Why Student Loans Are an Even Bigger Sham Than You Know

[xchrom]

http://www.alternet.org/why-student-loans-are-even-bigger-sham-you-know

It’s becoming an annual ritual. Every June, Congress debates what to do about the interest rate on federally subsidized student loans, to avert what this year will be the imminent doubling from 3.4 percent to 6.8 percent. But interest rates alone don’t tell the whole story.

At a time when overall student debt approaches $1 trillion, the facts reveal that student loans aren’t loans, not in the traditional sense. They exhibit none of the qualities of modern consumer financial instruments, and are often sold under false pretenses, with the promise of a lifelong benefit that never materializes. We need to change how these loans work and have a broader conversation about what we should be doing — including bankruptcy and refinancing — to help future generations obtain a quality, affordable education, which is critical to our economic future.

The roughly two-thirds of U.S. students who take out loans to finance their college education can end up in a situation most resembling the historical concept of indenture. In medieval times, peasants would sign deeds to work land, which would then get cut in a jagged line (looking like teeth, or “dentures”). Each party would get half, and rejoining them would prove the authenticity of the contract. Colonial indentures would trade years of labor for the opportunity of transportation to the New World. The indentured could not alter the terms of the contract, no matter their circumstances. One way or another, the debt would get paid.

This is basically how student loans work. A college student might remember freshman orientation, when an instructor told them to look to their left and right, explaining, “One of you won’t graduate.” But student loans aren’t extinguished for those who don’t finish college; instead, the debt becomes a burdensome reminder of this early mistake in life. This is also true for students snookered into matriculating at sketchy for-profit colleges, which offer almost no marketable skills or career preparedness to justify the cost. And it further describes recent college graduates who, through an accident of timing, entered the real world during the Great Recession and its aftermath, finding it difficult to obtain work in their field of study.

[Generic Brad]

1. Maybe the problem is not loans

I suggest that how we fund education may be the actual problem. We put the burden of the cost on the student. If our society truly values education, we should share the cost among all of us.

You raise an interesting point, however there is still a very real price tag to education. Someone still has to pay. If it is not the recipient of the education, then perhaps the cost should be shared among all who benefit. The student benefits, but so does our entire society.

[exboyfil]

5. That is why we have state universities

Which is a huge subsidy to higher middle income and rich families. Not that I am complaining.

[Generic Brad]

6. My daughter was recently accepted to a state university

And it is still expensive in my estimation.

[elehhhhna]

9. 25K here in TX per year (includes dorm, meal plan)

we are up to our ass. Luckily we also have Jr. Colleges that have dorms and feed a large number of kids to the uni's after 2 years.

We make @ 120K gross combined but after ins., taxes, mort., etc. we can't cough up the 15K diff. between scholarships and loans...thanks to the BA etc. our income is the same as it was in 1993 - when our college student daughter was BORN!

[closeupready]

28. Used to be totally free in TX - I'm talking the 80's.

Funny how quickly that changed. (And sad.)

[aikoaiko]

10. And that subsidy is shrinking quickly.

I live in GA so I know it best. 13 years ago and for many years prior, the state funded 75% of the cost of college education and now its about 50%. To make matters worse, budget cuts that won't be renewed automatically have reduced college budgets to mid-1990 numbers.

The good part of higher ed in GA is the HOPE scholarship. If you graduate from a GA high school with a 3.2 GPA, you can have 90% of your college tuition paid plus some fees as long as you keep your college GPA over 3.0. If you graduate HS with a 4.0, then 100% of tuition is paid for.

[Liberal_Stalwart71]

12. Times have changed, my friend. State and public colleges and universities are very expensive.

My guess is that they feel they have to keep up with competition from private institutions.

[exboyfil]

19. I can only speak for Iowa

but a big reason for the higher tuition (about $8K/yr for two semesters) is the state funding the schools at a smaller percentage than in the past. If you look at the K-12 and university budget combined, it is keeping ip with revenues on a percentage basis but most of the increases goes towards K-12 which has grown. If it was not for outside money (research grants etc) the tuition costs would be much higher.

[raccoon]

25. Many states have cut funding to state univ. and community colleges. Cut way back. nt

[JNelson6563]

2. My 21 yr old son

has stopped going to school because he has paid for all he can at the moment (& exhausted what we could give him) and refuses to get sucked into the college loan bullshit.

He and many his age see all of this stuff going on (mostly covered in the OP) and just won't sell his soul to get more letters after his name so he can go work at McDonalds.

I agree with him, screw that.

Julie

[Egalitarian Thug]

18. Good decision. How does he feel about what used to be called trades? n/t

[exboyfil]

3. The shadier public and non profit private colleges and universities

also have the tendency to obscure the fact that these are loans on their financial aid documents (not making it very clear that the money must be paid back). If you don't have someone watching out for you, then you can make mistakes which put you in a deep hole. I think public high schools do an abysmal job in explaining these concepts (teens don't want to listen and parents either do not understand or do not take the time to understand). Things to think about as you prepare to go to college.

1. Try to decide fairly early on your college and work your high school towards its requirements (best done in late Sophomore to early Junior year).
2. Take full advantage of as many college credit opportunities offered by your High School. These include in order of preference: Dual Enroll, PSEO (Post Secondary Education Opportunity), and AP. Also do CLEP on your own as much as possible (for example you can get 16 hrs. of credit in a foreign language with a high enough CLEP score).
3. If necessary pay for some courses early on that will allow you to access High School paid for credit opportunities. Take a look at the tax code when doing this you may find that tax credits apply in some cases.
4. Do as much while still at home (to reduce on campus living costs). This could include community college after High School graduation. Always make sure about transfer of the credits though.
5. Apply for every reasonable scholarship opportunity but don't waste time on low value awards with low potential. Get the FAFSA in as soon as possible especially if your family income is lower.
6. Don't be afraid to talk with the departments in your majors of interest and find out how they will treat you coming in with lots of credits (will they ensure that you have a fair shot at the Sophomore and Junior classes). This may be balanced by taking an earlier entry and foregoing some scholarships to ensure you move to the front of the queue when your credits are recognized.
7. While college should be fun, it needs to be treated like an investment and potential return on investments considered. Hint - if the major has unpaid internships you may want to consider something else. Your time is valuable why give it away?
8. Don't stick your nose up at state schools. The flagship schools in most states will give you an education that can take you anywhere with the right selection of major and performance. Even the regional schools can do a good job getting you started on a career (but do research on placement rates).
9. If at all possible consider the 529 if you can deduct from state taxes. The 529 in my state means I get a 9% immediate return on my investment. Since I am going money market I don't get the tax free earnings (I also don't lose sleep over my daughter's college tuition getting lost in the stock/bond market).

I am applying this strategy with my daughters who will have entirely different considerations. My oldest daughter just completed her freshman year of engineering as a High School Junior. She is on track to finish her A.S. and have all but two of her Sophomore level classes done (and actually several Junior level classes done) before she hits the campus. She could graduate in three semesters with a B.S. in Engineering if she so elects (she actually plans to also major in Spanish and do a year abroad studying Spanish and Engineering). Exchange programs are not that expensive for in state schools if you only have to pay your school's tuition (and that is the case for many nice opportunities at my daughter's first choice school). She will be in school three years and complete both B.S. degrees with 6-12 hrs. that can apply to a M.S.

[MissB]

17. Sounds like we have similar kids.

All excellent advice, by the way. Especially #5. Plenty of folks don't understand the FAFSA at all.

Our kids' school offers about 8 college credits within the school, just from two classes that are offered as dual enrollment, with the HS teacher being certified by the local community college to teach Writing 121 and World History. They also offer AP tests, but admit that not all AP tests will be available.

His high school has three options for continuing on - a local private college within walking distance of the high school, the local state university and the local community college. The private university is a great resource, but they don't award college credit unless the child ends up attending their university.

My oldest is taking a Calculus class at the local state university this summer. He may not even need to take it, as it will likely get waived by any state school he attends eventually, depending on his AP test score. But he wanted to take it and we wanted to get him started there to prep for the last three years of high school. He is done with high school level math, having earned 3.5 out of the 4 needed math credits by the end of his freshman year. We looked at the local CC, but they wanted him to take 6 hours of entrance exams in order to sign up for a class. They wouldn't even waive the basic math one with his SAT subject matter Math 2 test score of a perfect 800 (which covers algebra through pre-calc). The state university will take him as a non-admit with transferable credit awarded for a $25 application fee. He can take 8 credits a term and 21 credits in the summer, which is likely more than he needs. The per credit cost is a bit higher than the local CC - roughly $200/term - but it is conveniently located and the professors have all been very responsive.

It is likely that he will get through differential equations by the end of his sophomore year of high school, then we will encourage him to shift to chemistry and physics for his Jr and Sr year of high school (along with a summer math class if he wants and isn't overloaded with an internship).

The youngest child will be one year behind in math so he may not accumulate quite as many credits before heading off to college.

But we have to pay for this out of pocket. We always joked that we'd have 5 years of ramen ahead of us when our two kids are in college, offset by one year. But in reality we are just spreading the cost of college over a longer time frame (and not touching the 529s until they are actually in college).

We've also debated using a private college counselor. Having someone else nag my child might almost be worth the cost. Might.

[exboyfil]

20. Sounds like great kids

In our state we have the PSEO option. If you exhaust the available offerings at the High School (for example math classes beyond Calculus I) then the school district is obligated to pick up the class at the community college/public university and some of the private colleges. My daughter will have had C++, Calculus II, Engineering Analysis, Calculus Physics I and II, Mechanics of Materials, Economics, Dynamics, Thermodynamics, and possibly Statistics picked up by the local school district. The district actually only pays $250/course so it is not a burden on them. Some colleges resist it but it is the law. All of these classes will be done online (I can tutor my daughter in all of them - not an option for some families). I have also paid for several classes (taken over the summer or classes that are "offered at the high school" or unavailable from an Iowa school) (Chemistry I (taken at local university), Speech, Composition I and II, Geography, Statics, Differential Equations, and Calculus III). In general I can offer better instruction than even that found at our local university. I love to teach, and I work well with my daughter (actually both daughters I did Life Science and Biology with my younger daughter and had a blast - I am looking forward to working with her on her Biochemistry degree as she prepares for medical school). Learning is my hobby.

[Orrex]

4. I've been comparing student loans to indentured servitude for years

The earliest reference I can find on DU dates from May 2008, but I know that I made the comparison at least several years before that.

In nearly every case, a number of high-minded DUers have stepped forth to lecture me about the value of a college degree and my shameful irresponsibility for wanting to escape my loans.


It's refreshing to read a formal piece on the subject that draws broadly the same conclusion that I do.

[xchrom]

7. +1

[jtuck004]

8. Intentional profit making. Just like the thieving banks have learned that fees can increase their

income, enrollment management practices have increased tuition, then shifted aid that the college used to provide to students with need to wealthier students who can then pay higher prices, while using Pell Grants to supplant that money and placing less well-off students into massive lifetime debt.

So these practices, which used to be the bread-and-butter of the for-profit school, are now becoming the norm at more thieving state schools.

http://www.theatlantic.com/business/archive/2013/05/how-colleges-are-selling-out-the-poor-to-court-the-rich/275725/

At the expense of our future, and theirs.

[starroute]

11. Add in the Fed keeping inflation unnaturally low

Paul Krugman has been harping lately on the fact that 2% is an unreasonable ceiling to put on inflation and that if inflation had been running around 4% the last few years, the economy would be a lot better off and unemployment might be a couple of points lower.

If inflation had been at 4%, those students with 3.4% interest rates would have been seeing the amount of their loan burden go down, even aside from whether they were paying it off. That's not a cheat -- it's one of the traditional ways society keeps people from being crippled by inescapable debts -- but it's been made unavailable.

Class warfare isn't just about the 1% vs the 99%. It's about the creditor class vs. the debtor class -- and also about bosses vs. workers, which tends to amount to the same thing. If you're a working class person, with a mortgage and a car loan and a hope of rising wages, a moderate level of inflation is your friend. If you're a business owner or somebody with enough money to invest rather than borrowing, you want inflation as low as possible to keep your employees in line and to protect the value of your assets.

Both the US and Europe are being run for the benefit of the creditor class -- and all of us are feeling the pain.

[fasttense]

13. When I went to college in the 70s,

Most colleges were partly funded by governments both state and local. The support those colleges got from state and local taxes was near 80%. Today I think that amount is down to 40%. That is why colleges are looking at such high tuitions and other money schemes. They are just as broke as the rest of the economy.

But instead of funding our children's future we decided to let corporations and banks turn our kid's into profit centers. Profit over all is the American society today. The hell with everything else, as long as some overpriced CEO and board of directors is making huge sums off our children, then our government supports it. This is what America got when they voted in Ronnie Raygun.

[PatSeg]

14. Unbridled greed has

infiltrated pretty much every aspect of our society. When the only value becomes "profit", we are clearly in rapid decline.

[CrispyQ]

22. In America, Profit is God.

What kind of government won't take care of it's people? What kind of people allow this to continue? If I were 25 years younger, I'd be looking to move out of this country.

[PatSeg]

26. People in this country

became complacent super-consumers. Eventually someone(s) will take advantage of that.

Hey there! How ya doing?

[wyldwolf]

15. Great piece. And here's a good companion one: The College Industrial Complex

No one else is going to tell you this, so I might as well.

You sit here today, $30,000 or $40,000 in debt, as the latest victims of what may well be the biggest conspiracy in U.S. history. It is a conspiracy so big and powerful that Dan Brown won’t even touch it. It’s a conspiracy so insidious that you will rarely hear its name.

Move over, Illuminati. Stand down, Wall Street. Area 51? Pah. It’s nothing.

The biggest conspiracy of all? The College-Industrial Complex.

Consider this: You have just paid about three times as much for your degree as did someone graduating 30 years ago. That’s in constant dollars — in other words, after accounting for inflation. There is no evidence that you have received a degree three times as good. Some would wonder if you have received a degree even one times as good.

http://www.marketwatch.com/story/dear-class-of-13-youve-been-scammed-2013-05-17

[dionysus]

21. hey!

[wyldwolf]

24. yo!

Yeah, I still pop in when I'm not working or teaching the young 'en to be a good Democrat.

[marmar]

16. K&R

[HiPointDem]

23. kr

[Fire Walk With Me]

27. "Debt is their business model." Banks WANT you to be in debt. To them, it's good.

That we are allowing the worst aspects of capitalism to enslave our children, entire generations of them, is despicable.