Getting the Student Loan Debt Problem Under Control

The cost of going to college rises significantly every year, and more students are getting themselves deep int0 debt by the time they graduate. The New York Times rounded up a bunch of experts to debate what we can do to make things better for students who are being forced to take out enormous loans to attend school. Here’s what they came up with:

• Allow financially distressed student loan borrowers a way to find relief. People who file for bankruptcy can find relief from consumer debt, but not from student loan debt, which cannot be discharged in bankruptcy.

• For-profit colleges get most of its revenue from federal financial-aid programs, despite having poor graduation rates. We need to have better regulations to ensure that taxpayer money isn’t going into toxic programs. 

• The costs of going to college are getting out of control, and colleges need to slow that rate and get a grip on their spending (high-tech student dorms are nice, but all students really need are a place to sleep and an Internet connection).

• Cutting grants for low-income students is short-sighted (duh).

• Colleges lend out tens of thousands of dollars to students without knowing whether or not these students will be able to repay them after they graduate. If students default on their loans, colleges should assume some of those risks.

• College students aren’t very financially literate. Get them into some sort of program so they understand the financial risks of borrowing money before they take out loans so they’re not suddenly surprised by how difficult it is to manage student loan payments after they’ve graduated.

 

Photo: Flickr/Tulane Public Relations

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18 Comments / Post A Comment

Easy: the federal government just needs to set a cap on tuition that universities are allowed to charge if they want their students to be eligible for federal loan money. Also cap tuition increases at inflation + 1%. Problem solved. (Of course, this means states will have to stop using higher ed as a budget punching bag, but I see that as an upside and not a downside.)

awk (#840)

@stuffisthings It’s an interesting idea, but one that the government tries in other areas without much success — think medicare and medicaid, for instance. The scenario would play out like this: state university tuition is capped at +1 percent of inflation; after a couple years of the policy, state universities complain that their costs are rising faster than inflation due to the unique nature of their industry; universities request an exemption; caving to pressure from lobbyists, the federal government accepts exemptions. Tuition costs continue to rise.

awk (#840)

Also, I think that the policy that essentially bars the discharge of student debt in bankruptcy really created a lot of this mess. If the lenders truly took on the full risk of their loan, they surely would not be as willing to lend such huge amounts of cash. That would have a big effect on the prices that universities could charge…since there would not be an endless faucet of cash from said lenders.

@awk Indeed, that’s probably the easy fix.

Tuna Surprise (#118)

@awk
Except the impetus behind the bankruptcy discharge is that students would file for bankruptcy immediately after graduation (no job/no assets) and abuse the system. Maybe the best solution is to make them dischargeable after X number of years?

Also, as soon as the lenders bear the full risk, it becomes harder to get a loan. Want to major in sociology at a mid-tier school? Who would want to give you money to do that?

I think the problem needs fixing from all angles (lower cost of attending school, less funding for private diploma mills, more need based support and better loans).

@Tuna Surprise I don’t think someone who recently graduated from college and got a decent paying job with career prospects would necessarily want to immediately default on their loan, thus making it impossible for them to buy a house or car or get a credit card until they’re 30. Of course, this means lenders would only want to finance students who have some chance of getting a decent paying job…

Then again, as much as it pains me to say so, maybe we have TOO MANY sociology majors at mid-tier schools?

Ideally any reform would include strong provisions to ensure that everyone has equal access to education (e.g. schools can’t use ability to pay as an admissions criterion) but I’m becoming increasingly convinced that the US needs a much smaller number of social sciences and humanities graduates, ones who are actually committed to their field and can make meaningful contributions to the scholarship or practice of those disciplines, rather than just “I’m supposed to go to college so, eh, sociology.” This would also theoretically help reduce the problem that you really need a master’s to get any kind of job in most social science-related fields, even an entry level one, which would also help to reduce education costs. (For instance, I work in a development-related NGO and about 2/3 of our entry-level staff are currently leaving or planning to leave for grad school… which means in two years if they’re lucky they’ll be making just barely above the median wage, instead of just barely below, but with an additional several 10s of thousands of debt to deal with.)

Limaceous (#30)

@Tuna Surprise You’re right that we need to fix this from all angles, and I agree that a waiting period might be a good idea.

But would it be so much worse than the current situation if lenders didn’t cover sociology majors at mid-tier schools? (As in, we’re currently setting these young people up for lifetime of punishing debt-service payments that their incomes will never really be high enough to meet? Income-based repayment plans help with that, but seem very little known about.) I’m conflicted on this, as I have a couple of pretty ridiculous degrees, and am so glad that I had those experiences. But I’m also not floundering under six-figure debt, either.

awk (#840)

@Tuna Surprise Well, I contend that if access to loans wasn’t so readily available, then tuition prices would fall (or at least level off for a long time). And with less access to easy cash, students would be much more disciplined about choosing the right program and school, as @stuffisthings suggests. That is how the industry functioned before the onslaught of loan money.

And I also don’t think that loans would be instantly discharged in bankruptcy by a recent graduate. The loans are always cosigned by someone with assets… normally a parent. I don’t think that kids would want to send their folks to the poor house as soon as they were handed a bachelors degree.

Obviously there needs to be a multi-pronged attack to reform, but I really believe that bankruptcy is a huge part of it. It’s just not fair that a borrower should have to assume such a risk when the lender is basically invincible.

@Limaceous The problem with “fixing a complex socio-financial problem from all angles” approach in the current US political climate is that by the time fix gets through the Congressional meatgrinder, the only bits left are those that were put in to pander to entrenched interests, and the result is ridiculous complex, highly susceptible to being gamed by the savvy and powerful, and lacking in most of the anticipated cost savings. See: health care.

Limaceous (#30)

@stuffisthings True. There’s a substantial difference between what “should” be done and what is actually possible.

Bettytron (#111)

@awk There’s a house resolution currently being worked on that proposes loan forgiveness for fed and private loans after ten years of paying at least 10%. The forgiveness amount would be unlimited for people who graduated before the legislation was passed, but limited to something like 40K for students yet to graduate. This seems great to me- helping out people who’re already in over their heads, and setting the bar at a reasonable place so incoming students understand that over 40K of loans is unreasonable. (Maybe it sounds silly but going into undergrad I really had no idea what a reasonable amount of debt was and got in way over my head. Something like this cap on how much can be forgiven could be such a useful guideline for confused seventeen year olds everywhere). And in the long run may have the effect of lower tuitions to become competitive

Tuna Surprise (#118)

@all

I agree with most of your points. I come from a background of having six figures of law school debt and it makes me anxious to make it harder for students to get loans. Some people who may not look like the best candidates on paper end up having stellar careers.

On the other hand, their is a real disconnect between the schools and the students on whether the education is worth it. Law schools, in particular, have been encouraging students to pay upwards of 200k for legal educations when they know that the current job market is only supporting 50% of graduates.

It would probably be a reality check for a student that if a bank isn’t willing to bet on their education, then maybe they should reconsider if it’s worth it.

WaityKatie (#1,696)

@Tuna Surprise I mean, but wouldn’t law schools have to lower their costs if the student loan spigot were turned off? Seems to me that many low ranked schools would go out of business, and the higher ranked ones would need to start ponying up substantial financial aid. Just like undergrad colleges do. There’s no way Yale is going to pass up the next Barack Obama-equivalent because the student can’t pay. That’s just not going to happen. They will find money from “somewhere” to allow that student to go to their school. What will happen is that a lot of the people who went to law school despite not being fully qualified academically to do so, will not be able to go. I’m fine with that. Not everyone should go to law school. Heck, I often think I shouldn’t have gone, and I had the high scores and academic record to get in. I often think my life would have turned out much better if I had bombed the LSAT and not been able to get in anywhere. Law isn’t the sparkling wonderful career that we have all been led to believe it is.

r&rkd (#1,657)

@WaityKatie
If forced to bet on what would happen if student loans became dischargeable, I imagine that it would be similar to the market for law school graduates before and after 2008: essential unchanged for the very top, with much of the rest of the market simply going away. I’m not sure if this would be good or bad overall.

Also, for the record, had I been able to discharge my student loans in bankruptcy immediately upon graduation in 2006, I would have.

r&rkd (#1,657)

@stuffisthings
In addition to health care, another great example is regulation of private colleges. As you probably know, there was a legislative effort to accomplish basically Mike’s second bullet point, and it ended up with no meaningful effect.

r&rkd (#1,657)

Also to everyone, does anyone know whether, when student loan defaulters talk about facing garnishments, those are special garnishment powers that the student lenders have (comparable to the IRS’s special lien powers over tax debtors) or whether those are just judgment liens enforced like any other judgment lien?

1LessFixie (#876)

In regards to the “students aren’t financially literate” part I would like to add that lenders and schools do practically nothing to explain in clear and precise terms what the loans entail.

For example, I very recently received a notice from one of my lenders stating that the terms of my loan had changed. The letter further explained it *could have* changed in one of several ways (interest increase, decrease, stayed the same) because of several reasons which it lists. Nowhere in the letter did it state explicitly how my loan changed or why. Apparently, despite the fact that I have several loans out with several different lenders that seem to be constantly shuffled about, the burden of discovering how my loan changed and why is entirely left on me even though I don’t seem to have any say in how it has changed or why.

I believe that while borrowers, such as myself, should do their part to understand their financial situation, lenders and schools need to do more to make that an easier, simple process.

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