More on Student Loans

When the facts change, I change my mind. What do you do, sir?
John Maynard Keynes

Six or seven years ago, I still thought student loans were OK if and only if the student had a plan. A plan sounds something like this: “I will earn a BS-RN in nursing so that I might specialize in the field geriatric medicine. Given the large number of Boomers approaching or already in their 60s, this should be a lucrative field for a very long time.” Over recent years, my opinion of student loans, which was never all that good for the average somewhat immature undergraduate, has been steadily dropping. Today, I still would never say never, but I would advise almost every student at any level to avoid the loan office. In the current economy, unless you are getting a MD or a MS in Petroleum Engineering, I would consider the danger of not finding a job just too great.

Student loans do not go away, not even in bankruptcy. Thank my generation for that one. Too many students my age discovered it was easier to file for bankruptcy than repay their student loans. Since these loans are typically guaranteed by the taxpayer, our Congress decided to change the law. These loans have to be repaid even if the student never graduates. Imagine, flunking out of school, unable to find employment, and saddled with student debt that never goes away. These loans have to be repaid even if the money was not used for education. Recently banks and universities devised a scheme whereby students were given their loan money in a live debit card. In fact, the use of that particular debit card was required for those receiving student loans by the university billing office. What this meant in practice was an 18 year old kid could use that debit card to pay for tuition, books, or buy beer for a road trip to Atlanta. The outcry from the effected parents ended that scheme in a hurry. However, it does give one some insight into the morals of both the banking and the education industry.

This week, USA Today reports that student loans have exceeded the $1 Trillion mark. Americans owe more on student loans than they do on credit cards (really)! That number is increasing at the alarming rate of $100 Billion a year. Students are borrowing twice as much as they did just a decade ago. They are graduating with a debt burden that is so large that even with a good job and a good degree they are unable to move on with the normal progression of a middle class life, marriage, mortgage, family. In an economy with a realistic (U-6) unemployment rate of 16%, a good job is not a guarantee.

As with any well intentioned Federal program, the availability of limitless government funds has produced a dramatic increase in costs. The universities have no reason to control their overhead, when their customers can easily obtain low cost loans guaranteed by the Federal Government. Why not raise the cost of our product faster than the rate of inflation? Since 1985, the Consumer Price Index is up 107.05%. In the same time period the cost of a college education has increased 466.8%. Starting around 2002 the rate of increase in this line jumped pretty dramatically.

There are no brakes on this train and we are headed down the Great Saluda Grade.