Thursday, June 4, 2009

What we do to our kids: 19% and it can never be discharged in bankruptcy

New York Times columnist Gail Collins writes:

Citigroup sent a call to arms to its student borrowers, which is currently posted on Talking Points Memo. It warns darkly that if the Obama Armageddon comes to pass, “students and their families will not enjoy the benefits that competition has made possible for more than 40 years.”

There is, indeed, currently an army of different providers vying to supply students with financing for their higher education. I’m not entirely sure if the borrowing-money choices are as numerous as the body-hydrating ones, but they’re right up there.

This brings us to the critical question of whether endless options actually do any good. “We don’t hear students clamoring for choice in lenders. If anything, students and families need simplicity to understand the process and know how to navigate it,” said Edie Irons, communications director for the Project on Student Debt, a nonprofit dedicated to making college more affordable...

Some students receive financial counseling, but it’s usually cursory, and it is only mandatory for government-backed loans. “It’s not required for private loans, and a lot of students in the worst situation have both,” said Robert Shireman of the Department of Education. Shireman was just back from a panel where he met an officer in the United States Student Association, who told him that some of her loans had an interest rate of 19 percent.

The real competition among the lenders is not to win over students so much as the school financial aid officers. This has led to unfortunate but deeply unsurprising instances of thinly disguised bribes and kickbacks.
The 19% loan is a fully private student loan. Government student loans, and government backed student loans, have interest rates capped at reasonable levels.

With the 2005 bankruptcy law, to our great shame, private student loans can never be discharged in bankruptcy with extremely rare exception. Lawyers.com writes:
Student loans are not dischargeable in bankruptcy unless you can show that your loan payment imposes an "undue hardship" on you, your family, and your dependents. Non-dischargeable debts are those debts that you cannot totally eliminate when you file for bankruptcy and will have to be paid by you.

It is almost impossible to show an undue hardship unless you are physically unable to work and the chances of your obtaining any type of gainful employment in the future are non-existent.
So we have 19% loans for large sums of money sprung on unsuspecting 18 year olds that can essentially never be discharged in bankruptcy. With the immense exponential power of compound interest at 19%, this can quickly spiral to the point where it can never be paid off, with payments beyond a person's entire income This is shamefully close to a return to lifetime indentured servitude.

I once mentioned this to Al Melvin, Republican co-chair of the Arizona Senate Appropriations Committee. His reply was, "There's a thing called personal responsibility." But how can you be responsible for something you don't know about or understand? There are almost no 18 year olds who know that private student loans are not dischargeable in bankruptcy, or who could read the legalese in the contracts. There are few who understand the devastating power and implications of compound interest at 19%, which, with it's incredibly exponential growth, doubles debt in less than 4 years. Most don't realize that they should rely solely on government student loans as best they can because of the great protections of those loans and low rates (For example, federal government student loans allow for "Income Based Repayment" where payments are capped at 15% of disposable income (just 10% of total income for a family of four making $100,000/year), and any principle remaining after 25 years of payments is forgiven.)

We're not living in a freshwater economist's model. All 18 year olds don't hold all publicly available knowledge in their brains, and have advanced degrees in every area and specialty there is so they can always figure out what the perfect choice is, and instantaneously, with no time or money costs of analysis whatsoever.

Democratic Senator Dick Durbin wrote in a floor statement in 2007:
Mr. President, I would like to tell you about Connie Martin from Sycamore, IL. Connie's son decided to go to culinary school in Chicago 5 years ago at the age of 25. To pay for tuition, he borrowed $58,000 in private loans from Sallie Mae at 18 percent interest. His first payment was $1,100 a month--his entire monthly salary at a downtown eatery where he worked after graduation. His loan balance, including government-backed loans, is now $100,000. Connie's son has been working hard, and she and her husband have been trying to help him make the payments. I worry for borrowers like Connie's son who can't start over and will have debt that will likely haunt him for the rest of his life.
Is this really the society we want to live in? Where predators can troll the TV stations all day long with dreamy pitchs about how young people can become executive chefs, medical technicians, and fashion designers at exorbitantly priced for-profit schools (especially compared to community colleges), financed with private student loans at 18%, or more, that can never be escaped in bankruptcy. If you want to live in a country where predators are free to prey on our unsuspecting young, destroying their adult lives before they can even get started, then vote Republican. But if you want to fix the great harm that they have done over the last generation, oppose them in every election. The less Republicans there are in opposition, the more likely we can pass laws to protect our young from inescapable rapacious debt.