What causes tuition to be so high? Who is going to get stuck with the bill?
We asked Yahoo News readers to tell us their experiences with student loan debt. Over 600 graduates (and not-quite graduates) of all ages emailed to share their stories. We’ll be sharing more of their stories: in the next week over at our Tumblr.
Overwhelmingly, Yahoo News readers told us they felt burdened by their debt. “We do not like debt,” wrote Katelyn Fagan, who graduated from Brigham Young University: in 2011. She and her husband have a combined student loan debt of just under $70,000. Fagan tried to work while in college, but wanted to focus on her academics. “Maybe I could have sought out other employment options (and I sometimes did) but school was my top priority.”
“Student loans have basically ruined my life,” says Tanya Carter, who graduated from the University of Toledo in 2008. She went to community college for two years before transferring, and attended classes part-time so she could also work. When Carter maxed out on federal loans, she turned to private loans to finish her degree. As a result of all that debt, she writes: “I never see myself owning a home, vehicle, or maybe not even getting married.”
The need to delay starting a family because of financial worries was a common concern. Lauren Dollard graduated from Fordham University in 2008 with $157,000 in debt, including interest. “My boyfriend won’t marry me because of my debt,” she says. “He doesn’t want it attached to his name (I know, this could also be an excuse).” She said she would trade her “fancy private school education” in a heartbeat to live “as an independent adult.”
April Flores graduated from San Diego State in 2008 with $80,000 in private loans and $30,000 in subsidized loans. “It is going to be hard to buy a house and start a family with our debt,” she writes. “We joke and say that our baby is Sallie Mae, but it is true!: Education is invaluable, but I was not wise in my early 20s and did not make the right decisions when it came to my private loans.”
Flores was far from alone in bemoaning her failure to understand the implications of those promissory notes. Salvatore Aiello graduated from the University of South Carolina in 2009 with $68,000 in debt. “I blame ignorance in my pursuit of loans; my high school did a terrible job explaining our options when it came to financial aid,” he told us. “They made it seem that if I wasn’t rich or beyond poverty I would not have been able to go to college.” Aiello followed up with a second email–he and his girlfriend are now expecting their first child. They are, in his words, “very excited at the unexpected blessing but terrified.”
ACADEMIC economists like to make fun of businesspeople: they want competition when they enter a new market but are quick to lobby for subsidies and barriers to competitors once they get in. Yet scholars like me are no better. We work in the least competitive and most subsidized industry of all: higher education.
We criticize predatory loans by mortgage brokers, when student loans can be just as abusive. To avoid the next credit bubble and debt crisis, we need to eliminate government subsidies and link tuition financing to the incomes of college graduates.
Nearly eight million students received Pell grants in 2010, costing $28 billion. In addition, the federal direct loan program, which allows nonaffluent students to get government-guaranteed loans at low interest rates, cost taxpayers $13 billion in 2010-11. Total subsidies to university education amount to $43 billion a year, including around $2 billion in Congressional earmarks – and that does not even include tax subsidies (for college funds); tax breaks (for university endowments, for example); and subsidies dedicated to research.
Just as subsidies for homeownership have increased the price of houses, so have education subsidies contributed to the soaring price of college. Between 1977 and 2009 the real average cost of university tuition more than doubled.
These subsidies also distort the credit market. Since the government guarantees student loans, lenders have no incentive to lend wisely. All the burden of making the right decision falls on the borrowers. Unfortunately, 18-year-olds aren’t particularly good at judging the profitability of an investment without expert advice, and when they do get such advice, it generally counsels taking the largest possible loan. The stock of student loans has reached $1 trillion, while the percentage of borrowers in default jumped to 8.8 percent in 2009 from 6.7 percent in 2007.
Last but not least, these subsidized loans keep afloat colleges that do not add much value for their students, preventing people from accumulating useful skills.
That article also contains the solution:
Investors could finance students’ education with equity rather than debt. In exchange for their capital, the investors would receive a fraction of a student’s future income – or, even better, a fraction of the increase in her income that derives from college attendance. (This increase can be easily calculated as the difference between the actual income and the average income of high school graduates in the same area.)
The solution is to privatize the entire student loan system, and make the loans conditional on future earnings. That way, universities will be chosen based on their ability to provide jobs to students, and students will have to justify to banks (who represent ordinary people who put money on deposit with an expectation of a return!) why they should get a loan and how they expect to pay it back.
But what has Obama actually done?
The president, by way of administrative fiat, plans to continue redefining the federal student-loan industry, making taxpayers absorb the financial risks of federal direct lending and leading the country over a cliff into: future funding shortfalls.: On Wednesday, the president announced his executive order to reduce monthly student-loan payments, consolidate loans into direct loans, and offer loan forgiveness after 20 years, all in the name of college access.
President Obama’s executive action would cap monthly repayment at 10 percent of discretionary income and offer students an incentive for consolidating Federal Family Education Loans (FFEL) and direct loans into the direct-loan program, which administers loans directly to students, instead of having them issued by banks. Students will be given a 0.5 percent interest-rate reduction for switching to the direct-loan program.
But why the urgency to employ executive action to shift to the direct-loan program now? The federal government is currently lending to students at an interest rate of 6.8 percent while it is borrowing at less than 1 percent, and the difference is kept by the federal government and spent on other programs, like converting the popular Pell Grant program into an entitlement. The president is lobbying for more students to move to direct loans so that the government can spend the money elsewhere. As Rep. John Kline, chairman of the House Committee on Education and the Workforce, said, “It’s a pretty big slush fund.” Under the Healthcare and Education Reconciliation Act, all new federal student loans are now direct loans, but there are still $400 billion outstanding loans that are not.
But these “savings” are misleading, as future shortfalls are inevitable. These loans are riddled with risk. When pressed by a reporter about why students would want to pay back the loan if they will be forgiven anyway, Secretary Duncan simply said that “people want to do the right thing.” However, student-loan default rates have been increasing for nearly ten years and are now at 8.8 percent. On top of these high defaults, the jobless rate for Americans with at least a bachelor’s degree is now 5.1 percent, the highest since 1970.
As former CBO director Doug Holtz-Eakin wrote, “The Secretary of Education is now one of the top financial executives in the U.S., and Congress spent nearly all of the over-estimated ‘savings’ on the President’s health care reform and unaffordable education entitlements and will add more than a trillion dollars of risky loans to the national balance sheet by 2017.”
Just like the housing bubble, the Democrats have again made it easier for a certain segment of the population whose votes they wanted to borrow money – money that they now don’t have to pay back. Being a leftist means taking money away from people who earned it and giving it to others (students, universities) who don’t have to pay it back.
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