By Mitchell D. Weiss
Student loan debt is the elephant in America's living room, and with good reason. According to the most recent data from the U.S. Census Bureau and the National Center for Education Statistics, the average annual cost of tuition for a four-year school represented more than 40 percent of median household income in 2010.
That helps to explain why two out of three college students who are graduating with debt are doing so with an average of $25,250 in education loans plus another $4,100 in related credit card debt (per The Project on Student Debt and SLM Corporation, respectively).
Liabilities of this magnitude so early in a student's life have the potential to diminish the quality of that life by crowding out many of the things we take for granted. Cash-strapped grads are delaying marriage and children, or even moving out of their old bedrooms at home for that matter. They're also putting off car and other major purchases, with obvious macro-economic ramifications.
And yet, we're quibbling over interest rates instead of coming to terms with a problem that requires a great deal more than the plodding, incremental approach being taken by the Federal Student Aid office and congress.
For example, while the government's Income-Based Repayment Program is a decent starting point for addressing this crisis, it excludes private education loans, those that are already in the IBR Program or in ordinary repayment (for 2011 grads and older), as well as those that are currently in default -- arguably the loans that should be addressed before all others.
By contrast, the Student Loan Forgiveness Act of 2012 (H.R. 4170) proposes to include older as well as private loans but, in the case of the private loans, only when total education debt (government and private combined) exceeds average household income for each of the previous three years. Also, it's unclear whether or not defaulted loans would be eligible for consideration.
As for the "forgiveness" part, the government program requires 20 years of payments to reach that point as opposed to the 10 under H.R. 4170. The House resolution also ups the ante by proposing to forgive borrowers who've already paid in for 10 years.
With all of this in mind -- and speaking as a former lender, student loan borrower and a parent of two kids who've made their own way through college and grad school -- I'd like to suggest an alternate approach that has the potential to address the totality of the problem while distributing the pain a little more evenly. I say that because while I'm convinced that the schools, government and private lenders have all contributed to the making of this grand mess, students and parents are also responsible for their part of it.
Going forward, I'd also like to suggest that the government-sponsored loan program be modified as follows.
Consumers requiring additional borrowing may then decide to apply for loans from the private lenders, although with the change in bankruptcy laws that I'm advocating, that's probably going to be tougher to accomplish. Consequently, I would expect students and their families to become even more frugal with their higher education dollars as they consider alternative school settings, degree acceleration and other cost-saving strategies.
I would also expect these moves to pressure the schools to rethink their cost structures, as they should.
This story is an Op/Ed contribution that originally appeared on Credit.com. It does not represent the views of the company or its affiliates.
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Why are we not hearing more about education as a human right, doing away with the need for student loans to begin with, and cutting corporations out of the mix entirely.
Post-secondary education should be provided, without charge, perhaps based on merit, perhaps not, to any and all that desire to pursue it, and yes, you should pay for it, I should pay for it, we should all pay for it, just like we pay for everything else that is essential to progress, just like we pay for primary and secondary education now.
Most importantly, corporations should be paying for it, after all, they stand to gain the most from having an educated workforce.
Many middle-aged people ( & people over the age of 60), have student loans which they just can't afford to pay. Especially the private loans, which are very dangerous & highly predatory. Private lenders gave student loans at 14% plus Libor, and higher. Those loans are now double or triple. The monthly payments can't be deferred at all, & there is no IBR for private loans. If Sallie Mae says your payment is $500 a month, well, that is it. The loan defaults if you can't afford the inflated monthly payment. Federal loans are more flexible.
Bankruptcy protection should be returned to borrowers of private student loans, especially since many people were steered into these loans without even knowing that they could have requested other types of Federal loans.
Compounding can’t be avoided unless the loan is structured to be "simple interest" in nature, provided that the payments are made in full and on time. Otherwise, the shortfall would then be added to the loan balance and interest would end up being applied against the adjusted total. In other words, you’d end up with a loan that compounds.
I’m advocating for a wholesale restructuring of those loans that cannot be paid in full so that the payment shortfalls are no longer "negatively amortized". In my view, it’s the only responsible way to deal with this problem.
As for the matter of garnishment, I know that I'm going to make some enemies when I say this but loans need to be repaid. Otherwise, who would be willing to lend to anyone else ever again? Still, garnishment should truly be a last resort for a lender. I know it was for the companies that I owned and operated. In fact, the only times we traveled down that path was when the borrower was unreasonably uncooperative or deliberately obstructive.
It's been my experience (after more than 30 years in the financial services industry) that the vast majority of borrowers who hit a rough patch in their lives have as strong a desire to honor their obligations as those who continue to have the means. All they need is a lender who's willing to find a way to help them to do so.
That article links to this petition to stop the practices that encourage many defaults here http://tinyurl.com/6ssql5s. Please visit these pages to learn more and help stop them.
The default rate is as many as 1 in 3 loans. Of the rest, it seems impossible to acquire accurate information as to how many actually manage to pay their loans within the "standard" repayment period ( usually 10 years ).
Moreover, for those of you who think you don't have a horse in this race because you don't have loans or your good fortune allowed you to pay yours "on time." - consider this.
The cost of college education has risen at an inflationary rate of over 800% since 1980. The corellation between the gradual elimination of all consumer rights and protections for borrowers and the staggering increase in college tuition and fees should seem familiar to anyone impacted by the sub-prime mortgage debacle.
Sadly what was presumably done to protect taxpayers and borrowers has badly backfired.
If this situation existed with any other debt instrument their would be a catastrophic financial meltdown.
Some will say that allowing bankruptcy protection on guaranteed loans will be unfair to the taxpayers. Wake up call folks....we all pay and allways have paid a premium for financing and products to absorb the cost of bankruptcy in other private and public debts. It is a big part of how the system works in the first place.
Shame is I retired from Service to see it all come to this in America