Approaching Crunch Time on the Student Loan Debacle (About to go the way of subprime mortgage mess)

American Thinker ^ | 11/26/2012 | Gary Jason

[SeekAndFind]

For a number of years now, a number of critics of the American system of higher education have rightly insisted that there is a "bubble" in the system, with more and more students running up loans in amounts they will find difficult to pay back.

This bubble has been fueled by the federal government's lavish subsidization of the student loan program (which was nationalized four years ago), in a way similar to how the housing bubble was fueled by government agencies pushing subprime mortgages.

This extensive government largess has produced a number of unintended -- though not necessarily unforeseeable -- negative consequences. First, it has dramatically driven up the tuition and fees charged by colleges, which in turn has forced more students to take out loans. This should have been easy to foresee, since the agents running the colleges would know that their clients had access to government-backed loans and so would jack up tuition quickly to extract that money.

Second, this flood of money has only encouraged administrative bloat, which in turn has increased college costs with no increase in the quality of education. Again, this should have been foreseeable. The administration would be rationally well-informed about the new honey-pot of taxpayer-backed loans, and the self-interested administrators are the ones who decide where to spend the money, so you don't need to guess where they will (and did) spend it.

Third, the rising price of college tends to erase the potential returns of a college education for students of only average ability. In effect, like homeowners who refinance their homes only to squander the increased equity, many students are spending more (and borrowing more) of whatever future extra earnings their college educations will bring.

[SeekAndFind]

Two recent studies suggest that this bubble is indeed real and is beginning to burst. The first is the recent Department of Education report on student loan default rates. The report shows that the two-year default rate rose from 8.8% in FY (fiscal year) 2009 to 9.1% in FY 2010. This marks the fifth year of increases in the two-year default rates — indeed, the two-year rate is nearly double what it was in FY 2005.

This means that the number of borrowers whose first payments were due between 10/01/2009 and 9/30/2010 and who defaulted before 09/30/2011 went up dramatically — numbering 375,000 in all, on a base of 4.1 million borrowers entering repayment. Remember — all these loans are ultimately guaranteed by the government.

[napscoordinator]

I thought we got rid of the loan guarantee program and that saved a bunch of money. The banks work directly with the schools and no third party now. The banks have still not given out loans to people so they must have plenty of reserve. I would not allow students to default...use the rest of their lives to pay and if they never pay it then take it out of their estate. Seriously people are not paying because they can. Make it impossible to get rid of student loans. These folks took the loans out so it is up to them to pay them back no matter how long it takes.

[nascarnation]

The “Big Education” cycle:

1) Provide huge subsidized loans to students while hyping the necessity for “college”.
2) Schools charge outrageous tuition.
3) Schools use funds to pay profs and admins big salaries.
4) Liberal profs and admins donate to Democrats.

and repeat

(aren’t you SHOCKED the MSM has never worried about this?)

[Vigilanteman]

Instead of playing defense and try to block a government bailout, the GOP should be playing offense. Something like this:

1. Allow a write-off at something like 25% of the loan value from the general fund (broke as it is) in return for broadly defined "public service."
   
2. The borrower gets 20% of the write-off, with the additional 80% transferred to the learning institution which generated the loan. They only have to collect on 75% (or 93.75% of the 80%) to break even. The balance would be profit and/or a write-off allowance.
   
3. The institutions now own the loans and governments at various levels have claims on the borrows for service for the 20% write-off.
   
4. Government educational loans at the federal level are now dissolved except as a record keeping entity for the various educational institutions which now own and service the loans.
   
5. The educational institutions who cannot or will not repay the loans will have liens put upon their endowments, real property or other assets until the 75% is paid off.
   
6. Said institutions can collect on their debt by the threat to suspend or even rescind the academic credentials of the borrowers in default.
   
7. The smart ones (especially those which trained their students with marketable degrees) would use the loan pool to generate a profit and line up lenders to feed more students into their system. This is exactly the model used successfully by Hillsdale College (Michigan) and being considered by other conservative colleges such as Liberty (Virginia), Grove City (Pennsylvania) and Brigham Young (Utah, Idaho and Hawaii).

There is no reason the same model couldn't be applied by colleges nationwide. If they turn out too many kids with unmarketable degrees, then their chickens come home to roost with them, not the taxpayer.

[Vigilanteman]

Your hard principled approach might be technically correct, just like unsuccessful U.S. Senate candidates Akin and Murdouck's statements on rape exceptions for abortion.

It will be politically even less salable.

See my post #5.

[Red_Devil 232]

What are the consequences of defaulting on a Student loan? Can’t the IRS or other department of government go after these monies?

[delapaz]

No need for all that. Just make student loans bankruptable like any other debt.

Instantly the problem is solved, loans will only be made then to good characters with prospects.

[Vigilanteman]

I like your approach a lot. But it is tough to determine the character of a twenty-something kid with little or no credit history.

Plus, you'd hear a loud wail against lending institutions who charged high rates or refused to make loans for useless degrees.

I'd rather see more wailing against the educational institutions which are so much a part of the problem.

[delapaz]

the institutions would have to lower their rates for worthless degrees then, wouldn't they?

Again, problem solved.

[SeekAndFind]

RE: What are the consequences of defaulting on a Student loan?

SEE HERE:

http://www.nolo.com/legal-encyclopedia/default-student-loan-29859.html

The IRS can intercept any income tax refund you may be entitled to until your student loans are paid in full. This is one of the most popular methods of collecting on defaulted loans, and the Department of Education annually collects hundreds of millions of dollars this way. In some cases, you can challenge a tax refund offset.

The government can take (”garnish”) a limited portion of the wages of a student loan debtor who is in default. It can take up to 15% of your disposable income. However, it cannot take more than the equivalent of 30 times the current federal minimum wage.

The government can take some federal benefit payments (including Social Security retirement benefits and Social Security disability benefits, but not Supplemental Security Income) as reimbursement for student loans.

The government cannot take any amount that would leave you with benefits less than $9,000 per year or $750 per month. And, it cannot take more than 15% of your total benefit.

For example, if Doug receives monthly federal benefits in the amount of $900, the government may take either $150 (the amount of Doug’s $900 benefit that is over $750) or $135 (15% of Doug’s total benefit of $900), whichever is less. So, in this case, the government can take only $135 each month.

The government and private lenders can sue you to collect defaulted student loans. Unlike other debts, there is no time limit on suing to collect student loans — you can be sued indefinitely.

CLICK ABOVE LINK FOR THE REST....

[alloysteel]

One effect of widely available student loan programs, is that costs of attending college have no governing market force to control potential increases. When tuition was maybe $1,000 a year, the practical undergraduate worked long enough to earn the tuition and other costs, and paid as he (or she) went. But a lot of IMPRACTICAL people were talked into attending college (just high school plus), and they did not have the ready funds to attend, so the bright idea came up to LEND the funds to the potential scholar. Suddenly, a whole new influx of cash was available to collect as tuition and other fees, and prices rise to the level that reflects the willingness to pay. Since this was “free” money, its immediate cost was virtually nothing, and the bill only comes due several years later.

Meanwhile, the cost of tuition, and other costs, has exploded to $10,000 per year, or more, for undergraduate studies, and perhaps several times that much for post-graduate degrees. Worse, the influx of cash has encouraged the growth of “diploma mills” that produce nearly worthless degrees, or worse, the undergraduate just drops out before acquiring even this degree of limited value. But the incurred debt is still there, and the poorly prepared sometimes employee finds himself (or herself) unable to make even the minimum payments, therefore defaults.

A new form of indentured servitude has been foisted upon the youth of America - with no discernible long-term social benefit.

[Gamecock]

Instantly the problem is solved, loans will only be made then to good characters with prospects.

Yup.

Ya know, I am about to buy a house. I am shocked at what 225,000 will buy in my market. Houses on golf courses that were $400K in the early '00s.

[ColoCdn]

Thanks for this.

[napscoordinator]

I like your #5 and I think it would work!

[Vigilanteman]

They can hound you to the ends of the earth, take it out of your tax refund, garnish your wages or even take it out of your SSI disability income if you can’t work. Don’t even go there.

[yefragetuwrabrumuy]

It really is up to the states to put a halt to this, and their path is fairly simple.

1) Recognize that the purpose of state subsidies to universities is so that students can earn more than they could with just a high school diploma - benefiting the state as well.

2) Examine college degrees compared to placement in that field within six months after graduation. Some degrees, like nursing will have very high placement, others, like basket weaving, will not. So why subsidize degrees that do not profit the student or the state?

3) Examine college degree courses with an eye to eliminating “dross” courses used as electives, that have no intrinsic value to a given degree. These should end as well, unless students pay the full amount for them.

4) Examine state licensing, with an idea to eliminating a college degree requirement when one is not absolutely necessary. Microsoft Certified Software Engineers do not need a degree, only to pass a test. Granted, a very hard test. But if people can pass a written test for many occupations, why subsidize unnecessary schooling? And since such tests could be given under the auspices of the state, it eliminates accusations of unfair testing.

Practically speaking, states could easily slash billions in costs from their higher education systems, and yet get even better performance results. Better for students, better for the students financial health, and better for the state.

[lacrew]

There is also a step 2.a:

Students use loans in the exact same manner as a credit card, using them to pay rent, buy coffee at Starbucks, etc.

One of the most perplexing things about student loans is that there is absolutely no requirement they be used for tuition, books, lab fees, etc. In fact, students seem to be encouraged to also use them for ‘living expenses’.

A co-worker’s wife has maxed out the Stafford loan program, and is using private lenders now (the private lenders know they are implicitly backed by the government, so they have no lending standards other than fogging a mirror). He got upset when his wife couldn’t get enrolled in a summer class...he had no idea how he would pay his bills without 3 months worth of loans.

He’s a liberal of course...and when I suggest the folly of his trajectory, he looks at me like I just sodomized a disney character.

[NEMDF]

I believe that when this program changed four years ago, the banks were the ones cut out of the system. It was taken over by the federal government. So the point about banks not giving out loans to people is moot.

[napscoordinator]

I believe that when this program changed four years ago, the banks were the ones cut out of the system.

Are you sure? I thought it was the loan guarantee agencies that were kicked to the curb.