May 26, 2013 -- intro: Student loans are supposed to help middle-class kids pay for a college education, but these days they can do more harm than good. It's high time we did something about that.
If you imagine a world where the federal government and private lenders actually partner with students, instead of treating them as a profit center, have I got a bridge investment deal for you. As things stand, the Affordable Care Act has a better shot of garnering support among Tea Party activists than the average American kid has of getting a good deal on a college education.
Riddle me this: Why should middle-class students pay more for loans than is absolutely necessary, all the while padding the government's coffers and enabling state universities to build facilities that the students will only get to use for four years?
The answer: they shouldn't.
While no doubt there are more, here are five instances where middle-class kids are getting hosed on their student loans and student loan debt.
quicklist:title: The $50.6 billion heist. text: As Washington prepares for another epic battle over keeping federal Stafford loan rates at 3.4 percent rather than allowing them to double to 6.8 percent, an important fact goes overlooked: Stafford loans are already a significant profit center for the feds. Indeed, these loans earn Uncle Sam some 36 cents for every dollar it puts out. Bottom line: the government will reap $50.6 billion in profit from federal student loans in 2013 alone.
So instead of arguing for weeks over whether we should hold the line on Stafford interest rates, perhaps the debate is better focused on how we might cut them to a level sufficient to cover administrative costs and provide a slight cushion. That should help to make college more affordable for the middle class.
quicklist:title: Student loans fund tuition inflation. Average college debt has grown from $9,188 in 1993 to $35,200 now.text: Here's the dirty little secret why colleges and universities charge so much: Because they can. Their operating budgets are funded largely by student loans, which are repaid by students themselves. So why not pay your college president $3 million a year, spend $194 million to build or renovate a football stadium or "invest" $70 million in a pool?
Experts have suggested a panoply of solutions, including capping the maximum loan amount available to people who plan to pursue low-paying majors such as art history, or making student loans pay for education only, and not facilities like dorms, arenas or sports stadiums. (Credit.com contributor Mitchell Weiss explores more ideas along these lines.)
Whatever the solution, we have to stop this crazy cycle before it shuts the middle class out of college entirely.
quicklist:title:Till death do us part...really! text: You can never shake student loans, because unlike other types of loans they cannot be discharged in bankruptcy (with a few rare exceptions). It doesn't matter if you get laid off, are financially devastated by the illness or death of the family breadwinner or take up residence in your car. Student lenders will hound you until your last breath or they are repaid, whichever comes first.
This change to the bankruptcy laws was originally conceived to protect taxpayers, who otherwise would be on the hook if (and when) borrowers default on federal loans. After years of aggressive lobbying, private lenders eventually won the same benefit, i.e., they have the same risk of not getting repaid: Essentially zero. Yet they still charge a premium.
In addition to being a Credit.com contributor, Weiss is a finance professor at University of Hartford and says he regularly counsels students whose private loans boast 12 or 15 percent interest rates. The same loan from the government costs a quarter of the price.
It's the cornerstone of credit that interest rates are based on risk: the higher the risk that a borrower won't pay a debt, the higher his or her interest rate. Private lenders flout this rule, pumping more money into the higher education system and driving tuition inflation.
Maybe it's time for private lenders to play by the rules. Lending means risk. If they are unwilling to accept that risk, perhaps they should open a chain of newsstands.
quicklist:title:Limited tax benefit. text: When you get a mortgage, the federal government allows you to deduct the interest on your taxes to help incentivize homeownership. Having a well-educated population is no less important to our nation's future than buying a house. We should demand that student loans get the same tax treatment.
Currently, only people who earn below $75,000 can write off a portion of their student loan interest. That's a problem. If you graduated from an expensive school, you may owe $100,000 or more in student debt -- as much as many mortgages. But even if you get a good-paying job, you could face a crippling student loan payment every month. It's a slippery slope from there to a tepid economy, because if all of your money is going to pay rent and service student loan debt, you're not going to be in a position to buy a house, a car, and/or all the other things that put "consumer" into our consumer economy.
Let's change this, and give student loans the same tax benefits that apply to mortgages.
quicklist:title:Forbearance = Tightening the Screws. text: Many people who are having trouble paying their student loans mistakenly assume that forbearance is just another word for free. Weiss says he works with students all the time who believe all they have to do is fill out a form, and their payments magically go away.
In fact, forbearance can cost student loan borrowers a great deal of money. The entire time their loans are in forbearance, the interest keeps accruing, and is being added to the principal. Over time, that can make even small loans balloon into Behemoths. In many cases, forbearance is the only option most private student lenders offer distressed borrowers, even though they can offer other alternatives like loan restructure or modification. But hey, why would they when bankruptcy rules essentially guarantee full repayment? Clearly, this needs to change.
First, eliminating the "Render to Caesar what is Caesar's" lending environment and allowing student loans to be discharged in bankruptcy will bring private student lenders to the bargaining table, cause them to offer a host of reasonable options and force everyone to make smarter choices.
Second, let's expand the Pay As You Earn Repayment (PAYER) plan, the federal program that in many cases caps monthly student loan payments to a percentage of the borrower's income. We should include all private loans, as well as borrowers who are seriously behind on their payments. These are precisely the people in most dire need of help.
America has always been the land of "What's next?" Washington's failure to adequately address suffocating student debt, where few have had any incentive to act differently, represents "what was," cripples millions of Americans and stifles economic growth.
Adam Levin is chairman and cofounder of Credit.com and Identity Theft 911. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.