Everyone's been talking about the mortgage crisis that continues to wreak havoc on families. But have you focused on the next looming crisis? I'm talking about student loans.
Executives of America's largest for-profit colleges recently convened in our nation's capital to address the issue, and our own students are telling me how their friends still can't get a job. They're staying at home as a result, but the bigger issue is paying the college loan bill.
As students take on more debt -- $14,000 on average for those earning just associate degrees at the for-profits -- the default rates are growing. Some $275 billion in loans made to students at for-profit colleges will default over the next 10 years. In fact, these for-profit universities represent 10% of all university students, yet they account for 43% of all student-loan defaults, according to the Department of Education.
So, the question is, how can we prevent the high default rate from leading to a repeat of the mortgage crisis and further wreaking havoc on America's families?
Job creation: our duty
We have a duty to help families make the right college decision, starting in high school. If a student wants to become, say, a doctor or a dancer, do they have the financial wherewithal to carry the debt to get there? What will salaries be when they graduate? What are their chances of achieving that salary? And, will they be earning enough to live and finance the debt? What about the "what if's" -- the ambiguities of career, cost of living, and life in general?
It's like health insurance: if you're not directly or immediately paying for the doctor, you're not sensitive to the costs. In fact, you don't even question the charges because insurance will cover them. Similarly, even as college costs skyrocket, many young students and families don't even think about it. Worry about it later, when the bill comes due.
But thinking about it now is an exercise that every teen and family should go through as they embark on the expensive proposition of a college education. It's an exercise, however, that many parents are simply not equipped to do on their own.
Ideally, this should be a job conducted with the help of a guidance counselor. But the problem there is another huge shortfall. Schools typically have just one guidance counselor per 1,000 students, according to Public Agenda, and already only spend about 38 minutes on average directing their future.
Rethinking loan standards
Second, just as lenders have been motivated to modify mortgages and re-think lending standards, so too must we re-think our student loan policies. The truth today, as Steve Eisman, hedge-fund manager and star of Michael Lewis' The Big Short, put it: "If you can breathe, you can get a loan."
One might argue that tighter lending standards should be in place, an easy solution and one now embraced by mortgage lenders. Problem is, the pendulum has swung so far the other way that even creditworthy families, my own included, have found it next to impossible to take advantage of lower interest rates, which would put them on a better financial footing long-term. It's an increasingly common paradox: the banks are so concerned about your ability to pay that you can't even refinance a loan to make yourself more able to pay.
We need to have the right lending standards and payment incentives. For instance, I remember taking out a loan as I was financing my own way through college. What I discovered after moving in with relatives and buying a used car was that I no longer needed some of the loan money for which I qualified. I opted to skip the additional debt in favor of financial freedom, but not so many others would. Years later, in fact, I saw my peers in business school using their college-loan money to engage in online stock trading.
As Rishma Naqvi in the student-loan office at the University of California at Los Angeles told me, a student can use "any remaining loan funds left (after tuition is paid) as they please, for whatever expenses -- rent, food, books. There's no way to monitor that."
Incentives for faster loan payback and new restrictions on the use of funds should be considered. Couldn't that be good for the borrowers, federal coffers, and lenders?
Regardless, let's not forget that, unlike mortgages, America's investment in education yields a far greater return: not just from income and sales taxes and other contributions, but by helping America become more competitive globally.
Finally, it's in our best interests to work with borrowers, not against them. During a television interview with Fox's Neil Cavuto in 2008, I called for lenders to modify existing loans, well before it was in vogue. The banks were being penny-wise and pound-foolish, I argued. The same is true of student loans. While loan forgiveness and forbearance programs may help relieve some of the financial burden temporarily, a review of these policies in light of the job market would make sense.
It's important that borrowers understand their responsibility to repay. But it's also up to us to make repayment possible -- both through job creation and an affordable education. In the end, we as taxpayers win in two ways: funding for future loans and continued self-esteem among borrowers as they search for jobs.
The financial crisis was an opportunity to re-examine and modify lending practices. But we're still learning from it. As leaders in education convene to wrestle with student default rates and their own reputations, we need to be sure policy leaders embrace the topic -- not only to prevent bailouts by the government, but to arm students and families with the right skills and education to compete in today's global economy.
Jennifer Openshaw is an adjunct professor in personal finance at New York University, chief executive of Family Financial Network and founder of SuperFutures, which helps teens build the skills to succeed in a new economy. You can reach her on Twitter @superfutures or on Facebook
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