The Student Debt Escalator
The following was contributed by James Kvaal, who has written for the Warren Reports here and here.
The high profits on student loans earned by Sallie Mae come at a high cost to students and taxpayers, according to a fascinating story on this week’s “60 Minutes.” If you missed it, the transcript and video is on the CBS web site.
Business is booming for student lenders. Federal student loans are now a $62 billion industry, according to the College Board. That figure doesn’t even count wholly private loans, the fastest growing part of the industry.
Each federal loan carries subsidies guaranteeing lender profits. If a loan defaults, the feds pay. Sallie Mae can send defaulted loans to one of its collection agencies, which can keep an additional 25 percent of whatever it recovers. If the student still can’t pay, no problem—student loans can’t be discharged in bankruptcy.
The news is not as good for students. The “60 Minutes” story (which included an interview with Professor Warren) described students whose debt had ballooned into six figures after illnesses or job struggles. One man’s debt doubled to more than $70,000 after he was ruined and left homeless by the 1994 California earthquake.
Graduates are finding it harder to enter low-paying careers such as teaching or social work, and we haven’t seen anything yet. Record-low interest rates in recent years have hidden the full impact of student debt, but the good times are coming to an end. Interest rates will rise by 1.5 percent points in six weeks.
Middle-class families are getting hit hard. If they don’t send the kids to college, their chances for earning a decent living will be sharply reduced. If they do send them, both the family and the students may be mired in debt for decades. And if the student doesn’t complete college and quickly go on to a well-paying job, the whole family may sink under the debts.
With rates rising and tuition outpacing inflation, there is no end in sight to the student debt escalator. It might not end until the whole system breaks down.
Another impact of student loans is that normally, after graduation a student, even with a good paying job, may not be able to afford a house, save for retirement, afford to start a family or move to a better neighborhood. Because of the debt load, all they have to show for their efforts is "an education." They are more productive, they earn a little more, but the debt and interest on it wipes the gains they have made.
What a deal.
Find the Truth. Do Justice.
May 17, 2006 5:58 AM | Reply | Permalink
The parallels to the illegal immigrant workers who have to work 20 hours a day (see NPR web site for transcript from yesterday) to repay loan sharks who finance their trip to the US for a low paying job should be striking.
This is also related to the deterioration of the minimum wage. Thirty years ago, a lower middle class student could finance most of a college education with summer and part-time work. Imagine a graph from then to today, with the minimum wage flat-lining and the cost of higher education growing in double digits as taxpayer support for higher education declines. Now imagine trying to pay for that education with a minimum wage job. The only possible way out is to take on debt and finish as quickly as possible. And leave the low paying jobs to the illegal immigrants.
May 17, 2006 8:36 AM | Reply | Permalink
If you are a student, instead of financing your education with student loans why not use credit cards. Then when you graduate go bankrupt.
May 17, 2006 8:49 AM | Reply | Permalink
karl 251 Check out the new bankruptcy laws yet ?
May 17, 2006 8:58 AM | Reply | Permalink
The part I liked best from the 60 Minutes program was when the guy who supports the 100% government-run loan program called the private lender-based loan program
"socialistic." A comment that was appropos of nothing.
Did the author ever stop to think that maybe the reason loan volume is $62 billion is that the nation spends at a minimum about $200 billion a year on higher education? That's the root of the problem right there.
May 17, 2006 10:48 AM | Reply | Permalink
I can vouch for Okielawyer's comment. I'm one of those people. A lawyer, too. Whoo-hoo. If I had a nickle for everytime I've heard about my great education, I might be able to pay off my student loans! Maybe I could even start saving for retirement.
May 21, 2006 7:44 AM | Reply | Permalink