February 15, 2010

Shock: Banks and the US government don't give a crap

I found this to be a fairly well balanced article on the student loan debt problem.  I am in basically the same position as the woman in the article, though thankfully not at quite those heights.  I took out debt for law school.  Through a series of things that were not my fault bad life choices, I deferred until I ran out of time.  The principal amount tripled and I'm now making hellishly high payments.  My choices, my consequences and I try not to whine about it too much.  It sucks, it restricts my life choices and I try very hard not to think about how old I'll be before the loans are paid off.

I am somewhat torn about this entire situation.  It is utterly self-serving of me to want there to be student loan reform.  Would I like my interest rates dropped and principal payments lowered and the 20% default fee removed?  Hmmm.  Let me think about that for a minute.  Of course I want that to happen.  But I knew the details of the loans.  I knew the consequences of failure to pay.

I am less than persuaded by those who claim they did not know the details.  Read the fine print, people.  Having said that, the loan process is stunningly opaque.  The schools have a vested interest in getting as many people to take out as many loans as possible.  What does the school care if you can't pay it back?  They got theirs.  Getting answers to questions such as "what will my payments be?" and "how much will I  have to make to not starve in the streets?" are not easy.  So while I don't particularly have sympathy for those who claim they didn't know the terms and didn't know about the default fees, etc., I do think the process can be far more open.

People do not realize that student loans are the one debt that does not go away.  There is no discharge in bankruptcy.  There is no negotiating a lower rate.  There is no bargaining about the amount.  The default fee is usually about 20% or so the then outstanding balance.  Think about that.  A person who has demonstrated that s/he cannot pay is now slapped with another huge principal amount.  Interest then piles up on that as well.  Loan sharks think that's insane. 

What to do?  Again, from a totally self-serving position, I think it should be easier to come up with some type of workout program.  I understand that people who pay on time will be pissed about someone else not paying and then getting a lower rate.  Think about this though.  By the time that point is reached, the outstanding interest will be capitalized and will now be part of the principal.  I think that alleviates some fairness concerns.  There are supposedly limits as to how much can be garnished in order to prevent people from being pushed below the poverty line.  In reality, it is nearly impossible to get any loan servicing agency to correct an error.

I am extremely hesitant to make loans dischargeable in bankruptcy.  Even with the new bankruptcy laws, within 7-10 years that bankruptcy will fall off a credit history.  Absolutely there will be those who use that to get a free ride for law school/medical school/business school.  For that matter, I would argue that is a rational choice to make.  Not moral, mind you, but rational.

If we're going to insist that everyone go to college, then kids need to be told about the true costs.  They also need to be told that there's nothing they can do to get out of the loans.  That's only fair. 

Posted by: alexthechick at 11:04 AM | Comments (24) | Add Comment
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