Sunday, July 8, 2012

A Trillion Dollars in Student Loans

Recently I discussed student loans, and especially as they can present a problem to folks trying to buy a home. Because these loans always show up on credit reports they lower the amount that can be borrowed--and they are a debt that must be paid. Many banks make paying off a student loan a condition of the loan--before granting a mortgage. And the government has decreed even personal bankruptcy will not erase this debt. (Student Loans are treated like an IRS lien).

You might think that folks with student loans are mostly kids and the total of all student loans doesn't add up to very much. Well look again, student loans have been growing eight to ten percent a year for at least two decades, and now add up to one trillion dollars of debt outstanding—roughly $25,000 each for the 40,000,000 former students who owe this debt.

And these former students are no longer kids, approximately 40 percent of the debt is owed by people 40 years of age or older. So when politicians talk about maintaining low interest loans to "help kids go to college", more often than not their help is going to middle-aged individuals long gone from the halls of academia, and whose interest today lies anywhere but their ancient student loans.

With this as an introduction, I just received a memo written by Richard Vedder—the author of Going Broke by Degree: Why College Costs Too Much. Let me share some of his thoughts regarding federal student grant and loan programs.

(1) Since student loan interest rates are always set by Congress at below-market rates, often too much money is borrowed for college. Currently the key rate is 3.4 percent—which, after adjusting for inflation, is approximately zero. Here is a perfect example of the fundamental problem facing our nation today: politicians pushing programs whose benefits are visible and immediate; while their long term costs are put off on future taxpayers. (Some call it kicking the can down the road).

(2) Colleges are responsible for allowing loan commitments to occur, but they face no penalties or negative consequences when defaults occur, (this is an obvious conflict of interest which imposes the costs  and penalties on taxpayers). And consider this: a top student at M.I.T. pays the same interest rate as a below average student at a state university. College graduates who get good jobs are what the programs were designed for, whereas students who fail to graduate fail the system as well as themselves. 

(3) The cheap money from the grant and loan programs has contributed to the tuition price explosion. Students are not nearly as sensitive to college costs that they can finance. Colleges and universities take advantage of that and raise their prices to capture the funds earmarked to help students. This is what happened in health care, and is what is currently happening in higher education.

(4) College Enrollments have increased due to the federal loan programs. But in today's job market the number of new college graduates far exceeds the number of new jobs—positions that college graduates have traditionally taken. 54 percent of recent college graduates are underemployed or unemployed. It's estimated there are 107,000 janitors and 16,000 parking lot attendants with bachelor’s degrees. And many of these folks are still struggling to pay off student loan obligations.

(5) The federal government underwrites student loans by borrowing 30 to 40 percent of the money it currently lends, much of that from overseas. Thus Americans are incurring long-term obligations to foreigners to finance loans so largely middle class students can go to college.

(6) A growing percentage of those going to college simply should not be there. These are students who cannot or do not master much of what college students are expected to learn. As a result, many students change majors over and over and either do not graduate or fail to graduate on time. Approximately 40 percent of Pell Grant recipients take six years to graduate, and many others simply do not finish. Today's students spend on average less than 30 hours per week on academic work—less than they spend on recreation.

(7) In a recent North Carolina student loan fraud case the judge wrote: With funds so readily available there is a temptation and opportunity for persons to acquire low interest student loans--with the intention of dropping out of school--and use the proceeds for other purposes. (In North Carolina, the case he refers to was former students who started up a t-shirt business using student loan money.)

With the federal government continuing to spend more and more taxpayer money on higher education at an unsustainable long-term pace, a re-thinking of trillion dollar federal student financial aid policies is a good place to start in meeting America’s economic crisis.

Dane Hahn is a real estate professional practicing in New Hampshire and Florida. You can reach him at dane.hahn@gmail.com or by phone at 941-681-0312. See him on the web at www.danesellsflorida.com



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