Monday, December 9, 2013

Student Loans in the Marketplace

It is beginning to appear that underwriting principles are being applied to granting, forgiving, and refinancing student loans.

The same kind of reasoning that traditional health insurance has applied to preexisting conditions is appearing in the student loan marketplace. Recently, students in a potentially lucrative major at a prestigious university are getting better rates with less administrative hassle than an average student majoring in the liberal arts at a second tier university. This makes actuarial sense. Would you rather lend money to someone majoring in petroleum engineering at Texas A&M or a film arts major from a small southern liberal arts school. While most student loans can not be discharged even in bankruptcy, the lender will not necessarily recoup all his money or get his money when he hopes to get it from a student that doesn’t have a job. There are programs that cap student loan repayment in such circumstances. Ultimately, you can’t squeeze blood out of a turnip. While these practices make sense to the originators of the loans, the investors who purchase products based on securitized student loans, as well as the Federal agencies who guaranteed those products, it exacerbates the problem of long term social inequality that student loans were intended to address.

Loan forgiveness programs are also structured on the basis of scarcity.

Nurses who agree to work 32 or more hours a week at a needy not-profit facility can recoup 60% of their student debt in just two years. A third year can bump that number to 85%. For all intents and purposes that takes care of the problem. Information on these programs can be found at the Health Resources and Services Administration website.

The National Health Service Corps is looking for doctors, nurses, physician assistants, dentists, dental hygienists, psychologists, and social workers. Volunteers can receive $25,000 a year in debt forgiveness for two years, then an additional $35,000 a year for a third year of service.

Science, math, and special education teachers working in low income schools can shed $17,500 after 5 years of service. Other majors are only looking at $5,000, a sum hardly worth worrying about.

The College Cost Reduction and Access Act of 2007 will trade 10 years working as a public service employee for total debt forgiveness in some cases. If you qualify that could mean over $100,000 in equivalent after tax income when compared to a similar job in the private sector, very interesting. Now we’re talking real money.

Of course as always the military, Peace Corps, and Americorps all offer various programs to avoid or pay off student debt.

These numbers come from Paying Off Your Student Loans with Forgiveness Programs by Lucy Lazarony.

Like every other kind of loan, student debt is more easily refinanced at lower rates and better terms for graduates with a good job and a high credit score. The students who really are in need of mercy are facing late fees and penalties that just continue to drive their balances higher. They are also receiving threatening (some times illegal) calls from collection agencies working as Federal contractors (really).

Lenders, even the Federal Government are reluctant to refinance when they are no more certain that these loans will be repaid at a lower rate or better terms. There are some degrees from some colleges that just aren’t worth what they cost. It is unlikely that the student will ever totally escape from their bad career choice compounded by bad financial decisions.

To be fair, the universities are responsible for a lot of this problem. They get their money up front. It doesn’t matter if the major has a future or no future. It doesn’t matter if the student graduates with honors or flunks out after two years. The university gets to keep all their money. There are way too many horror stories out their describing the actions of unscrupulous university employees who coaxed na├»ve 18 year old children or even desperate unemployed middle aged students into terrible life destroying decisions.

Mitchell D. Weiss identifies the biggest problem as the $500 Billon in student loans that are owned by private lenders and their investors. Roughly 60% of these loans are guaranteed by the taxpayer. Why on earth would a bank choose to refinance a guaranteed loan at a lower rate? If he doesn’t get the money from the student, he gets it from the taxpayer. If he restructures the loan for the student’s benefit it comes out of his hide.

The entire, well intentioned, student loan program has turned into a colossal embarrassing $1 Trillion disaster that is destroying the first decade of adulthood for way too many of our young people. Personally, I think the Federal Government needs to get out of the student loan business altogether. Lenders, students, and especially universities all need to have skin in the game. If the lender and the university stand to loose money if they lend to a bad credit risk, it will change their behavior. If a student can receive a better deal if they choose a major in nursing than in the liberal arts, this would help supply the country and the economy with an educated workforce who can actually find work.

There is no doubt that the taxpayer is going to end up footing a sizable portion of the bill for three decades of folly. I don’t know the best way to work out an equitable plan that makes students responsible for their decisions without destroying the lives, while protecting innocent investors and the overburdened taxpayers of this country. I hope our elected officials find a way to defuse this bomb before it blows up.

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