Courtesy of Fark, an article at ABC.com tells the stories of several college grads who have lousy jobs and lots of debt. The stories all had a disturbing common thread:
So Percell borrowed enough money to pay about $24,000 a year to attend Rivier College in Nashua, N.H. She's about $85,000 in debt.
Alfred said he owes more than $125,000 for his degrees in theater when he's not even working in that field.
Walter Rowland got a degree in meteorology and now owes $77,000 in student loans.
In all cases, this is an absurd amount of money to borrow for an undergraduate degree. You can't even get a federal loan this big---on average, these kids are borrowing more than twice the federal borrowing limit, a limit that is there for their protection.
This is the biggest single problem with our student loan system, and the biggest source of perpetual debt: not interest rates or gotcha clauses, but predatory overlending.
What I personally find disturbing about these horror stories is that the kids are always blaming something other than their loans . In this article the kids blame their poor post-graduate situation on their colleges. They blame their degrees for not getting them the job that helps them pay off their massive debt---nobody seems to point the finger at the outrageously huge and unnecessary loan.
In a previous article from the Chicago Tribune, students with massive debt blamed interest rates for their woes:
Like many recent college grads, 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 learning he’s received. It’s the interest rates on his government-backed student loans, which range from 6.8 percent to 8.5 percent.
Now this is sad. Five minutes with a loan calculator will tell this dude that the problem isn't the interest rate. It's the massive principal, which can ruin your finances at any interest rate, even 0%.
This has all the signs of a con. The victims are out a ton of money, and yet they may never realize exactly who screwed them and how.
When does it become overlending?
The maximum federal borrowing limit for 4 years is currently around 45K, which is about the median gross pay of a college graduate. That is roughly in line with some calculations I made in a previous diary, where I figured that you shouldn't borrow more than 1-2 times your expected annual take-home pay.
The federal borrowing limit is not some arbitrary number: it represents a big but manageable level of debt that a median college graduate can retire in 10-20 years at 15% of take-home pay. Note that slating 15% of your take-home pay requires some fiscal discipline, and paying this back isn't a walk in the park. It is, however, feasible to do so.
Now, compare that to the cost of a degree: even at an in-state public, the retail price of a 4-year degree is more like 75-80 grand (most of this cost is 4 years of room and board, however, and you can easily shave this down by doing without.) The price take is almost twice the safe borrowing limit, and that's for an affordable college.
The take-home message is this: if anyone lends you enough money to completely pay for a four-year degree, that is predatory overlending.
You are not supposed to finance a 4-year degree entirely on loan. The students above seem to have done so, and assumed they were supposed to do so, and this is the reason why they are currently screwed.
[Note that these calculations assume that you alone are paying back your debt: if your parents take out a loan to pay for your college, that is a different matter entirely. These are safe borrowing limits for the student.]
How does it happen?
There are three basic causes of overlending. First, you have a lender happy to stiff an uninformed kid with a loan they can never pay back. We can't really wish those lenders out of existence.
Second, you have a system in which this act is profitable. Without the protections granted to lenders, it would be impossible to turn a profit by lending money to people who can never pay you back. Reform is the eventual solution to this problem.
Third, you have kids who are fooled into thinking that they are supposed to take out an $100K loan to pay for an $100K education. Because they are supposed to go to college, and it has to be paid for, and they don't have the money, so it has to come from somewhere, right? So they take the money.
This problem is a matter of educating the borrowers before they are conned, something we can accomplish without waiting for reform. The puzzle is, why do kids fall for the con in the first place? They're not dumb: they know perfectly well not to buy a Hummer if they're broke and working at McDonalds; but they'll make an equivalently insane decision regarding a purchase 2-3 times as big. Worse, even after they realize how fucked they are, they may never realize exactly how they were conned. Why?
I think part of the problem is a lack of information about college, and part is the cultural perception of college. In previous generations, it was understood that if you were broke you had to work through college to afford it. Loans would assist you, but in the end you were the walking dead for four years. This was a common stereotype of students in previous decades: the kid with the bleak expression who for some reason is wearing a hair net to Calc III, and who freaks out if he misplaces five dollars.
Of course, back then dorms were cinder-block structures with cafeterias that served "creamed corn surprise". Now they have climbing walls and food courts and a fridge/microwave combo in every room, if they haven't replaced standalone rooms with suites. College is no longer hard living, it's more like a cruise ship that ran aground in the middle of New Jersey. It's a magical world where the archetype of the starving student no longer exactly fits. The idea of working night-shifts through college makes about as much sense as working night-shifts while on vacation in Hawaii. Like a vacation, you pay for it by working either before or after, not during.
Sadly, this trend is a result of the massive loans that students can take on, in a terrible feedback loop. Kids have the money, and universities invest in massive construction projects and luxury dorms in response. This creates a glamour that redefines what college is, and then the next crop of kids borrow themselves into four years of false wealth.
How to fix it
While federal reform is necessary to fix the problem, a key point is education. The first stop for potential borrowers is ed.gov, to see if they can get a federal loan. The scam starts when they see the borrowing limits and look elsewhere. It makes sense to lay out important facts about borrowing on that site.
The closest we have right now is www.college.gov, a site which lays out some basic facts about funding college, and avoiding some specific scams like fee-based scholarship searches. Their "Be Money Smart" section has one tiny note at the end about private lenders:
Private loans. Private loans can be useful, but watch out for bad deals. Interest rates can be higher, and repayment terms can be harsher than government loans. Use all federal student loan options first. Investigate the private loan organization, check with the Better Business Bureau, get references and read the fine print.
This is the current state of our borrower education: the government is advising students to shop around when choosing a loan shark.
One of the easiest ways to prevent these horror stories is to revamp this site to clearly and truthfully explain loan limits, putting the role of private lenders in their true context. Students pass through these portals on the way to be screwed; we could at least explain how the scam works along the way.