After writing in my last post what a bad idea it is for
seniors to go into debt to pay for a child’s or grandchild’s education, I’m
going to go a step farther and encourage even the student to shun student
loans, or at least minimize what is borrowed to fund college attendance.
Being awash in debt, even for a good cause like obtaining
higher education, saddles the borrower with years of payments, with no
guarantee of a high-paying job to meet the payments and still maintain even a
modest lifestyle. Countless students
fell into this debt trap in the early 2000’s and then found themselves
graduating into the beginning of one of the nation’s worst recessions where
they were unable to find decent-paying jobs.
I believe it’s happening again.
We’ve been riding high for over nine years in the recovery from the last
recession. Students (and not just
students) are mortgaging their future with the debt they are incurring.
But the truth is, it doesn’t take a recession to do the
students in. The labyrinth that is the
federal student loan program is enough to do that. I’ve read or heard stories in the last month
on CNBC, Mother Jones magazine, and
NPR about students who graduate with relatively modest loan balances but by
accepting loan forbearance offers to get them through a financially lean time
end up owing much more than was actually borrowed. The plans that cap monthly payments at a
certain percentage of the borrower’s income are no better. One former student, now age 61, had borrowed
$55,000. Several times he went into a
period of forbearance. The accruing
interest was tacked onto the loan, and today he owes $300,000. This may be an extraordinary case, but only
in degree. Similar stories abound.
The Public Service Loan Forgiveness program is no better, and
might even be worse. It holds out the
carrot for borrowers that go into government or non-profit public service jobs
of having their balances forgiven after ten years of payments. But the rules for the program, the many
exceptions and “gotcha” fine print that can disqualify someone from
participating—even after making years of payments—have brought financial
disappointment and grief to many others.
What’s the lesson here?
Besides eschewing debt, students and their parents need to be wary of
government programs and fast-talking college financial aid officers. The latter clearly have an incentive to paint
a rosier picture of the repayment period to get you to borrow and enroll in
their school. But even upon graduating,
they may continue to do you financial harm by encouraging wrong decisions. You see, schools can lose their ability to
participate in federal aid programs if too many of their graduates default on
their loans within the first three years of repayment. But a student in forbearance during that
period of time cannot be counted against the school’s record. This incentivizes the school to recommend
that route over wiser courses of action.
In the end, the borrower will owe much more and likely find repayment
harder; but by then his misery will not be the school’s problem.
And the design of the student loan program? Like so many government plans, it sounds good
on paper and maybe even came with lofty aims by the originators. But it is still, in the end, a government
program. It is nearly impossible to
navigate it safely these days except by the most savvy (and fortunate) of
borrowers. And this cannot be blamed on
one political party over another, one administration over another, or even one
Department of Education secretary more than another. This is a mess decades in the making. Steer clear of it if you are approaching
college years, for yourself or a loved one.
Until next time,
Roger
“When that servant
went out, he found one of his fellow servants who owed him a hundred silver
coins. He grabbed him and began to choke
him. ‘Pay back what you owe me!’ he
demanded. His fellow servant fell to his
knees and begged him, ‘Be patient with me, and I will pay it back.’ But he refused. Instead, he went off and had the man thrown
into prison until he could pay the debt.” Matthew 18:28-30 NIV®*
Copyright © 1973, 1978, 1984, 2011 by Biblica, Inc.™
Used by permission. All rights reserved worldwide
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