With three generations of borrowers in need of relief, it makes no sense that they are all simply irresponsible. The fact that this is a multi-generational cry for help points to something more.
Here are a few facts to better understand what is happening to student loan borrowers and just as importantly why it is happening. Please don't stop here, dive into your own research, educate yourself and help to educate others—the truth is compelling.
March 2012: Based on a total debt amount of $870 Billion, The Federal Reserve Bank of NY released numbersthat many found startling; 36 Billion dollars (4.2%) of our nation's total student loan debt belongs to Americans60 and older.
An additional $98 Billion (11.3%) belong to soon-to-be seniors ages 50-59, and those between age 40 and 49owe $142 Billion (16.4%).
These age groups, those that should be planning for or enjoying retirement, account for 32% of our nation'stotal student loan debt.
There's something wrong with a system that is structured so that, even at these ages, borrowers havenot been able to pay off their student loans!
Source: Federal Reserve Bank of New York
Take a look at the past 30 years. Since 1980:
- Salaries for full-time instructors has approximately kept pace with the rate of inflation and many colleges seek out part-time instructors to keep their costs down.
- The consumer price index rose 179%.
- The cost of medical care is up 436%.
- The cost of tuition has skyrocketed by an alarming 827%, far exceeding CPI and even out of control healthcare costs.
- Meanwhile the actual cost of instruction rose by only 5.6%.
The first reason is that much of college is no longer about the students, its about building facilities and managing/marketing them. Fancy facilities provide better positioning in what has become a highly competitive business, a business that comes at the expense of actual education.
The second reason; cuts in state and other funding sources put colleges in the position of seeking these funds from the student in the form of tuition increases.
The outcome is that students are paying more while getting less in the classroom.
This rise in tuition costs and the lack of transparency around how tuition dollars are spent is short-changing our students. Not only are they receiving less education for their money but they must borrow more of it to obtain an education that is worth less and less.
Many employers now insist on a 4-year degree. Some contend that the current 4-year degree is equivalent to a high school diploma 20 years ago (perhaps this is why employers insist on candidates with degrees?)
Depending on factors such as the current economy or what type of education employers are looking for at the time, obtaining employment that supports this hefty student loan debt can be next to, if not impossible.
This debt can literally follow student loan borrowers to their graves.
Sources:
Delta Project on Postsecondary Education Costs, Productivity, and Accountability, http://www.usinflationcalculator.com/inflation/current-inflation-rates
http://trends.collegeboard.org, http://www.postsecondary.org, http://nces.ed.gov/fastfacts, http://collegestats.org, http://www.finaid.org, http://tcf.org
Imagine buying a home, signing the mortgage documents only to learn 4 years later that your interest was compounding and your balance was growing, not decreasing!
To understand the enormity of this problem, run the numbers for yourself. Using a compounding interest calculator, enter a principal, an interest rate and loan duration. Would the resulting terms be acceptable to you? Of course not--you would feel you had been cheated and you would be right!
Student Loans have become the most profitable and the most oppressive type of debt in our nations history. This debt has been the financial ruin of millions of hard working Americans.
Profitability is the key reason these debts cannot be discharged in bankruptcy—lenders have spent millions lobbying for their own interests at the expense of student loan borrowers.
Currently, student loans cannot be discharged when the debtor declares bankruptcy, which means that, unlike most other unsecured debt, student loans will stay with the debtor post-bankruptcy--this was not always the case:
1978: With the introduction of US Bankruptcy Code (11 USC 101 et seq), exceptions to discharge were implemented. The ability to discharge is limited to loans in repayment for 5 years or representing an undue hardship.
1990: The five-year period was extended to seven years.
1998: Congress reauthorized the Higher Education Act, eliminating the seven-year rule
2005: The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 expanded to include private student loans.
The popular argument against discharging student loans in bankruptcy is that it will be abused--although at the time Federal loans were dischargeable, less than 1% were discharged--hardly an abuse. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 include a number of safeguards to prevent abuse and fraud and make it difficult to file bankruptcy. It is also important to note that there is no evidence that student loan debtors are more likely than other borrowers to file for bankruptcy.
In 2009 alone, Sallie Mae spent 3.4 million dollars lobbying against changes to student loans proposed by President Obama, and since 1989 Sallie Mae has been the single largest contributor to John Boehner's leadership PAC. (History of Sallie Mae lobbying)
The argument of "abuse" is nothing more than a fear tactic perpetrated by the lending industry and the elected officials they own. Ironically, these lenders, even when intending to defraud the public by overvaluing their holdings, can themselves file for bankruptcy should they chose.
A college
financial aid office should be a student’s trusted friend. After all, they are the experts on financing
an education and students trust them to guide them in making sound and informed
decisions about funding their education.
Often they are instead a student’s worst enemy, counseling students
based on the colleges (and lenders) best interests rather than the interests of
their students. The resulting choices
made by students following this counsel are potentially leading them into an
inescapable lifetime of debt.
In 2007
a clear conflict of interest emerged
when student loan providers and colleges were underinvestigation for their questionable relationships. Lenders
were providing kickbacks to colleges for top placement on college
preferred lender lists, these lists are provided to students seeking educational
loans. Rather
than face legal ramifications for illegal inducements, dozens of colleges and
lenders paid settlements to the tune of $15 million, effectively sweeping this
scandal under the rug.
The
Bush administration rewarded student loan industry officials and lobbyists with
prominent positions within the Department of Education. Meanwhile lenders such as Sallie Mae showered
Republican congressional leaders with hundreds of thousands of dollars in
contributions each campaign cycle. A top
recipient of that campaign cash, Rep. John A. Boehner, told the Consumer Bankers Association
"Know that I have all of you in my two trusted hands. I've got enough rabbits up my sleeve to be able to get where we need to." Clearly he still does.
The
Higher Education Act of 1965 defines illegal inducements for
lenders, guarantee agencies and colleges. This does not prevent them from pushing right up to the
line by way of activities considered to have “nominal” financial benefits. Sadly, depending upon who is in office, the line may be non-existent.
All of this political and corporate maneuvering comes at the expense of students; those seeking an education to better their own lives and make meaningful contributions to society.
Private student loans are consumer loans intended to help pay for college. They are provided by for-profit and nonprofit lending organizations and are not backed by the Federal Government. Some schools have their own private loan products. The largest lender is Sallie Mae, who until 2010 also provided Federal student loans.
Private student loans do not have the same repayment options available to Federal student loan borrowers such as Income Based repayment (IBR). Here’s an overview:
- They often have variable interest rates
- No limits on origination fees
- They are not dischargeable in bankruptcy
- Interest begins accruing from the day they are dispersed, not after graduation as do subsidized Federal loans
- Some lenders may offer financial hardship/unemployment deferments but fees must be paid to obtain them and those fees vary by lender
- Interest rates are based on the borrowers credit-worthiness and given that these borrowers are young with poor or little credit history those rates are often very high
- Lenders
may require a co-signer, which potentially puts them at risk
These are for students with financial need. Loan amount is determined by the school. No interest is charged while enrolled in school at least half-time and during grace periods and deferment periods.
Direct Unsubsidized Loans
Student is not required to demonstrate financial need. Loan amount is determined by the school. Interest begins to accrue from date it is paid out. Interest payments may be made while in school to prevent a higher balance at graduation.
PLUS Loans for parents
The parent borrower must not have an adverse credit history. Interest is fixed at 7.9%. Repayment begins when loan is fully disbursed.
PLUS Loans graduate and professional degree students
Applicant must not have adverse credit history. Interest is fixed at 7.9%. Repayment begins when loan is fully disbursed.
Direct Consolidated Loans
Each semester requires separate funding. By the time a degree is complete there may be several individual loans. It is sometimes more manageable to consolidate into a single loan. Direct Consolidation Loans has a fixed interest rate for the life of the loan. The fixed rate is based on the weighted average of the interest rates on the loans being consolidated, rounded up to the nearest one-eighth of 1%. However, the rate will not exceed 8.25%.
Many borrowers have graduated only to discover that while in school their unsubsidized loans have been accruing interest—capitalized interest —and they are faced with a much larger debt than anticipated. Likewise if a borrower faces financial hardship post-gradation and utilizes deferments to avoid delinquency or default, the balance can grow exponentially leading to a lifetime of bondage to this debt.
Financial Aid Offices are required to conduct an exit interview, which outlines this process, however, this often does not happen. This discussion should also take place at the time the borrowers signs for the loan—it often does not.
Delinquent means a payment(s) is late and Default is the point at which the lender turns the debt over to collections, depending on the lender, between 3 and 9 months of delinquency.
Todays #1 reason for delinquency is a reflection of our current economy--lack of good paying jobs and lack of jobs period.
This impacts student of all ages; new grads have trouble finding first jobs, older borrowers already in the workforce have taken pay cuts, have been laid-off, lost homes, etc….
When weighing keeping a roof over ones head and food on the table against making a student loan payment, the choice should be self-evident.
The competition for jobs is felt by all ages. Many employers are inclined to hire younger workers with more longevity. This results in both devaluing younger workers who can be had for lower wages and perpetuating ageism.
Older workers that are fortunate enough to have jobs (who in previous generations would be transitioning out of the workforce) are struggling to hold on to those jobs longer because they simply cannot survive without working.
No matter how you look at it, this is painful at any age.
Both private and Federal lenders seem to lack in communication skills. Communication around changes to loan terms, mysteriously losing paperwork submitted by borrowers, etc… result in borrowers being left in the dark about the status of their loans. Often borrowers do not even know they are delinquent or in default until they begin receiving non-stop and often harassing calls about late payments, payments that now have fees attached to them.
Lenders of Federal loans make it insanely easy to fall behind—this is by design—it drives up the overall debt, which they will recover from the government. As interest is capitalized, the loan balance grows by leaps and bounds each time a loan is placed in forbearance or deferment. These periods of temporary relief extend the loan term (resulting in more capitalized interest) but deferments eventually run out at which point if the borrower cannot make the subsequently higher monthly payment the loan goes into default and the government pays the lender.
These lenders assume only a 3% risk on their investment as the government compensates the lender 97% of the balance if the borrower defaults.
It’s easy to do the math: a 50k loan paid by the borrower is worth far less to the lender than a 50k loan which has grown to 200k and is paid by the government at a rate of 97%, or 194k. This is a sweet deal for Sallie Mae and the like--all at the expense of students!
Lenders of Federal loans also receive a subsidy called Special Allowance Payment, which sets the interest rate that lenders are guaranteed to receive on a FFEL loan (while FFEL loans are no longer being made there are still millions of them out there). This rate adjusts automatically every three months to reflect short-term market interest rates plus 1.79% (prior to 2008 the rate was 2.3%). That guarantee, or insurance, is a significant subsidy.
The Special Allowance Payment is designed so that it bears no relation to the interest rates that student loan borrowers pay. Thus, lenders do not earn interest from the borrower; they earn it from the federal government, who then attempts to collect from the borrower in the form of wage, tax return and Social Security administrative garnishments.
Private student loans typically have variable interest rates. When those rates increase, so do monthly payments and overall balances. This increase creates an insurmountable obstacle to a borrower already struggling. Deferred repayment options are at the discretion of the lender and may or may not be available and if available may require a fee.
Some borrowers who have fallen on hard times may have defaulted because they did not know what options were available to them. Once in default they find a hefty fee has been added to their balance by the collection agency--as high as 25% of the total loan balance at the time of default. If turned over to another agency for collection another hefty fee is attached, and so on.
Speaking of responsibility, take a look at Sallie Mae, the largest lender of both private and Federal student loans in America.
Sallie Mae plays multiple roles in the student loan marketplace including originating loans, purchasing loans, servicing loans and collections.
The types of student loans purchased by Sallie Mae include Subsidized and Unsubsidized Stafford Loans, Parent Loans for Undergraduate Students (PLUS), Supplemental Loan for Students, Federal Insured Student Loans, and Health Education Assistance Loans (HEAL).
Prior to July 2010 (see SAFRA Act), Federal student loans originated by Sallie Mae included those offered under the Federal Family Education Loan Program (FFELP).
A Brief History of Sallie Mae:
1971: The Student Loan Marketing Association (Sallie Mae) was originally created as a government-sponsored enterprise (GSE) and was the largest originator of Federal student loans.
1997:
Began privatizing, completed in 2004 when Congress agreed to terminate its
federal charter.
2005: Former Sallie Mae employee filed a Federal lawsuit against the company, alleging that it had a pattern and practice of granting forbearance in a purposeful effort to increase total student loan debt.
2006: Elizabeth Warren, professor of law at Harvard Law School, expert on bankruptcy and an outspoken critic of consumer lenders, questioned Sallie Mae's dual role as both lender and collector.
2007: A False Claims Suit was filed against Sallie Mae and other lenders by former Education Department researcher Dr. Oberg seeking the return of $1-billion in excess student-loan subsidies to the federal government. The suit alleged that Sallie Mae and other lenders deliberately overcharged the U.S. government. Morehere
2009: The Education Department's inspector general issued an audit that found that Sallie Mae had overbilled the department for $22.3-million in student-loan subsidies
Asset Performance Group - Collections, acquired 2007
Arrow Financial Services - Private student loan lender, acquired majority interest 2004
First Trust Financial - Mortgages, acquired 2002
General Revenue Corporation (GRC) - Collections, acquired 2002
GRP Financial Services - Buyers of non & sub-performing residential mortgage portfolios, acquired 2005
Nellie Mae - Private student loans, acquired 1999
Noel-Levitz - Enrollment management consulting, acquired 2000
Pioneer Credit Recovery Inc. - Collections, acquired 2002
Sallie Mae Bank - Private student loans, Banking, established in 2005
Sallie Mae Inc. - Private student loans, 529 savings plans
Sallie Mae Financial Corporation - Banking
SLM Corporation - Holding company for Sallie Mae
SLM Student Loan Trusts - Loan purchaser
Southwest Student Services Corporation - Private student loans, acquired 2004
Student Assistance Corporation - Default prevention services
Student Loan Finance Association - Acquired 2004
Student Loan Funding - Acquired 2000
Upromise - Acquired 2006