A college education should be a road to success, not a path to bankruptcy

This weekend George Bush did something so out-of-character that it seems impossible to believe–he signed into law new legislation that will actually benefit the American people. Specifically new laws that overhaul the corrupt and bloated student loan system:

The law, which received overwhelming bipartisan support in Congress, will slash federal subsidies to private loan companies and increase grants for students. It will gradually reduce interest rates on federally subsidized loans for low-income students to 3.4 percent over five years. The law will also offer loan forgiveness for those who have held public service jobs for 10 years and will cap payments on federal loans at a certain percentage of a college graduate’s income.

Here’s a thumbnail description of the new laws, and here’s the full text of the legislation.

This is not a perfect solution by any means. The idea that public employees need to pay 10 years’ worth of loans before receiving forgiveness is still a substantial burden to bear, since public salaries don’t match the private sector at the best of times–and certainly not for college graduates. It also doesn’t address the reprehensible changes to bankruptcy law that make it virtually impossible to discharge private loans in bankruptcy. But it is progress, especially in light of stories that illustrate the burdens of students graduating so deeply in debt:

Kristin Cole, 30, who graduated from Michigan State University’s law school and lives in Grand Rapids, Mich., owes $150,000 in private and government-backed student loans. Her monthly payment of $660, which consumes a quarter of her take-home pay, is scheduled to jump to $800 in a year or so, confronting her with stark financial choices. “I could never buy a house. I can’t travel; I can’t do anything,” she said. “I feel like a prisoner.” A legal aid worker, Cole said she may need to get a job at a law firm, “doing something that I’m not real dedicated to, just for the sake of being able to live.”

This is a terrible situation for any young person to be in, and it’s a not-so-subtle means by which they are directed to take on big-paying corporate jobs just to maintain a reasonable standard of living. It makes the idea of public service or nonprofit work impossible to conceive of–you should not have to live in poverty just for the sake of doing something more idealistic than being a cube slave. Daniel Brook’s excellent book, “The Trap”, explores this idea in depth–the reason why youth activism isn’t as powerful as it should be isn’t necessarily because today’s youth are more materialistic or nihilistic (although there’s much truth in that), but that they’re simply too burdened by trying to make ends meet, thanks to overpriced student loans and predatory credit card companies that doom college student to decades of debt servitude just to make a buck. Or as student loan exec Kevin Bruns whines, “How can you run a lender-based program if you’re not allowed to earn a reasonable profit margin?”

The G.I. Bill gave literally thousands of people a chance to build a real future for themselves while serving their country, and while this act is not as sweeping, it IS a good start on getting us back on the right road of providing for our young people’s education, which can only benefit our country in the long run. As for Bruns, here’s hoping he finds himself another line of work due to lack of opportunity soon enough.

14 replies »

  1. I’m cautious assigning all the blame to the student loan providers and/or the government. Yes, the rising cost of tuition is getting a little scary. But, when did government assistance for college become a right?

    I come at this situation from a different angle. At another site discussing college costs, I argued that parents shouldn’t raise their kids with the expectation “you can go to any school you want” and instead talk about the costs/benefits of in-state vs. out of state. I stated that unless my kids got a full ride somewhere, they were going in-state for undergrad. People thought I was going to be a horrible parent, how dare I limit my kids, yadda-yadda. My response was “how can you tell your kids it’s okay to go thousands of dollars in unsecured debt when they have no idea what their income or situation will be in four years? It’s the responsibility of a parent to steer them away from bad choices.”

    My parents were very clear to me as a teen: don’t take one more dime in student debt then you need. So I only took enough to cover the in-state tuition and worked to cover all the other expenses. Which is why I graduated with under $12k in debt while my friends were owing anything from $50-$100k. Since my student loans are paid, I’m in a much better situation than my friends if I decide to go back to school.

    While the quote of the profit margin makes them sound greedy, here is another take: How can you expect to run a student loan program, which is high risk, without covering your bets? You are offering loans to people with no income (for the most part), with no collateral, and a long, long time before they need to pay it back. Not to mention most student loans are designed to be wiped out if the student dies before it’s paid off (non-transferable asset). I’d build in a safety margin, too.

    Lara Amber

  2. Martin,

    There’s another reason to worry about this law. Here’s the definition of “public service job” from the text:

    (B) PUBLIC SERVICE JOB- The term `public service job’ means–

    `(i) a full-time job in emergency management, government, military service, public safety, law enforcement, public health, public education (including early childhood education), social work in a public child or family service agency, public interest law services (including prosecution or public defense or legal advocacy in low-income communities at a nonprofit organization), public child care, public service for individuals with disabilities, public service for the elderly, public library sciences, school-based library sciences and other school-based services, or at an organization that is described in section 501(c)(3) of the Internal Revenue Code of 1986 and exempt from taxation under section 501(a) of such Code; or …

    Note that last clause: OR at any section 501(c)(3) organization.

    Now, please, note this:

    A faith-based organization may be organized as a tax-exempt, nonprofit entity under section 501(c)(3) of the Internal Revenue.

    A year from now, let’s take a hard look at exactly what “public service jobs” have qualified under this law — and at what organizations.

  3. I hate to say it, but is a college education really needed today?

    With the damage outsourcing has done with the high-paying jobs moving offshore, there are plenty of kids graduating from college deep in debt with student loans but only low wage jobs available.

    The only thing college might really be needed for are professions like lawyers, doctors, or architects, where licenses to practice are required.

  4. Wow, Martin.

    What a difference a generation makes. I went to state schools to save on costs by choice, but I had also full scholarship and grant rides. For my entire education – undergrad through doctoral – I wound up out of pocket less than 5 grand. I’ve been able to have a significantly improved life than my parents had.

    There’s another guy who’s running for POTUS who had a similar experience. His name is Edwards….

    My close friend Sam – a guy you may know – went to school in the next generation when Reagan did every thing he could to destroy federal assistance that made it possible for Boomers to go to school. He got some help, but not enough – not because he didn’t merit it, but because it fucking wasn’t there. (Sorry, but this stuff just makes me see red.) He’s saddled with significant debt.

    Of course the big tax cuts Sam’s gotten from the Republicans have allowed him to pay that debt off and buy his second home in Aspen. Just ask him.

    This is criminal. The only people who have benefited from the policies of Reagan, et. alia are the banks and other lenders. Remember my piece on them?

  5. Lara – how is it high risk when student loans can’t be discharged in bankruptcy and they can garnish your wages? Just wondering. And also, if it’s so high risk, why is it so easy to get a student loan?

  6. For a while there, my wife’s and my combined student loans exceeded our combined yearly income. I alone came out of three years of grad school with over 50k in debt (and it could have been more than 60k – I just don’t remember any more). I was lucky enough that my parents were in a position to cover my undergraduate education, and I chose not to work during grad school.

    At this point, the student loans will probably be the last thing we pay off because we have an obscenely low interest rate. Why? Because the Feds guarantee that the supplier will get a given rate even if the interest rates are low, and because we locked it in with a refinancing at the low point just before the Fed raised rates.

    If I wasn’t an engineer, and if my wife hadn’t worked as a teacher for the last 7 years, we’d have been screwed. As it is, we’re still only about half through our loans, with another 25 years to go (we’ll pay of the house before the student loans) if we don’t pre-pay.

    The only reason we’re not as hosed as Sam is because I make a very good salary – if we were both teachers, we’d be f-ed.

    I have a problem with paying for my education for more years than I was in school, from kindergarten all the way through grad school….

  7. “I have a problem with paying for my education for more years than I was in school, from kindergarten all the way through grad school”

    Back to the future: indentured servitude.

  8. I partially agree with Dom – it almost seems pointless to go to college when the jobs aren’t there. Also, in some parts of this country, the jobs exist, but the salaries don’t. I have seen advertisements for web developer jobs paying $10.50/hour – they want AJAX,.NET and PHP developers who *’also* have great graphic design skills. WTF.

    Also, Many IT businesses still want to see a piece of paper with a degree on it – even though there are lot of skilled people who were ‘self taught’ or learned their skills from previous jobs.

    “I stated that unless my kids got a full ride somewhere, they were going in-state for undergrad.”
    In-state schools can be just as pricey as many out of state or private colleges. You can save money by commuting, taking non-major classes at community colleges if your school allows it…but still, most students will owe bucko bucks to their lenders.

    Believe me, I am all for personal responsiblity – parents should teach their kids about saving – getting the latest ipod is a lot more rewarding if you’ve earned the money to get it. Or, do they reeeeaally need that ipod?
    Why not save up for something that may not be obsolete in the next 20 years (if I can think of something, I’ll let you know..)

    I’ve always thought there should be “Math Safety” classes in school – so kids will learn about compound vs. simple interest, how to shop for a real bargain :), down payments, budgeting, amoritization, all that good stuff.

    But, being ‘loan savvy’ still doesn’t pay for the loans. At least maybe it would teach students to avoid the ton of credit card offers thrown their way…so then they’ll have more money saved to pay off student loans. Sigh.

  9. Leah,

    I’m glad you said this, because you beat me to it. The problem is that there are so many people saturating the market with these skills that companies feel like they can offer the crappiest salaries imaginable in order to frighten people–“Take this job or we’ll outsource it.”

    I think what Dom is saying is eerily prescient…in the future, even a simple Bachelor’s degree will only be the province of the truly rich, or those wiling to go all the way for a Masters’ or PHD and get the big corporate job . Everyone else will be forced to fill all those service-sector jobs that will be vacant in the coming years, especially as wage pressures in developing countries will stem the tide of outsourcing.

    In the end, the jobs will come back to America, because there will be a whole generation’s worth of workers who simply can’t afford anything better than a crappy retail career, and the corporations will be happy to ensure that.

  10. When I saw that Bush had signed the bill my immediate reaction was “what’s wrong with it?” Some more research reveals that yeah, it’s progress, but when you look at the magnitude of the problem it’s like celebrating that you only got shot once instead of twice.

    We MUST do more. Refusing to invest in education is the surest possible road to irrelevance that a society can take….

  11. I right there with Leah on the rates being driven down to almost nothing.

    Something else people are finding out today is that corporations are advertising for openings, not with the intention of hiring anyone, but to make the case for getting the H1-B visas for highly educated people from other countries at reduced rates.

    In addition, the government doesn’t help when they do stuff like this:
    The $104 Billion Refund
    The most absurd corporate tax giveaway of 2005

    But the comment I raised earlier, was the fact that the types of jobs being created today are the restaurant waitress/server category, and according to the BLS, the average is $15.60/hr with no benefits and an average 33-34 hr workweek. That’s mighty Bush jobs program for you. The engineering and professional jobs continue to move offshore for now. And Alan Blinder, the economist, estimates that we could see upwards of 500,000 jobs move out of the U.S. ( Offshoring: The Next Industrial Revolution? ) So it really makes one pause today when deciding college would be a good investment when weighing all the factors and the reality.

    I agree that education & knowledge is a good thing.

    After reading about John Taylor Gatto, I’ve considered that maybe we’re teaching the wrong things today too on the road to college. But that’s not a new problem.

  12. Taylor,

    I think I answered in my original post why student loans are “high risk” for many lenders, but I’ll reiterate.

    1. The borrower has no source of income, and no actual idea of his/her post graduation income.
    2. The borrow will not start making payments until graduation. This means the lender’s money will be tied up for at least 4 years with no payments being made.
    3. If the lender offers a really low rate, they risk losing money, even if the person pays them back. This happens if the interest minus the cost of servicing the loan brings the interest rate below the rate of inflation.
    4. For many student loans, the loan disappears if the borrow dies before it’s paid back. Gone, kaput. They could owe you $100,000 and you can’t collect one dime upon their death. Any other kind of debt would be paid out of the estate before the heirs could collect inheritances. With people taking out huge loans and taking decades to pay them back, the odds of this happening are increasing. Especially with people returning to school for advanced degrees later in life.

    I think the tuition hikes are the scariest issue facing future students. Wouldn’t you rather save $50,000 off the tuition to begin with instead of 0.5% off the interest rate?