Wednesday, April 25, 2012

How Did College Grads Acquire the Debt "Millstone" Round Their Necks?

We read in numerous media (e.g. WSJ, The Economist, NY Times etc.) that there is now nearly $1 trillion in outstanding college debt. Many recent grads are so buried in debt (especially from the the usurious interest rates of private loans) that it will be decades before they get out from beneath it, if at all.

And the mountain of student debt threatens to become much more horrific a problem if the interest on gov't-linked Stafford student loans are increased from 3.4% to 6.8% this June, as the House GOP wants to do (in conformance with terrific Wall Street pressure to maximize profits for private lenders).

In fact, the worst error a student can make is taking on any private loan from a private lender. My advice on this score would be if you can't obtain a federal loan of some type (or combination), don't even think of going to college. Perhaps attend a community college, get an associate degree and done.

The reasons are obvious to any one who knows anything about these loans starting with the fact they usually carry uncapped variable interest rates, and they aren't required to have flexible payment options. As if these aren't bad enough there is no statute of limitations on collections, no chance to file for bankruptcy protection and the collection agencies can dog you into old age, even collecting your social security monies! Most current students are finding that though on paper they may owe $70,000, the actual total is more like $210,000! No wonder many are in despair!

Other downsides of these private loans are also clear:

- Delay in buying a car - purchasing a home

- Postponement of marriage

- Inability to rent because of high debt to income ratio

- Being forced to deal with sharks from private collection agencies

- Having liens placed on bank accounts and property

- Wages garnished, tax refunds seized

As one can see the misery index is incalculable, and the cost to benefit ratio in the end may not be worth it. Indeed, the only jobs noted in one WSJ piece three days ago that a grad can be certain of getting, are:  home health aid, Starbucks barista, or waste service ("sanitary") engineer.. The highly paid technical and skill jobs are almost all gone and unlikely to re-appear given a starved demand economy. That's the bottom line. So, what's the point of taking out $150-200 k in debt when one's life time earnings may not reach even twice that? (Debt to income ratio of 50%)

When I graduated from the University of South Florida in 1971, I had roughly $1, 500 in National Defense Student Loans outstanding. These were easily paid off after I left Peace Corps, at the federal 1% interest rate. By 1972, the government - enabled loans had essentially dried up after Nixon launched the Student Loan Marketing association or "Sallie Mae" which grew into a private-gov't hybrid with the main aim to shift the burden of paying for college loans from government to students.

So long as loan amounts remained in line with inflation there was no problem. Once inflation began galloping away in the late 70s, much of it owing to the higher price of oil, all bets were off. Loan interest now began to ratchet up and more private burdens were imposed as government assistance was pulled back. By the end of Reagan's adminstration, the balance between need-based grants and interest-bearing loans had shifted dramatically, to the extent Pell Grants covered barely one half what they did in 1981. And the student loan industry began to see its profits soar.

The catalyst was an ambitious Sallie Mae executive named Albert Lord. Within a decade of joining the company as comptroller in 1981, Lord rose to CEO with a plan to take Sallie Mae private and shift the company’s center of gravity from Washington to Wall Street. The desire was mutual and Sallie Mae’s assets multiplied eightfold during the Reagan years. Investors were salivating over the chance to get a piece of Sallie Mae’s expanding $15 billion portfolio of government-backed loans.It's been downhill for students ever since.
In 1996, Sallie Mae went private and began trading as the SLM Corp. All of the trends of the 1980s accelerated, and by the early aughts Lord sat on a personal fortune of $230 million. Sallie Mae’s 2003 annual investors report boasted of “strong fee income growth, largely from debt management operations.” With his profits Lord began building a private 18-hole golf course on his Maryland estate. Shortly after breaking ground, he bitched to The Baltimore Sun about having to deal with zoning officials. “I hate rules,” said Lord.
Not all rules. When he uttered these words, Sallie Mae had just spearhead the lending industry’s lobby effort behind the 2005 Bankruptcy Act, which stripped private student loans of bankruptcy protection. (Such protections around federal loans had long been chipped away.) Leading the effort in Congress was Lord’s golfing buddy and current majority leader, John Boehner. It was around this time that Sallie Mae hired Boehner’s daughter as an executive at one of its largest collection companies. Sallie Mae remains the largest donor in the history of Boehner’s PAC, followed by the unctuous for-profit education industry, where private student loans are most common, most toxic and least likely to result in a college degree.

Students, especially in massive loan debt, need to remember who their friends, and who their enemies are, as this November approaches. One big objective for them, and Occupy: Get out the vote and take back Boehner's House from underneath him! Show him that payback can be a bitch! This ought to be doubly motivating if the Goopers allow an increase in the interest rates of the Stafford loans to 6.8%..

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