Saturday, January 24, 2009

College and Student Loans - It's YOUR Responsibility

I would like to address an article found in the February 2, 2009 issue of Forbes and also found on The article, The Great College Hoax, is written by Kathy Kristof.

The central premise of the article is that college graduates may make higher salaries than high school graduates but the costs of college are so prohibitive that it is no longer worth it. Most importantly, to make up for a shortfall in funds, students have taken up ever increasing student loans that kill any advantages of a higher salary. Private student loan companies in particular are taking advantage of people by strapping them with a lifetime of debt that they cannot hope to repay.

For an indication of how out of touch the degree factories are with economic reality there's no need to pick on UCLA's course in queer musicology or Edith Cowan University's degree in "surf science." U.S. universities also minted 37,000 history degrees in 2006, including 852 Ph.D.s. That for a field with fewer than 500 job openings and average pay of $48,500. Plumbers, by contrast, enjoyed 16,000 new jobs that year and earned only $6,000 less than historians, census figures show.

I completely agree with this part of the article. If you are exceptionally smart, go to a prestigious school and have industry connections, you will probably do well no matter what you study in school. For everyone else, you better study something that pays well if you plan on taking out school loans.

Lacking honest input, three-quarters of high schoolers still seek to go on to college, many deluded about the financial prospects it holds, says American Institutes for Research's Schneider. "Part of the drive is the idea it pays," he says. "We need somebody making more realistic statements about the risks."

I agree again. We can start by explaining to prospective college students that taking out $100,000 in loans to get a degree in history or photography is crazy. A simple chart showing a ratio of expected starting salary against loan value would be a good place to start. I think a 1:1 ratio should be the maximum threshold. If you want to take out $60,000 in student loans you better be studying chemical engineering. If you want to study journalism you better not exceed $30,000 in loans. If you plan to take out $100,000 you better be able to put the initials JD or MD after your name.

The writer goes so far as to call the college and student loan system a "con" and the students taking out loans as "marks." She cites issues with the student loan industry, including poor disclosure of loan terms, variable rates of interest, kick back agreements between lenders and colleges and good old fashion fraud.

While I agree that college can be outrageously expensive and the student loan system is highly flawed, the writer is wildly off base in her judgment. There are plenty of ways for students to obtain a college degree with minimal funds. From the other angle, if students intend to take out big loans to fund their education, they need to be smart and realize that they have to obtain a degree that will afford them to pay off their loans. Once a student does decide to take on large loans, they then have to understand that they will have to live below their means for several years after school in order to reduce their debt load.

This reasonable amount of logic never seemed to occur to the writer. The article falls flat on its face with a cursory examination of the three alleged victims of the college and student loan "con." Let's examine each one:

Joel Kellum says he's living proof that the claim is a lie. A 40-year-old Los Angeles resident, Kellum did everything he was supposed to do to get ahead in life. He worked hard as a high schooler, got into the University of Virginia and graduated with a bachelor's degree in history.

Accepted into the California Western School of Law, a private San Diego institution, Kellum couldn't swing the $36,000 in annual tuition with financial aid and part-time work. So he did what friends and professors said was the smart move and took out $60,000 in student loans.

Kellum's law school sweetheart, Jennifer Coultas, did much the same. By the time they graduated in 1995, the couple was $194,000 in debt. They eventually married and each landed a six-figure job. Yet even with Kellum moonlighting, they had to scrounge to come up with $145,000 in loan payments. With interest accruing at up to 12% a year, that whittled away only $21,000 in principal. Their remaining bill: $173,000 and counting.

First of all, let’s do some math. Joel Kellum took out $60,000 in student loans. He and his wife graduated with $194,000 in debt. Even if we assume that he took out the $60,000 loan his first year of law school and interest started accruing right away, that still leaves roughly $110,000 in other debts. Were these his wife’s debts or additional debts of his own? Regardless, that is a lot of debt but it is manageable for two lawyers. If we assume the worse case scenario, all debts accrued at 12% so that is $23,280 in interest per year.

Kellum and Coultas divorced last year. Each cites their struggle with law school debt as a major source of stress on their marriage. "Two people with this much debt just shouldn't be together," Kellum says.

What kind of lifestyle were they living? Did they buy an overpriced house? Did they have two luxury cars? Did they pay for an expensive wedding?

[Upon starting Law School] Kellum filled out a fat packet of forms in his school's financial aid office. Weeks later, he says, he got a call asking him to sign over a check to the school without any discussion of the loan terms. Kellum complied.

Only after he graduated, and his payments came due, did he dig into the details. What Kellum discovered was that, instead of cheap government loans, the bulk of his debt was in Signature loans: variable-rate debt from Sallie Mae. Kellum's variable rate has ticked as high as 9% and his ex-wife's to as much as 12%.

Do I have this right - A law school student signed a contract without reading the terms? This guy got his education alright. How much sympathy should we have for someone who could not be bothered to ask a few simple questions and read what he were signing?

Like many grads, Kellum and Coultas hit bumps along their career paths. They deferred payments once when they were unemployed and twice more after their children were born. Each time, Kellum says, Sallie Mae tacked on fees for the delay. When he was a few days late making payments, he says, he got hit with more fees, which also accrued interest, and with a scolding.

They were both unemployed at once? I find it hard to believe that two lawyers were both unemployed at the same time for an extended period of time.

They also could have spent a few years reducing their debts and then decided to have children. I would not call deferring loans twice to have children “doing everything one is supposed to do.”

"When you're a second late, you get 20 or 30 calls," he says. "It [Sallie Mae's Signature loan] is coated as a sweet government loan, but you can get better interest rates, and better treatment, borrowing from Vito in downtown Brooklyn."

How would he know? He apparently did not do any legwork in figuring out what the terms of his loan were in the first place, let alone shop around for better terms.

I think what you have here was a couple of people who thought that law school was their ticket to riches Once they got their law degrees and their highly paid jobs they started immediately living the hot shot lawyer lifestyle. They did not examine the true costs of their debts until it was too late. What they should have done was save money and live below their high income levels for a few years to reduce their debts. Once they reduced their debt, they could begin living the lifestyle they wanted. Even with their estimated $23,000 in interest payments per year, good lawyers living comfortable lifestyles are capable of saving $25,000 a year each towards any debts. If they did this for 3 years after graduation they would have reduced their principal to about $100,000 and cut their interest payments in half.

Mindy Babbitt entered Davenport University in her mid-20s to study accounting. Unable to cover the costs with her previous earnings as a cosmetologist, she took out a $35,000 student loan at 9% interest, figuring her postgraduate income would cover the cost.

Instead, the entry-level job her bachelor's degree got her barely covered living expenses.

She has a degree in accounting and could not find a respectable paying job upon graduation? Accounting is one of the most sought after positions for employers. Accounting is also typically listed in the top ten majors for starting salaries for new college graduates. $35,000 in loans at 9% is only $3,150 a year in interest payments. Nothing to scoff at but certainly affordable for an accountant.

Babbitt deferred loan repayments and was then laid off for a time. Now 41 and living in Plainwell, Mich., she is earning $41,000 a year, or about $10,000 more than the average high school graduate makes. But since she graduated, Babbitt's student loan balance has more than doubled, to $87,000, and she despairs she'll never pay it off.

So she first deferred loan payments and then she was laid off? Why did she defer her loan payments while still working?

"Unless I win the lottery or get a job paying a lot more, my student debts are going to follow me to the grave," she says.

I agree. With $87,000 in debt at 9% interest she is now racking up $7,830 a year in interest payments. With $41,000 a year in income, she will have a tough time just making the minimum monthly payments.

According to this article the average entry level salary for an accountant is now $47,413. It looks like this woman lives in a low cost area of the country, so her salary might suffer some, but I do not see how she is making $6,000 less than entry level accountants. She is doing something very wrong.

Tracy Kratzer, 27, enrolled in the International Academy of Design & Technology in Orlando, Fla. in 2003. With visions of making big bucks as a Web designer, she didn't give much thought to the interest rate on her loan from Sallie Mae, the Fannie Mae of student lending.

The premises are preposterous. First of all, web designers can do well for themselves but big bucks is rare. Second of all, if you want to design websites you do not need a degree. Lawyers and accountants need a degree - web designers just need to learn the trade. Anyone can start their own website using Google blogger and have a site up and running in ten minutes with zero programming or publishing experience. Best of all, it is all free!

I built my first website in eighth grade. This was back in the early days of the web so you had to at least learn HTML and pay for a domain name and hosting or else be stuck with a horrible editor. Nowadays the technology is far better and the ease of building a site is remarkable. This site is a good example. I can produce it in my spare time, I make a few bucks on ads and my fixed costs are precisely zero dollars. There is still a lot to learn to become an expert web designer but there are free resources on the web to teach you how to build almost any type of website.

Shortly after graduating with an associate of arts degree, she discovered that the high-paying jobs she'd hoped to qualify for go to people with bachelor's degrees and years of experience. After a bout of unemployment, when she lived off credit cards, Kratzer recently found an hourly job as a clerk at a magazine, where she earns less than the average high school grad. In the meantime her $14,000 student loan has mushroomed to $27,000--more than she makes in a year--and continues to accrue interest at 18% a year. She says collection agents for Sallie and others hound her to hit up relatives for the money she owes.

If you have student loan debt you need to find a job as soon as possible after graduation. Turning to credit cards to tide you over until you land that dream job is suicide.

Which high paying jobs was she hoping for? If she was applying for software engineering jobs, then yes she is shut out of the industry because she probably has little real programming ability. If she was applying for web design jobs, she needs to have a portfolio of websites to show off her skills. Did she build her own sites to show off to prospective employers? My guess would be no. At the least, she could be working her current job and in the meantime building her own websites. This would allow her to show off her skills to prospective employers or develop a second income stream.

These three examples of victims are preposterous. If these are the best examples that the writer can come up with then it takes away from the arguments made in her entire article. I actually agree that the student loan system is deeply flawed but in many cases “greedy lenders” are scapegoats for individuals making poor financial decisions.

I accept hardships brought about by illness, family problems or gross lender fraud as acceptable excuses for getting into financial trouble with student loan companies. In these cases, I think it is reasonable for the individual to be able to file for bankruptcy and to have a portion of the debts removed by a judge. Most other cases come down to personal responsibility. In the end, it is your life and you are responsible for making the right decisions or you will suffer the consequences. No college, government or other external entity can possibly protect you from yourself.


Anonymous said...

The private education loan industry exploded after Congress designated this type of loan as impossible to bankrupt. The predatory lenders saw the guarantee opportunity and now we see ads on television for "$40 thousand dollars for any college student."

There is no requirement for these lenders to tell their borrowers about low cost federal loans. There is also no signature required from the college financial aid office. The student simply calls an 800 number, gets a check in the mail and never talks to anyone who is truly interested in his or her education.

Add to this that Congress continually increases the federal loan limits and decreases the grant dollars and you have a debt ridden generation of college students. Professions important to our country's public policy (teaching, nursing, child care, law enforcement) are slated to receive debt cancelation related to years of service -- but Congress leaves those programs unfunded.

It is not enough to SAY that college education is important, Congress is going to have to DO something and do it soon.

Anonymous said...

I agree except on one point:

I am a big personal-responsibility hawk, I assure, but the credit-driven education business has made an education possible, but far more burdensome than previous generations.

I refuse to accept the idea that exiting college with massive debt is a good thing.

The victim-parade in the article takes away from the real point that IS TRUE:

College is priced too high for the value it gives, and this must change.

And it will. Just as people are repricing in their mind how much real estate is worth, that same thing will happen to college.

Prices are headed down, of that I am certain.

We hit peak debt - people aren't in love with borrowing any more.

Anonymous said...

Weren't all the people in the article also in that faked-up Student Loan Scam book? I am so tired of reading sad sack stories of people who didn't mind their business, and lived beyond their means. Wishful thinking is NOT an effective financial plan!

The facts are that our goverment is out of the funding- higher- education business, and families are in it. And if they didn't save or if they refuse to spend their savings, then they have to take loans. Or, skip college, it is not for everyone.

SoYouThinkYouCanInvest said...

Anonymous 2 said...
College is priced too high for the value it gives, and this must change.

And it will. Just as people are repricing in their mind how much real estate is worth, that same thing will happen to college.

I think this is inevitable. College costs have outpaced inflation and incomes by a great amount and this cannot continue forever. The very top schools will probably be able to maintain high tuition but the middle of the road private schools are probably the biggest losers.

Anonymous 3 said...
Weren't all the people in the article also in that faked-up Student Loan Scam book?

Faked-up student loan scam book? Anyone want to shed some light on what this is?