Wednesday, September 13, 2006

A Rise in Student Loan Defaults

A new post over at Talking Points Memo site in the Warren Reports section entitled Canary in a Coal Mine? discusses the rise in student loan defaults from 4.6% to 5.1% in the last year. As the post notes, 5.1% is historically low. However, the report also notes that it is expected that 12% of the loans made this year will eventually default.

One of the main arguments for requiring students to borrow money is that it should be seen as an investment. Of course, we have heard the same argument for housing, too -- and look where the housing market is headed now with overleveraged investors in a excessively crowded market.

One of the problems is that many students are not able to graduate from college and find a job that, given a complete financial cost-benefit analysis of their earning potential, would justify "investing" in college by borrowing money. Section 523(a)(8) of the bankruptcy code virtually makes student loans non-dischargeable in bankruptcy. Therefore, such an investment carries with it a tremendous risk. More risk than, say, starting a new business.

We used to value a college education so much that we provided grants to qualified students so that their schooling was paid for. Because of our public policy, grants and scholarships are rarely granted anymore. In fact, colleges and universities are even getting "incentives" (read: kickbacks) to push students to borrow money from private lenders rather than the cheaper government-subsidized loans.

What makes this worse is that students from lower-income groups, who have a hard enough time moving up the economic ladder, become saddled with debt that may compound their difficulty with upward mobility. Somehow, the American people need to come to the realization that we all have a stake in educational opportunities. The world is changing. We cannot sit on our laurels. People in China and India want our jobs. We will have to work harder and continually learn new things if we expect to keep our place of preeminence in the world. Now is not the time to saddle people with debt that creates another barrier to entry to success.

3 comments:

Karl said...

The barriers to entry take is something I never thought of

Teri said...

Both my husband and I used to do factory work. We decided, in our 40s, to go back to school for training. We went to community college, but had to take out a modest loan for living expenses while in school. I was able to get a good paying job in the late nineties, and for awhile, it looked like I might actually be able to pay the loans off. We owe around 11k.

When the tech bust hit, my job went away. I was out of work for 13 months and finally had to take an $8 an hour job when unemployment ended. Quite a change from making 51k a year! I've managed to keep working since that time but had to file for chapter 7 bankruptcy. Of course, the student loans are still with me and are in perpetual deferment.

I've sold the house (and didn't make all that much on it). I now live in a trailer without any utilities, to trim costs to the minimum. I'm up to $11 an hour and my husband works as a janitor for $10 an hour intermittantly. I honestly don't know how I will ever be able to pay the loans off and just may have to default when they come out of deferment this time. In my mid 50s, it doesn't look like I'll be making more money any time soon. Of course, they'll be able to claim part of my SSN retirement money, assuming that there is any of that to be had.

I'm not sure why these loans have such a special status. I went into the computer field, so I did go into a field that should have had some potential for supplying me with a decent paying job. Instead, I'm not making all that much more than I did back in the factory days. As more and more jobs are sent elsewhere, I think you'll see more defaults.

OkieLawyer said...

Teri:

Unfortunately, I fear that in the next 5-10 years, we will see a lot more stories like yours. I hope my fears are wrong. But I got a bad feeling with all the economic fundamentals: housing bubble (there are hearings coming up this week in Congress on this topic), the high debt ratio (both individually and nationally), the trade deficit, inflation, rising interest rates, stagnated (or even falling wages vis-à-vis inflation) and a whole host of problems that I would have to think about.

Follow the link to Life After Bankruptcy on the right side of my main page; Stephen Snyder does gives some good pointers on how to rebuild your credit.