Arkady
President
Barring a last-minute fix by Congress, student loan rates are set to double today. This is an issue near to my heart, since I spent the first five years of my career in a constant panic about my own student debt. I owed $120,000 when I graduated, and thanks to the high interest rates at the time, that cost me almost $200,000 by the time I'd paid it down. When I first graduated, my minimum monthly payment was $1500, which is like having a mortgage, without any place to live. I graduated in 1998, the first year that bankruptcy laws prevented a person from discharging student loan debt, so there was no way out. It wasn't like credit card-, or car-, or mortgage debt -- no matter what, that bill was going to keep showing up until I'd paid off every penny, and anything I might do to defer the debt would just mean more interest.
In my own case, I had the advantage of having gone to elite universities and having an extremely practical graduate degree, so after sweating bullets for a few years, I wound up with a good job and a solid income that made paying the debt off early pretty easy. But lots of young people don't have that advantage. They get out of college with degrees the market doesn't take seriously -- only good enough to displace some less educated unskilled worker from a job at Starbucks, making a fraction of what would be needed to keep up with the interest on their debt, much less to make progress against the principle.
Probably the two worst mistakes these kids make are:
(1) getting a degree from a for-profit college that hiring managers discount almost entirely -- those colleges are widely seen as a scheme for diverting tax dollars into the pockets of big companies, by way of government student loans, while doing little to enhance a person's employ-ability.
(2) getting an impractical college degree with an elite price-tag from a non-competitive college. If you're thinking about shelling out $50,000 per year on college, make sure you're either going to a top-50 college, or that you're going to be getting a degree the market is demanding (like chemical engineering), or, preferably, both. It's amazing the number of colleges that charge as much as the top universities in the country, for a degree that grad schools and employers don't see as superior to the cheapest of state colleges. Take Sarah Lawrence College. It seldom ranks in the top 100 colleges in the country. Yet its total cost is $60,116, more than any Ivy League school, and vastly more than academically comparable state schools.
That financial "self defense" advice is useful, but this is a systematic problem and we need to address it. No other country strands its young people with so much debt to get a decent education. We can change things. At a bare minimum, we can reform bankruptcy laws to make student loan debt easier, not harder, to get out of, than other debt. It's truly bizarre that someone who runs up tens of thousands of dollars of debt in a Vegas casino can get out of it easier than someone who runs up the same money in a university, trying to better himself.
The conservatives worry about moral hazard. They worry that if people can get out of student loan debt too easily, they'll take on more debt than they can afford, and then walk away on a whim. Particularly of concern is that people will run up debt qualifying themselves for a lucrative career, and then go bankrupt to get out from under it right before starting that high-paying occupation -- for example, a doctor discharging a couple hundred thousand dollars of medical school debt right before starting his six-figure practice. But that would be easy to guard against without the cruelty of our current system. Simply create a rule that raises the tax rate on the top couple brackets for a certain number of years for anyone declaring bankruptcy. A doctor embarking on a lucrative career isn't going to go bankrupt to get out from under student loan debt if, in doing so, he's buying himself ten or twenty years of much higher taxes. That simple change would make sure that bankruptcy is only used by those who truly are desperate. And it would solve a problem well beyond the student loan arena (for example, currently professional athletes will sometimes go bankrupt to get out from under debt, even though they have a huge income stream that could cover that debt).
This change would also address another, more serious, moral hazard. Right now, with so many student loans being guaranteed by the government, and all student loan debt being impossible to get out of through bankruptcy, lenders are essentially encouraged to make irresponsible loans: lending unlimited money to people to get the most worthless degrees from the most overpriced schools, with no academic conditions attached, because they know that they'll get re-paid, sooner or later -- either by the government, or by the student essentially slaving away in indentured servitude for decades at McJobs, with the majority of his income supporting the lifestyles of investment bankers who helped dupe him into those loans. If it were easier to get out of debt through bankruptcy, lenders would have an incentive to scrutinize who is getting their loans and for what, in the student loan context. If they knew that students at certain schools and with certain majors were often going into bankruptcy, they'd be reluctant to lend in those situations -- or would put academic conditions on their loans (e.g., carry a certain course-load and get a certain GPA your freshman year, or you won't be getting sophomore year loans).
In my own case, I had the advantage of having gone to elite universities and having an extremely practical graduate degree, so after sweating bullets for a few years, I wound up with a good job and a solid income that made paying the debt off early pretty easy. But lots of young people don't have that advantage. They get out of college with degrees the market doesn't take seriously -- only good enough to displace some less educated unskilled worker from a job at Starbucks, making a fraction of what would be needed to keep up with the interest on their debt, much less to make progress against the principle.
Probably the two worst mistakes these kids make are:
(1) getting a degree from a for-profit college that hiring managers discount almost entirely -- those colleges are widely seen as a scheme for diverting tax dollars into the pockets of big companies, by way of government student loans, while doing little to enhance a person's employ-ability.
(2) getting an impractical college degree with an elite price-tag from a non-competitive college. If you're thinking about shelling out $50,000 per year on college, make sure you're either going to a top-50 college, or that you're going to be getting a degree the market is demanding (like chemical engineering), or, preferably, both. It's amazing the number of colleges that charge as much as the top universities in the country, for a degree that grad schools and employers don't see as superior to the cheapest of state colleges. Take Sarah Lawrence College. It seldom ranks in the top 100 colleges in the country. Yet its total cost is $60,116, more than any Ivy League school, and vastly more than academically comparable state schools.
That financial "self defense" advice is useful, but this is a systematic problem and we need to address it. No other country strands its young people with so much debt to get a decent education. We can change things. At a bare minimum, we can reform bankruptcy laws to make student loan debt easier, not harder, to get out of, than other debt. It's truly bizarre that someone who runs up tens of thousands of dollars of debt in a Vegas casino can get out of it easier than someone who runs up the same money in a university, trying to better himself.
The conservatives worry about moral hazard. They worry that if people can get out of student loan debt too easily, they'll take on more debt than they can afford, and then walk away on a whim. Particularly of concern is that people will run up debt qualifying themselves for a lucrative career, and then go bankrupt to get out from under it right before starting that high-paying occupation -- for example, a doctor discharging a couple hundred thousand dollars of medical school debt right before starting his six-figure practice. But that would be easy to guard against without the cruelty of our current system. Simply create a rule that raises the tax rate on the top couple brackets for a certain number of years for anyone declaring bankruptcy. A doctor embarking on a lucrative career isn't going to go bankrupt to get out from under student loan debt if, in doing so, he's buying himself ten or twenty years of much higher taxes. That simple change would make sure that bankruptcy is only used by those who truly are desperate. And it would solve a problem well beyond the student loan arena (for example, currently professional athletes will sometimes go bankrupt to get out from under debt, even though they have a huge income stream that could cover that debt).
This change would also address another, more serious, moral hazard. Right now, with so many student loans being guaranteed by the government, and all student loan debt being impossible to get out of through bankruptcy, lenders are essentially encouraged to make irresponsible loans: lending unlimited money to people to get the most worthless degrees from the most overpriced schools, with no academic conditions attached, because they know that they'll get re-paid, sooner or later -- either by the government, or by the student essentially slaving away in indentured servitude for decades at McJobs, with the majority of his income supporting the lifestyles of investment bankers who helped dupe him into those loans. If it were easier to get out of debt through bankruptcy, lenders would have an incentive to scrutinize who is getting their loans and for what, in the student loan context. If they knew that students at certain schools and with certain majors were often going into bankruptcy, they'd be reluctant to lend in those situations -- or would put academic conditions on their loans (e.g., carry a certain course-load and get a certain GPA your freshman year, or you won't be getting sophomore year loans).
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