The Real Debt we’re Leaving our Children

As you know, I just finished my doctorate and my youngest just finished her online bachelors degree.  I’d really like her to go get an MBA right now but she sees the debt that her sister accumulated during med school and my student loan debt which just basically happened over the last two years.  Tuition is going up almost as astronomically as health care costs because of the great recession.  Lack of jobs after school is a problem.  The youngest is bar-tending and doing part-time temp jobs in NOmaha.  She has yet to round up a good job.  I’m still looking for a tenure track position while working as an adjunct.   The only one that can probably hand the student loan debt is Dr. Daughter.  I didn’t get student loans for my undergrad or my first graduate degree.  I paid for them both.  This time, I just couldn’t swing the tuition.  My student loan is actually larger than my house loan at the moment.  That scares me when I think about it.  But, it would worry me more if I was younger.  Read these two NYT articles to see why.

At a protest last year at New York University, students called attention to their mounting debt by wearing T-shirts with the amount they owed scribbled across the front — $90,000, $75,000, $20,000.

Amanda Cordeiro of Clermont, Fla., owes $55,000 in student loans. She has changed her phone number about four times in a year to avoid being found.

On the sidelines was a business consultant for the debt collection industry with a different take.

“I couldn’t believe the accumulated wealth they represent — for our industry,” the consultant, Jerry Ashton, wrote in a column for a trade publication, InsideARM.com. “It was lip-smacking.”

Though Mr. Ashton says his column was meant to be ironic, it nonetheless highlighted undeniable truths: many borrowers are struggling to pay off their student loans, and the debt collection industry is cashing in.

As the number of people taking out government-backed student loans has exploded, so has the number who have fallen at least 12 months behind in making payments — about 5.9 million people nationwide, up about a third in the last five years.

In all, nearly one in every six borrowers with a loan balance is in default. The amount of defaulted loans — $76 billion — is greater than the yearly tuition bill for all students at public two- and four-year colleges and universities, according to a survey of state education officials.

Yes,  collecting student loan debt from students who face the worst job market since the Reagan years is now a cottage industry.  Oh, wait, I forgot, I was just supposed to take a loan out from my 90 year old father.   Right?

Last year, a study by the Institute for Higher Education Policy found that for every borrower who defaulted, at least two more borrowers were delinquent in their payments. And in March, the Federal Reserve Bank of New York, using a survey of credit reports, concluded that more than one in four borrowers of student loans, both federal and private loans, were behind on their payments.

Long-range projections by the Department of Education estimate that the default rate over 20 years, for borrowers who began repayment in 2009, is 17 percent; among students who attended profit-making colleges, the predicted default rate is 49 percent.

It is messy, though, to compare those long-range estimates with the official default rate published by the Department of Education. The long-range estimates are calculated on the dollar amount of loans in default, while the official rate is based on the number of borrowers in default.

Looking at defaults another way, about 15 percent of all borrowers have been in default at the end of the last six fiscal years, which ends Sept. 30, according to Department of Education data. Currently, 16 percent of borrowers are in default, nearly twice the official default rate.

This is a problem on all kinds of levels.

Government officials estimate they will collect 76 to 82 cents on every dollar of loans made in fiscal 2013 that end up in default. That does not include collection costs that are billed to the borrowers and paid to the collection agencies.

While the government’s estimates take into account the uncertainty of collecting money over long periods, some critics say they don’t go far enough.

A 2007 academic study, for instance, estimated that the recovery rate was closer to 50 cents on the dollar.

“The reporting standards that the government imposes on themselves are far weaker than what they require of private institutions,” said Deborah J. Lucas, a finance professor at the Massachusetts Institute of Technology and an author of the study.

Over all, collections on federally backed student loans were $12 billion in the last fiscal year, 18 percent higher than the previous year. Of that, $1.65 billion came from seizures of government checks like tax returns and $1.01 billion was collected by garnisheeing borrowers’ wages. More than $8 billion of defaulted loans, however, were consolidated or rehabilitated.

Here’s some more interesting items.  Here’s some items from Florida.

Student loan debt is now higher than credit card debt, and could become the next bubble to burst. Understandably, the recession has made it hard for recent graduates to repay their loans, but Baby Boomers have no such excuse. Plenty of employed Americans under 35 include loan repayments in their budgets.

The real unfairness is that during the last decade the government allowed students to be suckered, by privatizing student loans. Colleges got in on the scam. Florida State University’s financial aid director sat on the board of a company that did $27 million in loans to FSU students. Stetson University Law School’s financial aid director sat on the advisory board of a lender that did 70 percent of the school’s loan business. More than a dozen officials in the Department of Education under President Bush came from the student loan industry or left to work there.

Loans matter more than ever to many students. Florida has cut spending on higher education and raised tuition. Some in Congress want to cut Pell grants to students. Online courses may be one way to cut the cost of obtaining a college degree. For now, though, one way to reduce student debt is to force older students to repay it.

Hidden in this St. Augstine editorial is a nugget.  For nearly a decade, student loans were a free-for-all pig run for private lenders.  This has changed since 2010.   However, it exposes the deeper problem of students trying to get ahead in a world that demands skills when tuition costs keep skyrocketing.  Do talented students need to just settle for community college or hope they have a rich dad with deep pockets–as suggested by Republican Presidential candidate Romney–or is there a third way?

A college degree is still worth the time, money, and effort.  How can we help our citizens achieve this goal without saddling them with a house-sized debt?

… college graduates are doing better than everyone else. For instance, the median earnings of a college graduate with a BA working full-time in 2008 was $55,700 and for those with an Associates Degree (typically awarded by community and technical colleges) was $42,000. That’s significantly better than the $33,800 for high school-only grads and $24,300 for those without a high school diploma.

The unemployment numbers are striking, too. The latest figures from the Bureau of Labor Statistics show an unemployment rate of 4.3 percent for college graduates and above who are 25 years and older. That compares with 9.5 percent for high school graduates and 13.9 percent for those with less than a high school education. “The real damage has happened with the loss of low-skill jobs,” says Stephen Rose, research professor at the Georgetown University Center on Education and the Workforce.

The benefits of postsecondary education are apparent even after drilling down deeper into the unemployment numbers. For instance, some high-wage workers have little education—a plumber, say. And highly educated workers can make very little—an English PhD, for instance, working in the back office of a nonprofit. Specifically, after dividing worker wages into fifths, about 25 percent of those in the two highest wage groups, or quintiles, have only a high school diploma. Similarly, about 20 percent of workers with a college degree were in the lowest two wage quintiles. Yet from 2007 through 2009 the unemployment rates for less-educated high-wage workers rose faster than for college-educated low-wage workers, according to researchers at the Federal Reserve Bank of Minneapolis.

There are a number of ways to help our future work force invest in themselves.  First, we could actually decrease their burden or give them paybacks for success.  What about giving them some incentives not to quit school?  We can also encourage them to move or work in under-served areas.  Many states will pay for nurses and doctors to go to school if they will agree to practice in rural areas or go into practices that serve a key populace.   Other countries treat higher education like other forms of public education.  This problem of debt will not go away and we have to think creatively to find ways to help our graduates deal with it.  This should be something other than growing a cottage industry of folks to harass them into paying.  We need to invest in educated and trained workers and help students that succeed.  We also need to encourage schools to improve their delivery systems.  Where’s the conversation about all of this during this election year?