The Student Debt Disaster

I am going to deviate a bit from my normal practice on this one. I have found so much material on the impending student debt disaster I am not going to spend a lot of time referencing articles. I will just list a sample down at the bottom of the entry. Fueled by easy money backed by Federal guarantees the cost of higher education has soared. Since 1985, the total cost of inflation has increased by 115%. In the same time period the cost of a college degree has increased 498%. Between 1999 and the first quarter of 2011 total household debt excluding student loans has increased by about 150% and remember, Oh my friends and neighbors, that number includes the follies of the housing bubble. In the same time period student debt has increased by a whopping 511%.

This situation is rapidly growing worse. The shape of the student debt graph is taking on that parabolic look that always (and I do mean always) spells disaster. It is not only the young and naïve who are being exploited by the education industry but unemployed middle aged Americans taking one last desperate swing at the middle class life their parents promised them. Times have been good for colleges and universities. Nonprofit private institutions and public universities have been building new laboratories, buying new equipment, and raising the salaries of the tenured. The private for profit schools are rolling in profits. Well intention federally guaranteed loans have meant that universities could raise prices without restraint.

Everybody buys the idea that a college education is required for the good life. Last time I checked two of the three plumbers I know live in much nicer homes than this mechanical engineer. It appears to me that much computer industry hiring is based on a prospective employee’s body of work and a required certificate or two rather than a degree in Computer Science. Personally, I believe that entrepreneurs possess the most important job skill for the new millennium. Men of the industrial age (like me) are an endangered species. Yes, degrees are still important. Try practicing medicine without one. But the cost of most degrees, especially in the liberal arts, the social sciences, and the fine arts has greatly exceeded the utility of such degrees.

“We're burying our country's future under a mountain of debt.”

One of the authors begins his article with this quote. I don’t think he really understands the full truth of that statement, but let me save that rant for another day. The most recent estimate by the Federal Reserve Bank of New York puts the student debt total at $870 Million. Two thirds of all college seniors now graduate in debt. A total of 37 million Americans now owe money on education. Remember, not all of those people graduated. Not all of the graduates found jobs. But those student debts do not go away even in bankruptcy. Blame that one on the baby boom. Too many of my peers found the easiest way to discharge their student loans was to declare bankruptcy in their early twenties.

The average student debt is $45,000. However, even the student debt crisis has its 1%. It is reported that Kelli Space went to Northeastern University to earn a degree in sociology and graduated with $200,000 in student debt. No, that is not a typographical error. $200,000 for a degree in sociology!

Surveys indicate that 65% of students misunderstood or were surprised by some aspect of their loan. Do you think that might have something to do with financial aid officers telling their 18 year old victims how easy it will be to pay off their loans? This has been reported.

“A whole 20 percent were taken off-guard by the size of their monthly payments. Another 20 percent were surprised by their repayment terms. About 15 percent hadn't fully anticipated the interest rate they would be paying. Although more than 3,500 graduates took out both federal loans and private bank loans, almost two-thirds said they didn't now the difference between the two (hint: private loans tend to be a lot more expensive to pay off).”

80% of student debtors learned about loans from university counselors or the university website, obviously a bad place to learn lessons in basic financial literacy, especially the power of compound interest. Graduating with $100,000 in college debt is just about the same as having a mortgage and no house. I have seen this exact situation put a life on hold for a decade. As a society we must do a better job teaching financial literacy to our children.

This part of the story is simply unbelievable. The Education Department of the current administration has hired debt collection companies to go after the $67 Billion in student loans now in default. The Federal Reserve Bank of New York estimates about 25% of student debtors are behind in their payments. Your Government paid these companies about $1 Billion on a commission basis. Some of these contracts paid commissions as high as 20% of recoveries to companies that ran “boiler rooms” giving collectors bonuses of thousands of dollars a month, restaurant gift cards, and even trips to foreign resorts for the money they collected from debtors.

Last year the Federal Trade Commission received 181,000 complaints concerning illegal practices by debt collectors. The department of Education is using three companies that settled out of court with state governments and the Federal Government for allegations of abusive debt collection practices. The Department of Education stated these investigations did not involve the companies’ work for the agency.

Remember, under U.S. law, student loans cannot be discharged, even in bankruptcy. The Government can also confiscate tax refunds, Social Security payments, and paychecks without normal judicial procedures to repay these loans.

“Student-loan debt collectors have power that would make a mobster envious,” Harvard Law Professor Elizabeth Warren, who helped establish the Consumer Financial Protection Bureau and is now running for a U.S. Senate seat from Massachusetts, said in 2005.”
If you want the whole enchilada complete with gut wrenching horror stories check out the last article in the list.

http://www.theatlantic.com/business/archive/2012/03/the-real-meaning-of-1-trillion-in-student-loans/254928/

http://www.theatlantic.com/business/archive/2011/08/chart-of-the-day-student-loans-have-grown-511-since-1999/243821/

http://finance.yahoo.com/news/1-student-debt-crisis-owing-163540505.html

http://inflationdata.com/inflation/Inflation_Articles/Education_Inflation.asp

http://finance.yahoo.com/blogs/daily-ticker/student-loans-could-next-housing-bubble-robert-reich-144742652.html

http://www.bloomberg.com/news/2012-03-26/obama-relies-on-debt-collectors-profiting-from-student-loan-woe.html