Thursday, October 27, 2011

The Next Crisis: College Costs, Loans & Losses



Over the last two months I've been saving every story about college loans and rising tuition that I can. The gist in all of them is that because of our current economic condition more students are graduating college without jobs, astronomical debt, and no way to pay it back. Furthermore, with every freshman class that enters college the amount they are having to pay to stay in school is increasing by the year. Financial advisors continue to warn that if unchecked we won't have to look far for our next major financial crisis because it is already in front of us; brewing before our eyes and very few have done anything to stop it.

Enter President Obama.




Wednesday, President Obama announced new initiatives to make college affordable after graduation. The plan consists of two components. From White House.gov:

First, for some students we are proposing to cap student loan repayment at 10 percent of a borrower’s discretionary income, starting next year... ... We also want to provide immediate relief to borrowers already repaying their loans. While the pay-as-you-earn proposal would only apply to some current students and recent graduates, millions more borrowers may already be eligible for our current income-based repayment plan, which caps payments at 15 percent of a borrower’s discretionary income.


Second, beginning in January we will offer 6 million borrowers the chance to consolidate their loans and reduce their interest rates.



The President's proposal also includes the "Know Before You Owe" financial aid shopping sheet which will allow prospective students to compare aid packages. Another part of the proposal -- and my favorite -- is the loan forgiveness after 20 years. These proposals come after the Administration has already increased funding for Pell Grants and the American Opportunity Tax Credit.

The President's plan I'm sure will help many students heading to college and those graduating from college. It may even help some of us out of college and paying on loans. But like the housing crisis before it, if a borrower is already underwater on his or her student loan; i.e. paying more for an education than the job earned by said education is paying the employee what are you supposed to do. With underwater homeowners people can just walk away. You can't walk away from student loans there with you in perpetuity and beyond; private loans specifically.

Let's take myself for example: I graduated college in 2008. I received a pell grant, a book scholarship, and a scholarship from my school. I also have a stafford loan and a private loan from J.P. Morgan Chase. These money's partially funded my four years as an out of state student at The Florida State University. My mother still came out of pocket every semester about $3,500 (once I actually started taking loans. The first year and a half she paid about $7,500 a semester cash). I graduated Magna Cum Laude with about $40,000 in debt.

The field I chose to work in and to make my career famously does not pay much. No I'm not a teacher. I'm a journalist. Three months after graduation I packed up my belongings from my mother's house in Chicago. I put everything I owned in the back of my 1999 Chevy Cavalier and drove across the country to Amarillo, Texas where I made $8.50 an hour plus double for overtime at a job where I averaged 10 hours a day.

I was happy because I was working. But three months after my foray into the working world began the deferment period ended and the federal government and J.P. Morgan Chase wanted their money. I have been paying faithfully every month on the 8th and the 20th for the last three years. I make those payments: and when I was living on my own I paid rent, water, electric, cable, internet, phone, gas, groceries, and whatever other necessary purchases I made with a credit card like a bed, or a sofa. (remember everything I had fit in the trunk of a coupe) If I had $50 left after every paycheck by the time I finished paying bills I was ecstatic. I had enough to eat out once if I wanted to and see a matinee. BOOM

During this time I also received major support from my mother. One of the loans until March was being paid exclusively by the money that has been transferred from her account to mine since August 2004 when I began college.

Every student will not have a parent to support them in the initial stages of adulthood where money matters are the only matters. With our current economy some students, and by some I mean 85 percent, are returning to their childhood home with debt and no job and possibly parents who are unemployed; parents facing their own financial problems.

Student loans can't be deferred forever. Eventually you must pay. They can't be expunged by bankruptcy or even death (private loans only) and wages will be garnished from you or a family member -- in case of your death -- until the (private) loan is paid in full.

Right now America's graduates owe some $950 billion in loans. That's more than all of the credit card debt in the country. A new report from the College Board finds student borrowing has increased 57 percent in the last decade. Two in three students graduate with an average of $28,100 in debt. That's less than the cost of one of my loans. One in 10 students between September 2008 and 2010 defaulted on their loans.

These stats point directly to crisis. The President's proposal will help students with federal loans, but more students are taking those death will never do you part private loans because they offer fast cash quick. I know mine did. It seems like even with a plan to course correct the proposal is too little too late because the crisis is already out of hand.

Right now there are about the same number of jobs in America as there were in 2000 -- but there are 30 million more people in the country. (source)

No amount of going to a community college for two years and then on to a four year university as Suze Orman often suggests will fix the aforementioned problem. No amount of loan forgiveness, capping payments, or reducing interest rates on federal loans only will fix the aforementioned problem. Rick Perry's proposal to offer bachelor degrees at $10,000 a pop won't ease the burden. (Neither will his flat tax fit for the economy but that's another post) I have a loan for a little more than 10 grand. But with my profession and what I make it will still take about a decade to pay it off and that's being generous.

The President's plan is admirable but I think even he knows, recently out of student loan debt himself, that it's going to take a whole lot more than dropping interest rates, capping payments, and forgiving loans to fix the fundamental problem of the increasing cost of college education. What the President's plan seems to do is put more money in a recent grads pocket now and then down the road forgive what was not paid back because frankly it's been 20 years and if it's not paid off now it just won't be. It's a throw your hands up and say "fuck it" solution than an actual solution in my opinion.

Now is it a start? Absolutely. For that I applaud the President for trying to do something about a problem that has the potential to tank the economy as quickly and as drastically as the housing bubble did when it burst or possibly even worse. But now the President, Congress, parents and their high school grads need to take it a step further and find out whether or not the cost of college is worth the benefit of being college educated. I'm not saying college isn't necessary, I believe that it is. I also believe that there has to be a way around paying out the ass for it besides going to a school where you don't even get enough bang for your buck.

Right now I look at colleges and universities with the same disdain that I look at airlines. They have raised their admissions costs because of the economy, but it is highly unlikely that they will lower those costs when economic circumstances get better and their boosters and private donors begin contributing again.

This is the new reality of America; hopes and dreams dashed and potential careers not achieved because the means to accessing them is out of reach. Achieving a quality yet affordable education is not only the next civil rights movement, it is one of the biggest modern human rights issues to face us to date, in addition to being a moral issue that has the potential to balloon out of control like health care.

We live in a time where we cannot afford to be without a higher education yet we can't afford a higher education. This duality is what did us in on the housing crisis. Living in a time where we could not afford to be without a home (the demolition of HUD homes, Section 8, Welfare, and the Projects contributed to this fact) yet we also could not afford a home. We know how this story ends. It ends in a recession close to the Great Depression. It ends in highly educated unemployed people. It ends in anger, it ends in outrage, it ends in struggle and despair and wider wealth and education gaps than we've ever known. We are already dealing with that now, so you would think we would be doing everything in our power to avoid a repeat of such calamity. Yet here we are with a meager proposal to take on scraps of a problem much larger than anyone is caring to imagine.


Questions:

1. Is there anything else legislatively that can be done to avoid total economic collapse tied to a mass default of student loans?
2. Is college in this economy overrated? Should people focus more on blue collar work that pays well than degrees and white collar work who's well pay you must struggle for?
3. What are the alternatives to college?
4. Can economic collapse even be avoided with $950 Billion owed?
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