This feature story revolves around private student loans and was posted on WalletPop this afternoon. Commenters to posts like this usually fall into one of two camps. One camp is the blamers, who usually start with something like this: "I do do not feel sorry for the situation you placed yourself in. borrowing 40 some odd thousand dollars for an ENGLISH degree!!!!." The other camp are what I might call the empathetic types who open their comment with: "I am in a similar situation to the author..." My interest in stories like this is twofold; what lessons can be learned to assist others and what are their longer-term solutions that can be implemented to minimize cases like this in the future.
The first point to make is that this loan occured during a time in which one student loan executive admitted was "a bad lending bubble" which this lender inflated with over $5 billion of loans to high-risk students. The private loan market has overcorrected to the point now where this same lender is making loans to borrowers with average FICO score of 750 with cosigner rates north of 90%. So, I suspect there will be fewer stories like this based on loans being made today since underwriting criteria have become so much more stringent. The problem is that for the loans in this $5 billion portfolio of "non-traditional" loans (what a sweet sounding euphemism for what others might call subprime) that are now in repayment, have already charged-off at a rate over 30%. Individual stories like this one on WalletPop bring a human side to the statistics.
So, if I was to present this story to a group of high school seniors and ask them what they learned from it, I would hope they might come up with a list like this.
- A trifecta of warning factors: first in family to go to college, immigrant and minimal parental support
- Never asked for help in figuring out her financial situation
- Worked full or part-time but still borrowed $43,000 in private loans
- Unsure how much in federal loans she took out
- Learned how quickly interest accrues on a 9.5% loan
- Only takes about 5 years including an in-school period and other deferments/forbearances to increase the amount owed by 50%
- Wait until interest rates rise for these loans to become ever more challenging
- Learned that postponing payments on a loan doesn't come without a cost
- $150 fee for each three month period
- In hindsight, would have made a different decision: "I should have probably gone to a cheaper college or a community college (and gotten a degree in something other than English)."
So, how do we avoid a situation like this in the future? With many states now adding financial literacy to the list of high school requirements, I want to go a step further and develop a more specific goal: Require all students to complete a Higher Education Financial Plan (HEFP). The benefits of this requirement are twofold: require students to think longer-term rather than just how they are going to pay for the next semester and getting students and parents to talk about what can be a difficult topic.
I am reminded of a very simple spreadsheet that my brother (the engineer) sent me as his daughter was in the process of deciding about colleges several years ago. This spreadsheet listed several colleges she was considering and projected how the costs of attendance would increase over the four years while also listing all the available sources of funds (scholarships, grants and loans) that she would have available to her. It was basic but very effective in answering the question that all students should be asking BEFORE they enter school: How much debt am I likely to incur when I graduate?
Once a student has that answer (and they should probably run several scenarios to get a range of answers), it is then easy to compare that figure with the average salary for graduates at that institution. I would be careful about giving too much credence to projected major at a four-year program since most students seem to change majors at least once. Once the students have developed their financial plan from the bottom-up, you now have a teachable moment...and if that wasn't enough, this class should also discuss case studies of what can go wrong (think "Scared Straight").
So, what do you think? Another crazy, pie-in-the-sky idea or something that would help students and families make better decisions. I for one am tired of hearing "If I only knew then what I know now." Let's teach them now! Why wait for states to implement new requirements, let's develop an on-line course that goes further than any of the commercial products out there today? Any takers (or any sites that I should take a look at)?
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This survey of high school students demonstrates the generalized concern most students have about debt levels and yet few (only 20%) are crunching the numbers to know how much they will need to graduate:
"Student loans loom as both a major source of funding and a cloud over their futures. Sixty-six percent are either definitely or possibly taking out loans and are expecting those loans to cover sizeable portions of their higher education costs: 41 percent of this subgroup expects to borrow one-quarter to one-half, and 30 percent expect to borrow more than half of their higher education costs. Most of these students taking or considering loans are already concerned about their debt burden after college (60 percent "definitely yes" and 31 percent "possibly concerned"), and nearly one-third (29 percent) of them expect to take between 6-10 years to pay if off.
The majority of students have not done their homework: 68 percent have not researched any type of student loan. Of the 66 percent who are taking out or considering loans, 80 percent has not projected the total amount they will need to graduate, and 82 percent hasn't calculated the monthly loan repayment amount."
This concept of "The Number" makes me think of that annoying ING commercial where the adults carry their number around; that is the number of dollars they need to retire. Might be an interesting PSA for high school students: Know Your Number. The amount of debt you will need to graduate from college.
Yes, actually...I have a suggestion for you. Why not make your interest in this subject THREE-fold, and include solutions for borrowers who are in serious financial crises due to private student loan debt. Seems like suddenly there is a lot of interest in future borrowers, but no one is speaking up for currently defaulted private student loan debtors. The so-called advocates are absent on this subject, as is our President, Congress and everyone else who takes in cash from Sallie's lobbyists, who, by the way, literally wrote the 2005 law that took away the consumer's right to discharge these usurious loans in bankruptcy.
Posted by: Anon | February 25, 2010 at 08:57 PM
Are there any examples of a "HEFP"? It's a great idea and we'd like to include a modified version in materials we use working with middle school youth.
Posted by: Joe Booth, ALL Student Loan | February 26, 2010 at 08:00 AM
It's a stupid ridiculous student loan bubble. So many hundreds of thousands if not millions of students are bogged down with student loans. It will bog down our economy for years to come. These people are supposed to be our country's future spenders and instead it's all going to pay interest on student loans. That bodes very poorly for housing, cars, vacation travel, second homes, private elementary schools, etc.
Furthermore, as a side note, I'm the only person I know who is substantially prepaying his student loans. I'm not joking. I graduated law school 7 years ago with a combined student loan balance of $180,000! My first job paid $45k and now I make $77k. My student loan balance has been reduced from $115,000 in seven years. That seems like not very much but I know people my age with their student loans still in forbearance!
I live in an $800 a month apartment, and I rarely eat out, I drive an old car, I take few vacations, almost always local (lots of camping!); I keep a strict budget, I make all my food, I use the leftovers. It's amazing, I'm 32 years old, living in a college apartment and I have no money saved, only debt reduction.
How am I supposed to buy a house when I owe $115k in student loans with an income of only $77k? How am I supposed to buy a new car when my disposable income goes to prepay student loans? How does this bode for the future? And I'm one of the lucky ones here. It's a joke, talk about peak student loan debt.
The problem is that the boomers in congress have zero incentive to fix the problem. They're the same age as the professors and deans of colleges, and the managers of the funds that own the securitized student loans. They're counting on my and future students' interest payments to fund their lavish retirements.
I'll tell you, this boomer generation is going to be put into nursing homes and their children will loot every last penny they have, I have no doubts, their generation ran up the national debt, they squeezed the youngins' for every penny loans and spent every penny of it on the mcmansion in the exurb. I have no sympathy for them and I hope most of them go broke and die poor.
Posted by: Ron Tough | February 26, 2010 at 05:17 PM