STUDENT LOANS: THE GOOD, THE BAD, AND THE UGLY

Higher education has historically provided a financial advantage to American citizens.  Studies have demonstrated that college graduates will earn significantly more over their lifetimes than workers who do not attend college.  Consequently, the federal government has taken steps in the past to assist in making college affordable – whether directly through the GI Bill, or indirectly, by guaranteeing the loans made by private lenders.  The premise for making loans to students who obviously lacked the financial resources to repay the loans at the time they were obtained, or immediately thereafter, was that their education would provide them with the ability to obtain employment and repay the loans upon graduation.  Most student loans did not become due until six months after graduation (or when the borrower ceased to be a full-time student) in order to allow the borrowers to secure employment so that the loans did not go immediately into default.

Unfortunately, the slow but ongoing departure of jobs to foreign countries, coupled with recent recession has created high unemployment.  This in turn has resulted in an unprecedented wave of student loan defaults.  Several factors have contributed to the surge in defaults.  This article will address those factors, and what can be done in the future to minimize the risk of default for those planning on financing a part, or all, of their higher education by way of educational lending.

The most readily identifiable factor in the default surge is the loss of employment – and income – by college graduate borrowers.  This group was paying on their education loans until their financial situation was no longer able to bear the burden of payments, and still maintain other household liabilities.  As unemployment rises, more borrowers will be losing their jobs and the income necessary to maintain those payments.  As educational loans lack collateral (your diploma will not be repossessed), they are frequently placed low on the household priority list.  But high unemployment not only means that graduate borrowers are losing their jobs, it also means that less jobs are available for those borrowers who have yet to graduate.  This results in an increasing amount of “no payment” defaults by graduates who are unable to enter the workforce due to the diminishing amount of available jobs.  The promise of immediate employment that existed at the time that the loans were obtained has now evolved into the economic reality that the pool of jobs is narrow, and employment is not guaranteed.  Even after six months, recent graduates are finding themselves unable to secure a job that will allow them to meet their educational loan obligations.  Many of them are returning home because of the lack of income.

Other factors are also contributing to the default surge, and in an alarming amount.  Many government programs require retraining or re-education as a component of their benefit packages.  However, these programs may be funded in part by educational loans obtained by the borrowing students.  Some borrowers may obtain these loans and attend classes solely for the benefit of ongoing unemployment compensation, rather than for the intended purpose of reentering the workforce with a degree.  The proliferation of online universities, where students can participate with minimal effort and time expenditure, has only added to the problem.  As a result of the rising defaults, educational lending standards are tightening, and many private lenders have chosen to exit the market altogether.  This in turn has caused another group of defaults, this time with current college students.  As the lending has become more restrictive, many present students are unable to obtain loans necessary for them to finish their chosen course of study.  These borrowers are forced to drop out, and are left with the dual problem of educational loan debt without the degree necessary to obtain employment to manage the debt.

Why the concern about student loan debt as opposed to credit card debt or mortgage debt?  Unlike credit cards, educational loans are not dischargeable in bankruptcy.[1]  Regardless of the age of the student loans, or whether a degree was obtained, borrowers cannot escape the obligation in bankruptcy.  In addition, because a majority of student loans are guaranteed by the federal government, they are permitted advantages in the collection of their debts – such as the seizure of tax refunds – which are not available to other private creditors.  Deferments and forbearances may offer temporary relief, but also serve to increase the balance on the loans as the unpaid interest is “capitalized”, meaning that it is added to the balance of the loan.  The borrower will literally be paying interest on top of interest.

If you or a child is looking for ways to finance their higher education, do your homework first.  Be realistic about the cost of attending college, and the type of degree to be obtained.  Some may consider a business degree from Stanford to be more prestigious than a degree from Georgia Southern.  But if the student is going to remain in the state of Georgia following graduation, with its network of GSU alums, then the difference in the price of the educations cannot be justified.  Likewise, consider the major that the student will be pursuing, along with their career goals.  Find out what employers value in potential employees.  A business degree may not fill the educational prerequisite to be an art teacher.  A degree in ancient cultures may not yield the interest of an employer seeking a bookkeeper, and so on.

Secondly, consider non-financing alternatives.  Georgians benefit from the HOPE scholarship program, which has made higher education available for many students who otherwise would have been unable to afford college, or would have to obtain burdensome financing.  As a parent, make sure that your children understand the importance of the scholarship, and what they need to do to maintain it.  Explain the cost of their education if they had to pay it on their own.  Also research available scholarships and grants that may help reduce the financial outlay necessary for a college education.  Consider work programs that may be available at the school itself, such as working in the bookstore, which may further defray the cost of the education while at the same time allowing the student to invest their own effort in paying for school.  Parents should not overlook traditional types of lending, such as obtaining a second mortgage, to pay for college.  While I am always hesitant to suggest placing residential equity in peril, it would allow a potential interest deduction for tax purposes that can be utilized immediately, while the student is in college.[2]

If you are still going to need student loan financing, please follow these steps:

1. Know what you need to borrow.  Don’t borrow more money than you need to cover your education costs, just because it is available;
2. Set a rigid timetable for completion of your degree requirements.  The longer you take to complete your education, the more you will owe, as interest on the student loans will be capitalized while they are deferred.
3. Research your field of study to make sure that there will be employment opportunities available.  Ask prospective employers about the types of degrees they prefer for their employees.
4. Research your school.  Does it have a good reputation in the community or in your future profession?  Does it have a good graduation rate? Will the curriculum and available allow you to finish your degree requirements within the timetable you have set.
5. If you have the opportunity to pay on the loans while they are deferred – for instance from employment or a tax refund – do it.