Sunday, October 9, 2011

Student Loan Debt

Student loan debt is forever.  Think carefully before signing loan documents!

Some of the protesters on Wall Street and elsewhere today are protesting their student loan debts.  It is an odd thing - after all, most of us don't protest our car loans or mortgages.  But there you have it.

Student loan debt is nearly impossible to get rid of.  Thanks to clever law students in the 1980's, laws were passed making student loan debt survive bankruptcy.  Actually, bankruptcy law has changed a lot in the last few years - it is no longer a "get out of jail free" card as it was in the old days.

The reason why student loan debt survives bankruptcy is simple.  Some clever students back the day figured out that they could run up huge debts - student loans, graduate student loans (the latter of which are based not on need, but perceived ability to repay) and credit cards.  Upon graduation, they would then declare bankruptcy, and walk away from tens of thousands of dollars of debt (which back then was a lot of money - like $100,000 today) and start off their career, debt-free.

Today, things are different.  You can't play that game anymore, as the loophole has been closed.  Student Loan debts survive bankruptcy.  And your credit history is often considered  when applying for a job - so it is no longer such a swell idea to go bankrupt.  The end result, of course, is that a lot of young people get into a lot of trouble over student loan debt.

Why is this?  A number of reasons:
1.  18-year-olds are not very mature, particularly in America.  So they sign loan documents and don't make the cognitive connection that it is they, not some "older dude" who will have to pay it back.

2.  Many students spend lavishly during school, convinced the "hardships" of college entitle them to take-out pizza and a new car (I kid you not) plus, of course, a killer stereo, and a neat computer (which you need for school) and other junk.  Many, if not most graduates live a worse lifestyle in the years immediately following graduation.

3.  Legitimate Schools have raised tuition by 2-3 times the rate of inflation for the last two decades.  This is, of course, the core problem.  But students take this lying down and do not protest - except after they graduate, and then, only at Wall Street, instead of at the Dean's Office.

4.  "For Profit" Schools encourage minorities and the poor to take out huge loans for largely worthless educations - educations that do not lead to high paying jobs (or indeed, any jobs) but saddle the victim with massive debt.

5.  Even for "Legitimate" schools, many fields of endeavor do not pay enough to warrant spending hundreds of thousands of dollars on an education.  A degree in Philosophy from an Ivy League schools might cost well over a hundred grand, and take a lifetime to pay back.  But few jobs exist that would make it possible to every pay such a loan back.

6.  The Middle Class is especially caught in this bind - not being rich enough to pay for their kid's education, and not being poor enough to qualify for grants, aid, and scholarships.

But all that being said, are the students really "victims" here, or victims of their own folly?  I think, to some extent, offering student loans to 18-year-old kids is akin to offering payday loans to residents of the ghetto.  Neither party has the sophistication and know-how to understand the documents they are signing.  And neither party has the ability to pay back these sorts of loans.

In other words, student loans, like payday loans, have really devolved into a form of loan sharking - preying upon the weakness and desperation of ill-informed people and holding out the promise of riches while simultaneously bankrupting the victim.

Of course, there are things YOU can do to protect yourself, and if you are 18 and reading this, read it carefully - the decisions you make today can affect the rest of your life.  And there are reforms we should make, as a Country, to eliminate these abuses.  But the latter approach is problematic - too many people are making too much money from this to allow it to be changed.

Yes, it would be nice if....
1.  Legitimate schools cut their overhead and brought tuition back into line with reality.  Good luck with that - do you really think the Dean is going to cut his six-figure salary?  Do you really think the unions are going to allow a pay cut - or allow any group of less than five men be tasked to empty garbage cans on the quad?  This is a non-starter.

2.  For-Profit Schools should just be run out of town on a rail.  But again, they have a lot of money to lobby Congress to protect their "legitimate" industry.  So that ain't happening, either.

3.  Amend the laws so students can declare bankruptcy and duck out on this debt.  This would take us right back to 1980, and all the abuses that happened back then.  No, that won't work, either.

So, it behooves YOU to protect YOURSELF, because the world isn't going to change overnight - or likely in your lifetime, to make up for your mistakes.
1.  Shop schools aggressively.  If more students shopped on PRICE, then schools would have to compete on price and tuition would come down.  With shrinking demographics in the college-age group, this could be very effective.  But in the short term, a cheaper school means lower costs - and often an education that is just as good, if not better.

2.  Borrow as little as you can.  Live as a starving student, not a wealthy one on borrowed money.  Doing without NOW will pay off in spades LATER.  And most things you think you "need" as a student often end up distracting you from your education.  Blowing a lot of money on cars, for example, is not only a waste of money, but a distraction from your studies.

3.  Consider WORKING your way through college.  Yea, I know, it sounds odd - no one can get a job once they graduate, how can you hope to get one now?  But the truth of the matter is, there are jobs out there, even in a recession.  I worked several jobs - at the same time - when I was in college, and that was during the last "worst recession since the great depression" in 1979.

4.  Pick your major - wisely.  Going to college without a definite course of action or plan makes no sense at all.  Majoring in something because you "like it" and have no clue as to the job at the end of the pipeline, makes no sense at all.  If you want to be an anthropologist, or a poet, or a writer, that is a fine and wonderful thing.  But realize that these fields don't pay a lot, so it makes no sense to borrow $400,000 to get an education in such fields - you'll never pay it back.  And majoring in such fields because the coursework seems easy is the ultimate in college foolery.

5.  Consider NOT GOING to college.  Today, a college education is not the guaranteed ticket to the middle class as it was in the past.  So many people have college degrees that the value of a degree - particularly a worthless degree in "communications" or other such feel-good endeavors - is nearly worthless.  College for many is just extended High School, and not much is learned there.  If you are destined to be a tradesman or just want to run your own business, there are more direct and far less expensive ways of doing this.  And bear in mind that some of the most successful businessmen in the world never went to college, or like Bill Gates, dropped out.

6. Stop Smoking Pot.   Yea, a lot of college students like to have a four-year party, and pot is a big part of it - and where a LOT of that student loan money goes.  If you are doing drugs and in college, think about where this is going.  Because, chances are, it is the drugs that are inducing you to sign the onerous student loan documents and it is the drugs that is steering you toward "easy" majors with no hope of a post-college career.  If you want to smoke pot, fine.  But don't whine when it all goes horribly wrong for you.

So, that is all very well and fine.  But what if you have already graduated with a degree in English Lit, from Ivy League Wanna-Be University with $200,000 in student loan debt, and Sallie Mae banging on your door, insisting on being repaid?  Well, you could borrow your Mom's car and go down to Wall Street and protest, but I doubt that will do much in the short-term, or indeed, even the long-term.  You are in a pickle of your own making, albeit perhaps one that you made when you were still young, stupid, and addled by drugs and beer.

There are a very few instances where you can duck out of student loan debt - but this usually requires a trip to bankruptcy court and a clear showing that under no circumstances could you possibly pay off this debt.  If, for example, you borrowed $400,000 and majored in economic development and went to work doing volunteer work in Africa, then you might - might - get a friendly judge to help you out.  But don't count on it.

You see, the judge just might as likely say, "Well, go get a higher paying job!" which is easy to say, but hard to do.  And this illustrates why these huge student loan debts are like a mortgage on your career.

You can refinance these loans, of course, amortizing them over 30 years, instead of 10.  But while this lowers the payments somewhat, it increases the amount of interest you will pay, over time.  And the loan companies are counting on your taking this option.

As I noted previously, I worked a number of jobs while in college - a career that spanned 14 years in all.  I worked as a Co-Op student at GM, and later got a job as a lab technician at Carrier (UTC).  Both institutions helped pay for tuition.  I also took night jobs delivering pizza, tutoring calculus, and even teaching sex education (the blind leading the blind!).  I scrounged and I saved and I also got some small scholarships and grants.   One advantage of being an older student is that your parent's income is not counted in calculating grants and scholarships.

Even then, I rang up about $30,000 in student loan debt - not a lot by today's standards, but consider that my older siblings graduated from college with no debts whatsoever, and it was a lot.

But on the other hand, with both Law and Engineering degrees, I was more than able to find jobs that would allow me to pay that money back, and after 10 years, I retired my last loan from Sallie Mae.

I do feel sorry for these young kids today, though.  They are enticed into taking on debt at very, very early ages - not only in the forms of student loans, but also in the form of credit card debt.  For many 20-somethings, life does not look optimistic, but rather just an endless string of work that has to be performed to pay off debts accumulated during four years of partying.  And to some extent, this is an accurate perception.

Be forewarned.  If you are thinking of college, don't fall into the student loan or student credit card trap.  But all that being said, if you are 18, I doubt you will have the self-control to say "no" to money being flung in your face....

UPDATE, November 2014:

A young friend of mind rang up a lot of debt while in college.  He bought a brand-new economy car (getting Grandma to co-sign!  Sweet!) and took out a lot of student loans.   He ran up a lot of credit card debt as well.   Upon graduation, he actually found a job that pays pretty well.

But, bummer, all that debt makes life no fun!  He had more fun in college with a new car and money to spend (and no loans to pay off!).   Post-college life is not as much fun as college was!

His solution?  Go back to college!   His student loan payments would be abated if he went back to graduate school.   And in graduate school, he can sign up for a ton more debt, not necessarily based on need!   Who knows, maybe Grandma will co-sign another car loan!   Why not?

Well, except that grad school is only a couple of years, and then you are right back where you started, only with more debt than ever before.   And his chosen Masters degree, I fear, won't get him a job paying much more than he is making now.

But you see the mentality at work here:  School is fun, life is a party, borrow from tomorrow to have fun today!  Who cares about the future!

And while you might expect this from an 18-year-old, it is sickening to hear it from a 25-year-old college graduate.

College just isn't what it used to be, it seems!