get into that discussion, the point of my post here and my own site is to educate as many people as possible. Student loans are what they are, and while many people may not like that, they have the choice NOT to take them. For those of us who value a degree and see the long-term benefits, the student loan industry is not some horrible monster, it is an opportunity for people like me to get a degree I otherwise would not have. I guess I just think people should have the right to make their own decisions, and I try to write about as many topics as I can that might help students make good ones.
The overall theme to my writing remains unchanged. I believe that students should get the cheapest, most usable degree available to them. They should attempt to pay for it with no loans, however this is simply impossible for many. If they need loans, max out the federal funds available by filling out a FAFSA. Don't overextend yourself, don't waste your time or money if you aren't 100% commited, and whatever you do, don't back out of your loans once you graduate.

Sorry about the duplicate post, I submitted it twice by mistake.
Artemis,
Elitist subtext? Are you crazy? You must be an SLJ member because your personal baseless attacks seem awefully reminiscent of my dealings with them in the past.
I am not going to explain my statements to somebody who is only looking to bend them to fit their argument. There are expensive schools and cheaper schools and price does not always reflect quality of education. There are degrees which average higher salaries and degrees which average lower salaries, both of which need to be considered when making the choice of what school to attend and what degree to choose.
Your comments are laughable. In your world, everyone gets to go to Harvard for free and study whatever they want. Loans can be paid back or they don't have to be, whatever you feel like doing. Profit for companies? Never.
Bottom line, it is the students choice what school to go to and what degree to get, but to suggest that the decision isn't important in the post-graduate culture is a perfect example why the problem exists. I truly hope you give your own children a little more guidance than that.

Once again, I have a blog site which gives information about making good choices without ever advertising a single product. My message is always the same, live within your means. I invite everyone to check it out and comment or post. StudentLoanWatcher

I also always give a link to FinAid because I think they offer a lot of valuable information to help students out.
So while people like you Artemis are out there name-calling, I am actually doing something about the problem. I'd much rather be part of the solution.

Sounds as if some Student Loan Company Employees are leaving comments on this page.

Students and loans = bad combination.

Why are some many wealthy countries, other than the USA, offering free education for their happier citizens.

I am thinking the United States of America is not such a great country after all. Bad on all accounts.

Time to move to France, Ou il y a beaucoup des personnes qui sont tres contentes.

Adieu!

A key contributing factor as to why schools charge so much for tuition (not to mention textbooks) is that the schools can. People will keep paying.

Parents feel they're short-changing their kids if they don't pay whatever a brand-name education costs. Teens, meanwhile, can be very competitive. It seems to mean something if they can get into a selective school (it's a bit like those long lines you see to get into certain clubs or restaurants--especially those where you wait for someone to pick you). The fact that the school is so expensive is further proof that it's "good".

Ever since student loans became the norm, back in 1979, college tuition has increased at twice the pace of inflation. Is that a coincidence?

Cheap money, easy credit, deferred payments. Why worry about what your classes, books, housing, and supplies cost? Just put it on your tab. No worries. You're going to make an enormous salary one day.

Parents and prospective students will continue to play this game. Meanwhile, colleges are becoming more and more like glorified high schools. Many are graduating students who lack even basic skills--but that's another story.

Everyone is encouraged to go to college, almost everyone does, and that, paradoxically, lowers the value of higher education (particularly in terms of what it does for your resume). So, the only way to stand out is to, well...get an advanced degree.

And keep playing the game.