My experience with student loan programs has been a tale of two cities. Not necessarily the best and worst of times, but I found myself playing two very distinct roles. I was a financial aid administrator for various schools over approximately ten years. There were two universities and two what they used to call proprietary schools. To varying degrees, all schools use the student loan program as a marketing tool for prospective students. The proprietary schools’ tactics were much more mercenary than the universities. I’m not particularly proud of this but one of my colleagues at the time, let’s say he was an “admissions counselor,” told the school director that I was discouraging applicants from signing up with the school. He said I took too much time to explain the advantages and disadvantages of the student loan program. I tried to speak to my colleague professionally about it but let’s just say we had to settle our dispute off school grounds. Truth In Lending disclosures won that battle.
I also dealt with student loans as a borrower. Fortunately, I did not have to request any student loans to receive my undergraduate degree. By the time I wanted to pursue an advanced degree, I had needed to use student loan programs. I graduated from law school in 1994, and by the time I paid off my student loans, it was 21 years later, and the total amount paid was five times what I borrowed. I committed my fuck ups but I still feel justified calling the student loan program the student loan shark program.
Before I move on, I have a sincere request. Can we please stop with the intergenerational bullshit about who is to blame for the current student loan dilemma? A breakdown of student borrowers by age shows the following:
Age Debt (Billions) Borrowers (Millions) Avg Debt
24 115.5 7.8 14,807
25-34 500.5 14.8 33,817
35-49 601.7 14.2 42,373
50-61 262.2 6.2 42,290
>62 86.8 2.3 37,739
As you can see, a borrower that is 62 or older owes almost as much as the group with the highest average debt load. All I am saying is that this has been a shitty program for a very long time, and many of us across generations have been paying the price for this.
Although the switch from guaranteed loans (banks) to direct loans (government-funded) has improved some conditions (Lower interest rates and multiple payment plans) slightly for the borrower, those changes do not address the more significant problems of the program.
It appears that the U.S. government formulated the program to make the banks the primary beneficiary. The number of sweeteners was inexplicable. Why would the government commit to paying the market rate when they were gift wrapping and handing over a customer base that was multiplying rapidly since the late 70s? This situation reminds me of the U. S. government’s refusal to negotiate drug prices for Medicaid. and Medicare, always passing on using leverage. In addition to this concession, the U.S. government also agreed to pay the interest during the period the borrower was enrolled at least half-time in an eligible program along with administrative costs. This deal was sweetened by promising to pay 97% of any defaulted student loans. Banks and financial institutions took very little to no risk while receiving significant benefits from the program.
On the other hand, the regulations and policies governing the student loan programs continued to kneecap students. The requirements and restrictions placed on federal student loan owners are onerous. Unlike most other consumer credit, federal student loan debt cannot be eliminated through bankruptcy by the borrower. I told my wife; my student loan obligation would follow me to the pearly gates. I’ll never forget the look of horror on her face.
Federal student loans are highly seductive, very much like the siren song it can lead to your demise (financial). As the cost of attending college rose astronomically and job opportunities dwindled, those available left many underemployed. Borrowers were more likely to find themselves delinquent or in default. There were two other options available to borrowers. One is a student loan deferment which allows you to stop making payments for up to three years. You had to apply for a deferment and be eligible. You either had to be in school at least half-time, unemployed, receiving federal or state assistance, serving in the Peace Corps, active-duty military engaged in a military operation or emergency, or cancer. There is also a difference between whether you have a subsidized or unsubsidized loan. If your loan is/were unsubsidized, the interest accrued is capitalized (added to your principal).
Then there is the forbearance option which is a temporary stoppage of payments for up to a year. During a forbearance, before the terms of a COVID-19 related forbearance, any interest due is accrued and then capitalized (added to the principal amount you borrowed). During the COVID-19 forbearance, there has not been any interest charged, but this program is scheduled to end on September 30, 2021. A forbearance generally can last up to 12 months. Very much like deferments, there are categories of eligibility. There is a General Forbearance and a Mandatory Forbearance. Most people apply and are eligible under the General Forbearance option. As helpful as these two options may seem, they have contributed significantly to the current student loan catastrophe. I have one more caveat. Be careful about loan consolidation. Once consolidated, it will be a new loan that offers you fewer budget and payment options. The impact of any deferment or forbearance interest capitalization will be more significant.
The inability of borrowers to pay their student loan debt is compounded by the government using Pay Day Lender tactics to generate unearned interest on interest. Sixty-seven percent of the $1.7 trillion or $1.14 trillion of that debt is generated interest. There is no doubt that much of that interest is due to the capitalization of interest generated by deferments and forbearances used by borrowers. Borrowers can pay for years and see no difference in the principal balance of their debts. Why should student loans be treated any differently than a mortgage or a car loan? Capitalizing interest is a predatory practice that has no place in our efforts to fund the education of people. A poll conducted by Vox and Data for Progress has shown that most Likely Voters support some form of student loan forgiveness. More than half of these voters support forgiving $50,000 of student loan debt if it is limited to individuals making no more than $125,000. Some of the reasons for non-support are that people feel that they didn’t go to college or believe going to college is a privilege that individuals need to pay. Then some have already paid their student loans and don’t see why others shouldn’t. Another is a fear that the wealthy will benefit too much if student cancellation happens. Statistics don’t support that.
I support student debt cancellation, and I don’t begrudge someone receiving it because I didn’t. What I would like to see is the following.
- Eliminate capitalized interest from student loan programs. Unlike other unsecured loans, an education loan is an investment for the individual and the rest of society. All current student loans should be reviewed and reduced by the amount of interest that has been capitalized to date. Then previous payments should be discounted by the applicable interest rate and applied to that remaining balance. This could benefit the more distressed borrowers while also disarming arguments that borrowers are not paying back what they owe.Deferments and forbearances granted should not result in expanding principal balances. The current COVID 19 forbearance shows we can do that.
- Student loans should be eligible as part of the bankruptcy process. For many, it is the cause of filing for bankruptcy.
- Offer student borrowers the option to pay back their student loans over a 10, 15, or 20 year period. We should cap interest rates at 3 percent. Many loans are now Direct Loans from the government, and the government should not act as a private lender would.
- Almost no one disputes that an educated citizenry is advantageous to a prosperous economy, but one steeped in debt is not. Increased tax revenues alone would justify minimizing the burden of pursuing higher education. For those who are Return on Investment fans (ROI), please quantify the ROI on our military expenditures or the 2017 tax cuts primarily for the wealthiest Americans and corporations.
- More accountability for schools regarding adequate counseling and information about student aid generally and student loan programs specifically.
The debate is ongoing, and there are still questions that need definitive answers, such as what legal authority would be required. Still, there is no question that millions of Americans need relief from student loan debt. Let’s figure this out.
References
https://educationdata.org/student-loan-debt-statistics
https://www.vox.com/policy-and-politics/2020/12/11/22167555/biden-student-loan-cancellation-poll
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