Wednesday, October 14, 2009

Student Loan Bailouts

In today's episode of "Can I Haz Bailout, Pleez?" we turn to David Lazarus, writing for the esteemed LA Times:

LA Times: How About a Student-Debtor Bailout?

Let me preface all this just a bit: I believe there is very little about student loan debt that is different from any other kind of debt: It too is a known claim against an unknown future.

It is not "good debt." It is not "bad debt." It is just debt.

Student loans are nefarious, though, in ways that other debts are not: Student-loan debt is typically issued so easily and in such large amounts that the people who take on its burden — young adults who, in the vast majority, have not yet created nor sustained a stream of reliable income — will find themselves facing five and six-digit liabilities at precisely the same time (no more Bank of Mom and Dad) that it is most important that they begin BUILDING SAVINGS.

No, I don't care about a college graduate's "earnings potential." Potential doesn't pay the electric bill. It isn't a PIN-based currency at Wal-Mart. Your landlord won't accept it as payment for rent. Those tens of thousands of dollars of racked-up student loan debt are certain, and inescapable. (Well, unless you're willing to flee the country.)

So here's how Lazarus' article begins:

Like many recent college grads, Los Angeles resident Steven Lee finds himself unemployed in one of the roughest job markets in decades and saddled with a big pile of debt. He owes about $84,000 in student loans for undergrad and grad-school costs.

But what Lee's angry about isn't the slings and arrows of an outrageous economy, and it isn't the idea that he owes a ton of money for all the schooling he's received.

It's the interest rates on his government-backed student loans, which range from 6.8% to a whopping 8.5%.

"That's just ridiculous," Lee, 35, told me. "The rate for a 30-year mortgage is around 5%. Why should anyone have to pay 8.5%?"

I dunno. Because you were loaned over $80k on an uncollateralized basis, maybe?

Well, because a deal's a deal, and that's the rate Lee accepted when he received his loan.

"I disagree," he replied. "The government has bailed out homeowners. It's bailed out big businesses. Why can't it also help students?"

They already "helped" you, Steve. They gave you $80k, no questions asked, with which you could pursue a higher education. All you had to do was sign your name. Presto! Eighty grand is yours!

What? Now that school's done, and you're out there in The Real World, you find that that repayment's a bitch? That the loan terms are "unfair?" That groups like mortgage bankers, real-estate pros, and Wall Street banks — groups with stuffed-pocket lobbyists, and groups who can effectively hold the economy hostage when their business plan puts them in the ditch — those guys get preferable deals?


Sounds like you DID learn something after all! We're making progress!

Good question -- and one that's especially germane as tuition continues to soar at both public and private universities. The University of California is looking to raise its fees 32% next year to more than $10,000 a year.

Damn that easy credit, anyway. Who knew it would cause such problems?

Look: You want to put an end to those nasty annual tuition increases at State U? Here's how you do it:

Stop making student loans easily available to anyone with a pulse.

Complicated, I know.

Nix the "Just sign here!" loan programs. Stop presenting as a given that EVERYONE should be able to go to college, regardless of price and/or background. Cut off the "free money" for college, and see what happens to tuition, room and board, and all the other associated college expenses.

In the mid-2000s, we made mortgage money available to be borrowed by pretty much anyone who could write down at least twenty percent of our alphabet, and in no particular order. What happened? Home prices blew up, up, up.

We've long made college loans available on much the same basis. And yet people are surprised — nay, infuriated — when college tuition rises by double digits, year after year.

Huh. Weird.

The more money you make easily available for Product A, the more Product A's price will rise. This is basic economics. We just repeatedly ignore it. (And create newer, bigger government programs to "solve" it.)

Ah, but I digress. Back to the article:

For the next decade, Lee is obligated to send $445 to the federal government every month. That will pay down $37,000 in loans held by the Education Department, which acquired the debt from Edamerica and another lender, All Student Loans.

The interest rates on those loans range from 6.8% to 8.5%.

Lee owes nearly $14,000 more to Edamerica at a rate of 7.25%, plus $21,000 to All Student Loans at 6.8%. Then there's $12,000 owed to JPMorgan Chase & Co. at a more reasonable 5.2% rate.

In all, Lee is on the hook for about $1,000 a month in student-loan costs.

"I'm not saying I don't want to pay," he said. "I'm just saying I should pay a rate that's fair. If 30-year mortgage rates are near 5%, student loans should be close to that."

Yes, Steve, I know. Paying back five-digit uncollateralized loans, at the terms to which you agreed, is so damn unfair. (Note to the gallery: See how we've become so addicted to "low rate" credit? How, after so many years of watching "free" money get handed out, we're all so entitled to more of it? Isn't Steve just a shining example of this?)

But there is a bright side — something that would maybe help Steve forget about those, uh, "predatory" loan rates. From what I see — and I'm just talking here! — he might be a fantastic candidate for the government-subsidized, FHA-backed, first-time homebuyer program! He should look into that!

Because, as we all know, more low-rate debt is the answer.

Always the answer.

Bring it on. Bailouts for everyone.


— Posted by Michael @ 9:40 AM


Amen, Michael. We want it all, and we want it for free. Gimme mine now.


Yes, bailouts for everyone except PF bloggers (and readers!) with a clue. Let's see....I have no cc debt, a paid for house, retirement accounts, an EF that could last for over 2 years and one car payment. Where's the bailout line for people like us?

It's all very discouraging.


Student loan debt is worth it (to me, anyways) but there's no such thing as "good debt." What it's used for may be a good purpose, but debt is debt.


Huh. When I was paying off my student loans, I had no idea what the going mortgage rate was. And even if I'd seen a reference to it, it wouldn't have mattered. Mortgages are mortgages. They are not student loans.

Apples and oranges.


@ Amy:

Nowhere. In this story, the prudent get to PAY for the profligacy of others. Neat, huh?

@ Denise:

Yeah. What's collateral got to do with it, right?

Too bad this guy didn't take all his student-loan debt and roll it into a HELOC, then stop paying, then get a mortgage mod, then stop paying again, and then walk.


Well I only have student loans that's still active but I was told this was a "positive debt" or some other.


HG, it's debt that should (in theory) increase your ability to pay the debt off, but it's still debt. Voluntary, at that.

And as such, it should be taken on with eyes open, especially since there isn't a direct correlation between the expense of education and the future salary. A person with a masters in social work from an Ivy League school will still earn a pittance as a social worker.

I like my verification word: bruxoma. If bruxism is clenched-jaw tooth-grinding, then a bruxoma could be the result of that. And quite possibly what Michael will develop if he reads too many more of these "Bail me out, please" stories.


I agree with no bailout sentiment; also that debt is debt. But borrowing is really part of an investment strategy and as any investment it can be terrible or good. So yes, earning potential is important: borrowing money for a Bachelor in liberal arts is a terrible investment. Borrowing money for medical school is a good one. Especially since there is really no other way to go to a medical school except for very rich.


"borrowing money for a Bachelor in liberal arts is a terrible investment"

Not necessarily. Thanks to education inflation, a bachelor's degree in almost anything can be a minimum requirement for a job. Even if it's not directly related to what the job requires.


The only group who we should be bailing out are the tax payers.

Over the last ten years we've had wars agianst terror, wars against bankers'renumeration, a war against our intelligence, a war against the middle class, a war againts success and a war against tax payers (at least, that is what it feels like). How about a war against entitlement and against abdication of personal responsibility?

If this guy asked me for either a loan or a job, I would tell him to fork off. Life is a two way street.


I suck.

Anonymous Evan Dorff
, at 6:30 PM, October 24, 2009  

I understand him when he says there is no bailout. I took out a student loan for 2500 30 years ago i was foolish I quit school for family reasons and I did not pay my student loan and it was my fault i understand but I work and have worked more than one job most of my life. For the last 20 years I have been paying 120.00 a month on this loan and it has never caught up according to the government and now i am 52 and still paying on it. Still 6000 balance left so you tell me where and when do we stop being punished. I could have but I never filed bankruptcy because i had an obligation now you cant file on them if you wanted to. I understand this guy. Its not about getting a break and a free ride its about seeing tons of people on welfare and getting free schooling and throwing it away, its about not being able to get a loan for anything because you have a student loan debt and its about being beat down job hunting and getting a rejection because you have a defaulted student loan. Every office i talk to they have many people in the same boat as me and they all say the same thing, that they have been paying on it for years. I am a good person I just made a bad decision a long time ago because it was so easy to sign on the dotted line so that the college recruiters can make commission. So those of you who wanted to say were shrugging our obligations and we want something for nothing or you want to leave harsh comments go right ahead but most of the people who are in this spot are the middle class who at least tried to better their lives not take a free ride on welfare. I know I am a good person and a hard worker but the laws must change regarding student loans and Obama is right out there encouraging women to sign on the dotted line and go back to school get a student loan. Yeah right..........OBAMA


This post has been removed by the author.


I have $24,000 in student loans and i hate it. when i was signing up for the loan i had a very vague idea what i was getting myself into. every time i make a payment ($326.00/mo) it hurts like hell. after 4 years of work i still make only $42K...

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