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Student Loan Mess

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June 02, 2010 – Comments (3)

This is a really interesting situation here, definitely worth reading:

http://finance.yahoo.com/college-education/article/109701/placing-the-blame-as-students-are-buried-in-debt?mod=edu-collegeprep

I would be interested in knowing people's takes here.  I mean I do not place the blame on the student here, really at all.  At 17 she doesn't know a whole lot of what she may or may not be able to afford.  Further, she is just doing what she has been conditioned to do.  To try to get into the "best" school.  Her mom certainly screwed up here, if for anything else by subscribing to the thought that it is all about the school and the more expensive the better.  With the father passing away, maybe the mom didn't know a whole lot about finance.  Who knows?  It irks me that we have this mentality in this country that the only good education is an expensive one from a name that is "known."  Honestly it drives me insane that this notion is so widespread.  I am a big believer in the education is what you make of it.  I know plenty of people who went to community colleges and the like and have done wonderfully.  They took the education seriously, got out of it what they wanted and have enjoyed the benefits.  I also know plenty of folks who never went to college and have succeeded as well.

So we know that the mom screwed up.  She was suckered by that false notion that is is all about the school no matter what.  The bank (Citi in this case...suprised?) should have never given the loan in the first place and the university could most certainly have done a better job as they are the ones ultimately getting paid.  But do the university and the bank just rely on the fact that this is a "student loan" and that it ultimately is "government protected" as far as their interests go?  An excerpt:

But what was Citi thinking, handing over $40,000 to an undergraduate who had already amassed debt well into the five figures? This was, in effect, a "no doc" or at least a "low doc" subprime mortgage loan.

A Citi spokesman declined to comment, even though Ms. Munna was willing to sign a waiver giving Citi permission to talk about her loans. Perhaps the bank worried that once it approved one loan, cutting her off would have led her to drop out or transfer and have trouble paying back the loan.

Today, someone like Ms. Munna might not qualify for the $40,000 she borrowed. But as the economy rebounds, there is little doubt that plenty of lenders will step forward to roll the dice on desperate students, especially because the students generally can't get rid of the debt in bankruptcy court.

I suppose ultimately I am for personal responsibility in this matter and the parents need to know the limits.  I have two young kids with 529s and we will know the limits when it comes time for them to choose.  But man, this is absurd.  It sounds like universities will accept the argument that they are not in the business of financial counseling.  Just enrolling students.  Who cares if the students cannot ultimately afford it.  And the banks?  Well we know about them already.  This is getting way out of hand.

JMo

3 Comments – Post Your Own

#1) On June 02, 2010 at 11:06 AM, Entrepreneur58 (36.76) wrote:

Student loans are a great example of what I call "relativity" in investing.  When banks loan money to someone to buy something, they actually make the price of that thing go up.  This is true for houses, cars, education, or anything else.  If you don't get a loan to buy something, it is less affordable to you than it is to someone who got a loan. "Relatively" speaking, every time a bank lends money to someone else, it makes you poorer because you are forced to pay higher prices.  I believe that understanding this one simple idea is at least 50% of investing success.

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#2) On June 02, 2010 at 11:31 AM, TMFJMo (70.86) wrote:

Excellent point Entrepreneur58...

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#3) On June 02, 2010 at 11:39 AM, PDTBiotech (88.52) wrote:

As someone who was faced with the exact same choices growing up but made very different decisions, I’d say these chumps should stop bitching and honor their commitments, even if it’s obvious in retrospect that making them was stupid.  For the record, I went to a cheap but well respected undergrad school which I paid for by working summers on a farm all through high school and college – nearly killed me, but I graduated debt-free (and got in the best shape of my life).  Then I got a PhD in a life sciences program that paid a stipend - still no debt and actually came out with a little $$$ left over.  Totally debt-free by choice (no car payment, no mortgage, no loans, no credit cards, no debt period) I’m now putting the PhD to work generating a healthy income in the private sector with intentionally minimal cost of living, and am very happy with how I chose to get to this point.  But those decisions weren’t just random, they took a lot of thinking and planning,  a fair amount of compromise, and sticking to my guns even when times got tough (the first year of grad school my stipend was $13k - needless to say I ate a lot of ramen noodles that year, but I’ll take being poor and working in a lab over working on a farm any day).

*Ms. Munna understands this tough love, buck up, buckle-down advice. But she also badly wants to call a do-over on the last decade. "I don't want to spend the rest of my life slaving away to pay for an education I got for four years and would happily give back," she said. "It feels wrong to me."*

It's a bad system, but ultimately it's both the mother's and her fault, and I don't think there should be any room for a “do-over”.  She took out $100k in loans to get "an interdisciplinary degree in religious and women's studies" - how did she think she was going to pay it off?  Other people saw ways around this and planned intelligently, why shouldn’t she have to deal with the consequences of her stupid decision?  I wish they would’ve asked her for this article how long she had anticipated it would take her to pay off the loans at the time she took them out.  I suspect the answer would’ve been a blank stare, as calculating the ability to make loan payments would mean estimating her future salary, which would mean knowing what job she was likely to have with that degree.

*After taxes, she takes home about $2,300 a month. Rent runs $750, and the full monthly payments on her student loans would be about $700 if they weren't being deferred, which would not leave a lot left over.*

Blech.  So her after-tax income would be ~$27.6k without the payments, but ~$19.2k if she makes the payments.  She lives in San Francisco, either way she’s gonna be poor.

* "I don't want to spend the rest of my life slaving away to pay for an education I got for four years and would happily give back," she said. "It feels wrong to me."*

I cannot comment on this and stay within the bounds of good taste.  

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