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Saturday, June 5, 2010

Student Loans and Bankruptcy

This is an issue taken up in today's New York Times. Over the past few years, there have been scads of articles featuring hapless recent grads of expensive private colleges, shocked at their loan burden. Interestingly, several of these students are grads of NYU.

Of course, this is an issue close to my heart, as my children regretfully declined acceptances from private colleges--complete with merit aid--and chose state institutions.

So I was inspired to pen a comment, which I am copying below. I wrote this in the heat of emotion without re-reading, fyi. So no guarantee of completeness or coherence.

I'm of several minds about this. Both my children got into prestigious private colleges--small liberal arts colleges. My husband and I had always dreamed of sending them to Oberlin, Kenyon,Reed, and the like. Yet when it came down to it, each chose a no-cost state institution--even at full-cost the price would have been very low.

Yes, teenagers are naive about money and the burden of interest payments. Yes, parents are complicit in urging the teens to go to a "top college." Yes, colleges have raised tuition in part BECAUSE of the ready availability of loans. And, as we found out last year, some college financial aid officers were receiving kickbacks from "preferred" lenders.

But I believe the laws were changed, in part, because graduates of law schools and med schools were declaring bankruptcy UPON graduation!

So I would suggest that colleges/banks be required--as credit card companies now are--to show what the payments will be down the road. But I also believe that families and students should take more responsibility about their college choices, especially when considering a private college. Tuition at private colleges has gone up at twice the rate of inflation.

Perhaps the ability to discharge student loans in bankruptcy will make the banks wary about lending vast sums of money to naive teenagers.

I think we've all seen the need to teach basic math skills and consumer awareness. I have heard from my own students, "I thought that it was an OK amount of debt because the bank said I could borrow it." Shades of the housing bubble.

What think you, dear readers? I said to Mr. FS--somewhat facetiously--that if we had known the laws would change we could have saved less money for the kids AND encouraged them to go for the prestigious college.

Frugal Note: Since I have copied and pasted this from a comment that will--perhaps--appear on the NYT website, I have created a twofer situation: two comments for the labor of one. This is more commonly known--in extreme couponing circles (of which I am not a part)--as a BOGO: buy one, get one free.


FB @ said...

I agree with these points in your post

1. Parents AND teenagers should sit down together to work out the costs of both colleges, and not just say "Mom I got into Harvard, LET'S GO!".. then end up with a $200k debt at the end of it with no job to show for it.

Encouraging a child to go to a trades school (if that's what they want), with the guarantee of a solid job after wards is not a mark of shame, but many parents think it is.

2. Banks need to rein in their free-for-all student loans, it's true.

Even if it means they can't go to college. I'd rather NOT go to college (and perhaps a trade school) than to be saddled with a $200k debt with a job that pays minimum wage

3. Basic finance needs to be taught. Just simple budgeting, tracking expenses... this should be a mandatory class in high school

Duchesse said...

Are there data re Harvard grads with no job to show (once one disqualifies personal issues)? I'm all for full disclosure of actual cost of a debt, and there are many web sites where, if you plug in the numbers, you can get the actual cost of any loan.

Good for you, Frugal, for writing!

Funny about Money said...

I saw that article this morning. It's an interesting development.

No question that some people were abusing student loans by declaring bankruptcy shortly after graduation. However, the response to that is pretty draconian, punishing everyone and putting students who have been lured into pursuing degrees at questionable institutions into untenable predicaments.

One of the reasons my son hesitates to pursue an MBA, even at a state institution, is that he dreads being locked into $40,000 to $100,000 of debt with no credible prospect of decent jobs awaiting him. Eighteen months ago, his roommate and the roommate's girlfriend graduated from the Thunderbird School of International Management, one of the top-rated business schools in the world. Neither has a job.

Thunderbird is famed for its efforts at finding jobs for its graduates. When the two young people went to a jobs fair on the campus, they and their classmates were told by company after company that no one was hiring -- that reps had come only because they had contracted to do so before the crash and couldn't back out of it.

The roommate is independently wealthy and paid for his degree in cash. The girlfriend, daughter of a single mother in a blue-collar job, is now saddled with $2,400/month payments. At the moment she's making a seasonal income harvesting marijuana in northern California.

Lucrative, no doubt, but it'll be hard to explain to the feds where she's coming up with the cash for the loan payments.

What we have here are people with tens of thousands of dollars of debt incurred to buy worthless graduate degrees, some of them from real schools with high-quality reputations.

My son is now apparently in FB's camp: rather not go to college (well, graduate school) than be saddled with a ton of debt and a job that pays no better than the dreary plod he has now.

Revanche said...

*sigh* Internet + blogger ate my comment.

I'm opting out of grad school until there's a compelling argument for a reasonable ROI, ie: a job that pays more than I can make now without it, or more job security than I have now (not much).

People truly need to better consider the worst case scenarios and stop pinning their hopes on the outcomes of promises that can't possibly be enforced.

Terri said...

I have colleagues with outstanding student loans larger than a home mortgage. Some of them continue to go to a way to postpone repaying.

Gone Broke said...

You know, I wish I was in the camp that looked at the financial situation before deciding on where to go to college. But what about those who realize they are getting themselves into an unreasonable amount of debt in the middle? There are perks in terms of facilities and recruiting (and internships which can lead to jobs). And is it worth transferring to a state (and I live in a state with a not so great school system) school after already going into so much debt?

I agree even after doing it that it is foolish to take out massive loans on the promise of a high paying job. But that promise does get more likely if you go to a school well known in its field.

So is it worth it to go $200,000 K into debt for a religious studies degree? Probably not. But if you want to go into say consulting or investment banking...

Frugal Scholar said...

@FB--I do think a lot of the "ambitions" are implanted by the parents! Banks are encouraged to overlend b/c the loans can't be discharged through bankruptcy. They have nothing to lose.

@Duchesse-It's not the Harvard students I worry about, but the ones that go to pricey schools w/out the name recognition.

@Funny-You are right--Draconian. Plus, the banks have no reason to say no. And so the schools raise their rates in response to the ready availability of money. Hope your son gets to do something he least a little.

@revanche--I don't necessarily measure ROI in terms of cash. I get concerned about people with a home-mortgage's worth of debt before they start working. (And I'm not concerned about med students, in spite of their complaints about debt.)

@Terri--So scary. I have colleagues who say they will pay off debt around the time they retire...

@Gone Broke-I've been thinking about your comment and will write a post JUST FOR YOU.