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June 07, 2010

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FMF,

Can you please send me an e-mail, so that maybe we can discuss this? I actually wanted to e-mail the author of this article, who recently wrote a follow-up piece (http://www.nytimes.com/2010/06/05/your-money/student-loans/05money.html) to the article that you just posted. Given the outrage that his first article generated, I'm not sure that an e-mail to him (from me) would generate a response.

I think it's interesting how he blamed Sallie Mae and Citibank for her debts, but let the lenders off the hook immediately after that. Like the woman profiled in the piece, I went to a school that I couldn't afford (in hindsight), but I have taken steps to remedy that debt ASAP. (For instance, I began paying it off when I got a summer internship while still at undergrad.

Although I am able to pay my debts, I find it interesting that student loan lenders will NOT refinance under any circumstances. One of my loans has a 9.5% + Federal Funds Rate interest rate. I might as well charged it on a credit card! There is nothing I can do about it now, except pay it off ASAP. So not only am I not allowed to discharge the debt in bankruptcy (that the author of the article pointed out), but I also can't change the (incredibly high) interest rate under any circumstances, even though my credit is now established, and I make more than enough money to pay the loan back. Why isn't this talked about more in regards to student loans?!

Looking forward to hearing from you soon.

--A

After taxes, I take home ~$2850/month on a pre-tax salary of $44k (in a low cost-of-living area, not San Franscisco, so I am doing pretty well and save over half my income). So I guess the $46k is just an estimate.

Yeah, this woman and her family weren't too smart about how they were going to pay off her debts in the long-term. I graduated debt-free thanks to going to a public university, some scholarships, and generous parents, but I worry about my family. My cousin, who is my age, graduated from undergrad with $75k in debt from a private college as a pre-med major. She is currently working on her physician's assistant degree/certificate and will surely have over $100k in debt upon graduation from that. I know physician's assistants make good money but I know she doesn't really the gravity of her debt. She told our great-aunt that "$75,000 isn't that bad, Auntie. Some of my friends have over $100,000 in loans." Sorry, but it is bad, cousin.

I have a feeling we will be seeing many more stories like this in years to come. I was pretty incensed reading this article. I paid for my own degree through academic scholarships and part-time work, but I had a few friends who financed their education with student loans. One friend used his loan checks to buy a truck (?!) and two other friends would have what they jokingly called a "loan dinner" and take all their friends out on the town when their checks arrived each semester! So when I read articles about massive student loan debt, I can't help but wonder what kind of lifestyles these kids led while in college. It is not easy to work while going to school, but lots of people do it. It is not easy to choose a cheaper in-state school when your friends are going the ivy league route, but lots of people do that too. So I find it hard to have much sympathy for someone who spends all that time and money educating themselves in their chosen discipline but spends no time at all educating themselves on the financial commitments they are making when they apply for/accept the loans.

A --

Do you mean my email address? If so, it's listed in the right-hand column under "contact me".

Sending you an e-mail now FMF.

Yeah, I was one of those reading the article and judging. Clearly a case of too little thinking going on.

Also, it amazes me how these type of articles try to pull at my heartstrings by saying how "tied down" and "limited" these kids are by their college debt. Because someone in their 20's has many years to form a family, buy a house, build up their retirement fund. Seriously, it's not a tragedy if it takes them 15 years to pay it off. My heart does not bleed for a college-educated 20-something who whines about how unfair it is that they may not be able to purchase their own home until they are in their 30's. Since when is this a problem? I couldn't buy a house myself until I was 35.

Below is from the Washington Post article titled "Five Myths about College Admissions" in the Sunday May 23rd paper.

"Future earnings are, on average, 45 percent higher for students who graduated from more selective institutions than for those from less selective ones, and the difference in earnings is widest among low-income students. And according to research by Thomas Dye, 54 percent of America's top 4,325 corporate leaders are graduates of just 12 institutions."

I question the validity of the "45% higher earnings" stat because I think it includes some major outliers. But, I believe and value the "54% of top business leaders are from 12 schools" stat. If you get into one of the 12, its likely worth the cost. Outside the 12, cost should be a major issue.

This wasnt exactly the point of the FMF post, but I thought it was an interesting data point and slightly applicable.

"Yes, she was naive. How did she expect her daughter to get "the good job?" Did she think simply because she went to a specific school that she was guaranteed a certain income?"

Yes, thats exactly what she thought, thats what her parents thought, thats what most people think. Listen to the words of the parents themselves:

"All I could see was college, and a good college and how proud I was of her," Cathryn said. "All we needed to do was get this education and get the good job"

So what did they do, they just did everything they could to take this path and encouraged her along it. I honestly don't put much blame on the 18 year old girl herself for making this choice. She is 18 for God's sake. You know how much she knows at 18 about the world outside of high school. Pretty close to zero. So what is she going to base her decision on? What all the supposedly smart people and people who lover her tell her.

So what do high school guidance counselors tell them: You have to have a college degree, you can't get a good job without a degree and the better your school the better your job etc etc etc.

College recruiters tell you the same message. The government tells you the same message and repeatedly talks about how we need more loans for college students so they can have such a bright future. And the parents hear all this and they don't know any better (they don't even know how to not get screwed on a house loan for crying out loud, how are they going to know anything about making a good college investment). So they just follow the same logic and push their kids into the "best" (read most expensive) college possible because its like the golden ticket to the future, I mean everyone says so, so it must be true. It has to be true. But it's not true.

Make no mistake, they made the decision and they owe the money. But this whole society is messed up about college. We preach that everyone needs to go to college, they don't. We preach that anyone who can get into a big name expensive college should go because it will definitely reap benefits far larger than the cost, but that is far from certain. We preach that you just go and get a degree, any degree, some might be slightly better than others but it doesn't really matter, follow you passion, do what you love, get that degree and the money will follow == BULLCRAP!!!!

And we cite useless statistics like those with a college degree earn 70% more than those without it. But averages are meaningless. Some people with college degrees earn 500% more than those without one, someone people earn 100% more, some people earn 10% more and some people (quite a few) earn nothing more (do you know that 15% of mail carriers have a bachelor's degree?)

We have education saturation in this country. There are plenty of people that should not be going to 4 year degrees, they should be getting trained in a skill that will get them a job rather than in some rediculous degree that has no real value.

Some people should go to harvard and get a big degree, they have the right stuff to make it work. Some people should be going to relatively high presitigous schools for certain fields for which those schools are valuable. Some people should be going to much cheaper state schools. All of them should be very careful about researching and determining exactly what they should study and if it's worth it. And lots of people who are currently getting degrees should not be in a 4 year college at all.

And We have way too many people in each of the categories I listed above spending far too much money getting degrees that they won't get a job with that either needs that degree or that they are going to be good enough to get that job in. And why do they do it? Cause everyone in this society believes and tells them thats what you have to do to be successful.

I remember when I was a sophmore in high school, I had a teacher who really ticked me off cause he told us all that we were 16 and didn't know a damn thing and that we wouldn't really know anything until we were 25 and then we would start to know a few things. He really ticked me off. He was so right, and an 18 year old without very wise guidance is going to make very bad college financial decisions 99 times out of 100.

It's not her fault. Our society does not prepare 18 years to make any kind of financial decisions. Most 18 year olds are financial toddlers, and most adults are financial teenagers.

This result is not only not surprising, its entirely expected and if we keep telling everyone they need to get as much and the best education they can, they will keep doing it and eventually we will all be forgiving all these loans and bailing them out with govt money (Obama is already proposing a 10 year max pay on student loans and the pay back rate is based on a percent of what you make, most students would never pay back even close to half, and that would do wonders for people making wise choices).

If we don't start being honest about how often college is a complete waste for many students at the margins, we are going to continue to have tons of marginal students getting worthless degrees that cost a ton of money. After all, they don't know any better and are just doing what everyone tells them to do.

It might also be relevant to note that unemployment rates for 15-24 year old's is around 15%. Finding a job after expensive college is harder than ever. Under employment at that age range has to be very high right now.

People who enter the work force during a recession also on average make a lot less over their life time than those who dont.

Now more than ever, the cost benefit analysis needs to be an important factor when making the college decision.

I know people that are very smart (much smarter than I am) that didn't have the money to go to college at all because the couldn't afford it.

Common sense should make a difference with college choices. If you can't get financial aid or a scholarship, go to the typically, much cheaper, state college!

I wonder if this person even applied for financial aid... I bet not ;)

Best Apex post ever! big high-five from me!

Apex/Tyler (and others) --

I have a post coming up next week titled "Is Going to College a Bad Financial Move for Many People?"

FMF--the WSJ had a similarly-themed article online this weekend---about college grads whose parents still pay for their cell phones, apartments, health insurance, and credit cards. Because they can't.

The funny thing was that the college grad featured, who was having so much trouble finding a job that would pay for her own needs....she double majored in college in *journalism and broadcasting*! (!!!) Then after college she went to chef school. Now she is (boo hoo) having trouble finding a job that allows her to live in NYC on what she makes cooking in restaurant....

@Tyler - aw shucks, thanks .... (blush)

@FMF - should be interesting, looking forward to it.

How many 18 year olds do you think read this site? Or any other PF site?

It's all well and good to point at the student and say, "you should have know better." Yes, they should have. But how? They would have to learn about loans, what it means to borrow, how to figure out what you can reasonably learn out of college. Where will they learn this if not from the parents, or the school? Sometimes the parents don't have a clue. I never received personal finance training in school. There was an accounting class on how to balance a checkbook and write checks. Whoa hard stuff!

Luckily I learned some from my parents, but they still didn't have all the knowledge, a lot of which I have learned now after college. It's only after getting out on my own that I took control of my finances and learned about it. Students are sheltered in college and have no impetus to educate themselves.

These are still teenagers. They still operate under the assumption that parents, counselors, administrators are doing right by them. And then a financial aid officer says, "Please sign this paperwork and then your college will be covered." Sure the number looks big but if they say that's what you need, it must be right!

I guess my point is, how does the student know that they need to educate themselves if there's nothing around them that tells them they need to do so?

I am sorry, but I cannot muster any sympathy for this gal. I wanted to go to college and I found a way to do it without any loans. Lots of part time jobs, frugality and zilch social life made this possible along with the encouragement of my folks. Of course that was 30 years ago, so maybe we had it easier in the good old days. Sure, I didn't go to an Ivy League school, but my degree in Business Administration has got my foot in the door at more than one employer.

Not everyone is cut out for college. My oldest nephew, knew he wasn't ready. So he took an indirect route by joining the Marines. I have seen a real turnaround in him and I feel( and he does as well) that he now has the work ethic to go to school and excel. This way is not for everyone, but it is working for him.

My son is starting his sophomore year in a local community college and I am very proud of him. He did a bit of cost/benefit analysis and decided that this would be best for him and us. If the plan holds, we should not have to incur any loans to pay for his education in Engineering, his chosen course of studies. Sure, we will be living frugal for a while longer, but neither he nor his mother and I will be slaves to the student loan system. At least that's the plan anyway.

Its a sad story. The student and her mother certainly made bad decision taking out so much student loan debt.

But I would also place a share of the blame on the side of the lenders and the way the system works. I mean seriously why is a bank lending $100k to someone like this? If you ran a bank would you lend $100k to a student based on the earning potential of their religious & womens studies BA at NYU? Think about it. The banks lend so much cause the system minimalizes their risks. Its almost guaranteed they'll get their money back cause you can't discharge student loans in bankruptcy.

It takes 2 to tango. If the banks wouldn't lend so freely based on the low risk and high margin OR if the students didn't borrow so much then the problem wouldn't exist.

Here's another sentence in the article: "For much of the time since her 2005 graduation, she's been enrolled in night school, which allows her to defer loan payments."

How is she paying for this? No doubt, she's adding more debt to the situation by taking night courses, just to defer her loans...

All in all, her situation is manageable, extremely manageable. I've seen far worse cases. She's taking home $2300 with rent being $750. (If she could find an apartment-mate, then she'd free up $300-$375 a month on rent.) Her loans cost her $700 a month. That leaves her with $850 a month, which is *PLENTY* of money to cover utilities, food, and transportation.

Heck, take away my mortgage and student loans, my remaining expenses are not more than $850 a month. I don't live the most frugal lifestyle either: I eat out occassionally and have some "fun" money.

While I cannot agree with her decision to pull that much in student loans, I can say that she should have any difficulties paying her bills and living a decent life.

@Jim

Lenders do this because student loan debt is not discharged in bankruptcy. Even though they give high interest rates on the premise of it being a risky investment to them, they will ALWAYS get their money back.

Also, private student loan lenders do not allow people who have their loans to re-finance them. You are stuck with a high interest rate no matter how good your credit is, or how much your ability to repay the loan has changed since you graduated college.

Furthermore, the lenders never ask for your major, or estimate your earning potential when you apply for a loan. They treat everyone the same.

$97,000 is outrageous, even if it were for an MBA or a law degree, but she spent all that to get a degree in religious and women's studies?!

I'm all for people pursuing their interests, and if that's the degree she wanted, so be it--but how much does a person realistically expect to make in an entry-level job in such a field?

"Also, private student loan lenders do not allow people who have their loans to re-finance them."

If you barrow money from me, and rates drop over the term of the loan, why in the world would I let you refinance the loan? If you want to refinance, get a loan from someone else, pay the prepayment penalties, and get out of the loan. If the original loan agreement failed to have any prepayment option... well too bad. The bank or person who made the loan has zero obligation to refinance the loan when rates drop. Sorry.

(Borrow sorry)

I am going to guess student loan default rates for private companies is more than 8% (federal rates are 5%+). So even though your debts cant be expunged by chapter 11, loans can still be in a status of default or no payments being made. The lender still has prepayment risk, default risk, market risk, inflation risk, etc. By refusing the expunge the debt via chapter 11 it reduces the market rate charged to all students by simply reducing some risk.

@ Tyler

Let me re-phrase this then.

1) Since the recession, most student loan lenders stopped offering consolidation (read: re-finance) loans.

2) Credit worthiness of the borrower is determined when the borrower is 18, has no credit history, and basically no proven ability to repay the loan. I agree with you -- their rate should be high.

However -- what happens six years later, when the student has a credit history, and a well-paying job? You can't re-finance your loans because lenders don't offer them, and you don't get any interest rate reductions for having a credit history.

What doesn't make sense with these loans is that your credit worthiness is accessed at least FOUR years before you ever start making payments on the loan. Once you start making payments you are more-or-less paying as if you were your 18 year old self who just took out the loans.

Note: this is coming from someone who makes $700 payments on his student loans, with about $450 of that going to interest. If I didn't start making payments during college, I am sure those figures would be inflated by a couple hundred dollars.

(begin sarcasm)

FMF, you are so conservative and out of touch with reality.

You actually believe people who sign a contract and take out student loans should actually be responsible for their actions, and responsible to pay back the loans that they promised to repay?

Come on. What's next, some crazy article suggesting that people who took out mortgages on homes they could not afford, and refinanced said mortgages to buy crap should actually be responsible for their actions, too?

Don't you know this is all the fault of the banks, who typically hold guns to people's heads to force them to take out loans?

(end sarcasm)

wanzman --

;-)

Wanzman,

I am thinking you are on the right track. I am thinking the bank should pay off the loan for her and then also give her a very high paying job that she deserves for going to the highly ranked college. Her mother also need to be compensated for the all the mental suffering she has experienced as well. Perhaps a new car and a fancy vacation would be a good start.

Not sure why this even gets to the "who's to blame" part. Where is the tragedy? Why does she feel so desperate? She owes $700/month, so lets say about $10K/year pre-tax (I forget what the deductions are for s. loans). Doesn't someone with a college degree make more than $10K/year more than someone with a high school degree in almost every situation?

Maybe I'm just out of touch, but I would have thought $46K/year for a 26 year old with just a high school diploma was pretty darn good, and she's just getting started in life.

Looking forward to the posting, FMF. Let me add not only my agreement to the others here, in particular Apex and Tyler but some history to how much this permeates our country.

When i was growing up the mantra given to children and teenagers was simple: To get a good job get a college education. But it was more than that, the message really was: Get a college education and you will get a good job.
Imagine my surprise when I graduated in 1970 and had a difficult time getting that "good job". No pity party for me necessary, I floundered bit, did some good volunteer stuff. And ended up with that good job.

My point is that this myth has been around too long, over 60 years.

PS Off topic @Apex. I saw your last post to me regarding that emergency fund question and HELOCs. I responded to it there, but briefly, you did clear it up and I completely agree. Thanks for the extra effort.

like you, i saw this article and was just about as mad as i ever get when reading something online. its noones fault but her own, its not the banks, or the governments, or the schools fault. you know the terms of the loan, and just because you ignore the facts or pretend that hte debt doesnt exist doesnt mean it should just be foregiven. i hope she has learned her lesson, and wont make the same mistake when she takes out her next car loan or eventually a mortgage.
Preferred Financial Services

@Strick

"Doesn't someone with a college degree make more than $10K/year more than someone with a high school degree in almost every situation?"

No they most certainly do not! You have bought the lie that a college diploma is a near guarantee to drastic increase in earnings.

It's true for some, not true for others. Some make $200K more, some make $20K more, some make $2K more, some make nothing more. (See my comment above about 15% of mail carriers having a bachelors degree. How much do you think that increases the earnings of someone who stuffs envelopes in boxes?)

The $2K more and nothing more people need to give some serious consideration to whether they should be in college at all or whether they are getting a degree in the right thing. But they don't figure it out until they have the degree because they assumed the same thing you did, that the degree automatically puts them into the category of making at least $10K more or probably more like $30K than those without the degree. Oops!


The entitled attitude really ticks me off. I can't believe how many people think that the debt they acumulate isn't their responsibility! I was actually going to do a post on this article already, but I'll be sure to link back here as well if I do. Great comments.

This is the next bubble. You can not sustain 10% increases in college cost. Free money is now strangled. How will colleges finance.

Oh wait the GOVERNMENT took over college lending and away from the private sector.

Alas we will have a massive competition for any degree that in my opinion are useless becasue there are no jobs available.

They made a bad financial move. I can understand frustration with it, but she has to own up to it. It's not unfair - we all must pay our bills. She just paid too much for something.

An education is critical, and can be a tremendous investment. It can be debt that is worth taking on, because of the payback down the line. But it has to be done strategically - or at least sensibly.

It would be tough to be highly accurate with this, but I would look at the NPV of college educations from different schools, and make that a key factor in the decision of my kid. It is an investment, and should be treated as such. Sure, it's not all about payoff, but there should be some rigor in choosing a school that involves looking at payback. I think a Net Present Value analysis, incorporating future cash flows, should be a part of the overall decision.

My first thought when you revealed what her degree was in was "Well...there's your problem!"

I have a friend who's dead set on art history and I just have to nod my head.

Reading all the comments I couldn't believe it took about half way down for someone to start talking about the degree! You know what there should be some blame passed around, to her friends and family who sat back and said good job spend 97K to get a bullsh!t degree where the only thing you can do is teach making a quarter of that (Or in the alternative get an unrelated job...which is fine, but clearly not what she expected).

SO Ryan, No, Don't just nod your head! ASK YOUR FRIEND WHAT THE HELL HE OR SHE IS THINKING

An economist once said that the reason health costs and college costs are so high is because we let a 3rd party in there - insurance and insured gov't. student loans. I went to college a year or two before guaranteed student loans started. Aren't I old?

I worked for a year before I went to college. I mostly worked 40-48 hours a week at a job while I was there. After 2 years I couldn't return because I was unable to find summer work that year. But - I WAS DEBT FREE and I went to our church college.

I just took 6 hours of community college classes in 2008 and paid more for those 2 classes and their books than I did for a whole year of tuition (32 hours) and room (I lived in the attic of the dorm with 20+ other girls.) I want to finish my degree, but that is mostly "want" because I am 73 and would probably not use my degree much. So, I am going to try to go 6 hours a semester until I get through and pay cash as I go. I am retired and debt free, so I should be able to manage. Anyway, it is fun to learn.

Interesting discussion! And congratulations on achieving a "Best of Money Stories" pick with this piece.

I was about to click "send" on a comment when I realized it really went on and on, and so decided to mount a post on the subject (duly honoring yours) at my own site, which should go up as soon as it's proofread.

Nice job. It's a subject near & dear to my heart, as a now-"retired" college teacher and administrator. BTW, you should be aware that when Michael Crow, president of Arizona State University, began his campaign to raise that school's tuition significantly -- this was well before the Great Recession began -- he argued that higher tuition made students eligible for larger loans and grants, and therefore it magically made the cost of living on the campus lower. Don't think about that one too hard... ;-)

This article -97K$ degree - was like watching America's Home Video.
So funny, painful and wondering why stupidity continues.
My kid read it 3x's and wrote 2 reviews. Now he understands what I've
been harping on. These debt slaves make great employees.

Here's the quote I took from the article: "10 percent of people who graduated in 2007-8 with student loans had borrowed $40,000 or more."
Sure there are graduates who are deep in debt, but 10 percent is not an epidemic.

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