student loan Archives - Page 2 of 2

How Debt Can Destroy a Budding Relationship

I’ve said many times that one of the problems that arises from running up large student loan debt is that the debt can scare off prospective marriage partners. A lot of single people do not want to marry a person who has $100,000, $150,000, $200,000 or more in school loans that will require a lifetime to repay. For many, marrying into a big school loan debt means the couple may never be able to qualify for a home loan – the school loans replace a thirty year mortgage.

The New York Times has a article on the sad, but all too common topic. The article is “How Debt Can Destroy a Budding Relationship.” The article is a must read for everybody who is contemplating going into big debt to pay for school.

“At a time when even people with no graduate degrees . . . often end up six figures in the hole and people getting married for the second time have loads of debt from their earlier lives, it should come as no surprise that debt can bust up engagements.”

Higher Education: Another Bubble about to Burst?

Musings from the Hinterland on the out of control cost of higher education and whether college is right for everybody: “while all this government money in the form of grants and loans is lining the pockets of the school proprietors, the students discover that what they’ve bought is nothing more than snake oil because they can’t earn enough money to justify the debt they’ve got to repay. Of course, the dirty secret to this is that the debt is owed to the U.S. government who has paid off the original lender via its earlier guarantee and now is hounding the hapless student for repayment. This important for two reasons. First, that check the government wrote is paid out of our money. Second, it was the lackadaisical, profligate Education policies which started the ball and caused the whole mess in the first instance, much as the relaxation of home loan standards during the 1990s started the ball leading to the subprime mortgage crisis.”

Is a College Degree still Worth It?

Times have changed, but many people continue to live in the past and follow the now out-dated and obsolete models passed down by previous generations. The belief that a college degree is a must for success and capturing the American dream may be an illusion.

Students are paying outrageous amounts of money to get college degrees and incurring school loan debts that may take a life time to repay. School loan debts are the modern day equivalent of the ball and chain. Years and years of loan payments that may prevent the former student from qualifying for a loan to buy a home.

As the average amount of debt incurred by the average college student increases, institutions of higher learning raise tuition year after year with no regard for the fate of their students. The out of control federal student loan program is what gives schools the ability to increase tuition and ignore the laws of economics and the consequences to their students. No matter how high the cost of higher education, the federal government gives students a blank check to pay the ridiculous tab. This bargain with the devil made by higher education, the federal government and politicians will ultimately come crashing down just like collapse of the entire higher education system when the bubble bursts as it did with the housing market.

Los Angeles Times: “As U.S. employment patterns evolve, a diploma is no longer a guarantee of a better job and higher pay.” The article states:

“As the warm glow of college commencement ceremonies gives way to the cold reality of today’s job market, this year’s graduates and their anxious parents might be tempted to wonder whether it was worth it.”

“After spending tens of thousands of dollars on higher education, often taking on huge debts along the way, many face a job market that doesn’t seem to need them. Not only is the American economy producing few new jobs of any kind, but the ones that are being added are overwhelmingly on the lower end of the skill and pay scale.”

“In fact, government surveys indicate that the vast majority of job gains this year have gone to workers with only a high school education or less, casting some doubt on one of the nation’s most deeply held convictions: that a college education is the ticket to the American Dream.”

Subprime Goes to College The New Mortgage Crisis — How Students at For-Profit Universities could Default on $275 Billion in Taxpayer-backed Student Loans

New York Post: “Until recently, I thought that there would never again be an opportunity to be involved with an industry as socially destructive and morally bankrupt as the subprime mortgage industry. I was wrong. The for-profit education industry has proven equal to the task.”

“The for-profit industry has grown at an extreme and unusual rate, driven by easy access to government sponsored debt in the form of Title IV student loans, where the credit is guaranteed by the government. Thus, the government, the students and the taxpayer bear all the risk, and the for-profit industry reaps all the rewards. This is similar to the subprime mortgage sector in that the subprime originators bore far less risk than the investors in their mortgage paper.”

“Though for-profit students account for 10% of all college students, they represent 44% of all loan defaults, according to the Department of Education.”

Doctor’s Student Loan Debt Now $555,000 Was $250,000 After Med School in 2003

The Wall St. Journal had a story on February 13, 2010, about the growing problem of student loan debts and the consequences of defaulting on student loans. The story mentions many people who now have massive student loans, including the medical doctor who graduated from med school in 2003 with a $250,000 loan debt that has ballooned into a $555,000 debt after default, penalties and interest. On so many levels our society encourages borrowing without any consideration of the consequences. Some segments of our economy are based on borrowing. Higher education is one of the worst offenders of the borrow now and pay later philosophy. Without students’ ability to borrow virtually an unlimited amount to pay for higher education, our college and university systems would be forced to adhere to the laws of economics. The government backed student loan system allows higher education to raise the cost of eduction without any consideration of the cost of living or the laws of supply and demand.

From the Wall St. Journal:

Unlike other kinds of debt, student loans can be particularly hard to wriggle out of. Homeowners who can’t make their mortgage payments can hand over the keys to their house to their lender. . . . But ditching a student loan is virtually impossible, especially once a collection agency gets involved. . . .There is an estimated $730 billion in outstanding federal and private student-loan debt . . . and only 40% of that debt is actively being repaid. The rest is in default, or in deferment, which means that payments and interest are halted, or in ‘forbearance,’ which means payments are halted while interest accrues.

If students were not given a blank borrowing check, colleges and universities would enroll far fewer students. Many colleges and universities would go out of business because the number of students who could afford an education would be a much smaller number than today. Consider a case in point. There is a law school in San Diego, California, called California Western School of Law. U.S. News & World Report, the bible of law school rankings, does not even give a rating to Cal Western. Notwithstanding that Cal Western is unranked in U.S. News, the school is charing students $38,400 tuition for the 2009 – 2010 school year. Approximately 305 students enrolled for the 2009 – 2010 school year. Annual tuition times 305 students equals $11,712,000 a year gross revenue. Can you spell C A S H C O W?

Cal Western estimates that the total cost for a single year of law school this year is $60,498. Number one ranked Yale law school’s tuition for 2009 – 2010 is $46,200. Yale estimates that the cost of one year of law school (room, board and tuition) is $67,240 for a single student and $72,340 for married students. Are you kidding?

A Yale law degree for $201,720 and a Cal Western law degree for $181,494!! These numbers do not include the opportunity cost, i.e., do not take into consideration the amount of money not earned by a student during the three years of law school. A student who gives up a $50,000 a year job to go to Cal Western is really paying a cost of $331,494. These numbers are bigger than the average home cost in most areas of the United States and homes can be financed over thirty years. Consider the monthly payments on a $181,494 debt repaid over 10, 20 and 30 years at six percent interest:

$2,005 per month ($24,059/year) paid over 10 years = $240,595
$1,294 per month ($15,528/year) paid over 20 years = $310,514
$1,083 per month ($12,996/year) paid over 30 years = $389,784

According to the website Payscale.com, the average starting salary in 2009 for lawyers was $45,919 – $69,351. Would you give up a $50,000 a year job to incur debt of $181,494 to spend three years in school a get a job the pays $45,919 a year? Unfortunately, too many young people are doing just that. For an interesting and detailed economic analysis of the cost and benefits of a law school education, see “Mamas Don’t Let Your Babies Grow Up To Be…Lawyers” by Herwig J. Schlunk, Assistant Professor of Law at Vanderbilt University School of Law. The abstract for this article states:

This essay treats a legal education as an investment, and asks the question of whether, based on known costs and expected benefits, such investment should be undertaken. The inquiry will necessarily differ from one potential law student to another. But for three posited “typical students” at private law schools, the investment is shown to generally be a bad one.

For more on this article, including some eye-opening tables comparing the economic costs of law schools to three typical types of law students, see the story in the Tax Prof Blog called “Law School Is a Bad Investment.”

All people who are considering borrowing money to go to school should consider the total cost of the education, the earnings they will lose while in school, the realistic expectation of getting a job in the desired field and the realistic starting salary for their desired post education job before incurring massive debt that could be a burden for most of their adult lives. Do not lose sight of the fact that big debt has big and lasting consequences.

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