College-Loans Consolidation: Why It Will Be Needed

Wel­come! Want to get your web­site on the top of Google? Visit My SEO Soft­ware! See Sam’s rec­om­men­da­tions on the Mid­dle East, eco­nom­ics, dat­ing, and more as well!

The Wall Street Jour­nal reports on a trend in pri­vate debt that will no doubt esca­late dur­ing the Great Reces­sion with­out sig­nif­i­cant college-loans con­sol­i­da­tion:

When Michelle Bisutti, a 41-year-old fam­ily prac­ti­tioner in Colum­bus, Ohio, fin­ished med­ical school in 2003, her student-loan debt amounted to roughly $250,000. Since then, it has bal­looned to $555,000…

Unlike other kinds of debt, stu­dent loans can be par­tic­u­larly hard to wrig­gle out of. Home­own­ers who can’t make their mort­gage pay­ments can hand over the keys to their house to their lender. Credit-card and even gam­bling debts can be dis­charged in bank­ruptcy. But ditch­ing a stu­dent loan is vir­tu­ally impos­si­ble, espe­cially once a col­lec­tion agency gets involved. Although lenders may trim pay­ments, get­ting fees or prin­ci­pals waived sel­dom happens.

Yet many for­mer stu­dents are try­ing. There is an esti­mated $730 bil­lion in out­stand­ing fed­eral and pri­vate student-loan debt, says Mark Kantrowitz of FinAid.org, a Web site that tracks financial-aid issues—and only 40% of that debt is actively being repaid. The rest is in default, or in defer­ment, which means that pay­ments and inter­est are halted, or in “for­bear­ance,” which means pay­ments are halted while inter­est accrues. (empha­sis added)

Read the part in bold this way: 60% of student-loan debt is not cur­rently being repaid. That’s a majority.

Think about the con­se­quences while I go into the history.

First, my gen­er­a­tion — and likely the one before and after mine — was told repeat­edly through­out our lives that we must go to col­lege to become suc­cess­ful. Par­ents, teach­ers, and guid­ance coun­selors told us that no mat­ter what the cost, it will be ben­e­fi­cial in the long run. Fair enough. But this led to a vast increase in demand, which was one fac­tor that led to the sky­rock­et­ing cost of college.

Sec­ond, uni­ver­si­ties started com­pet­ing with each other to attract prospec­tive stu­dents. They built high-tech dor­mi­to­ries, fancy cafe­te­rias, and sports com­plexes to increase their attrac­tive­ness. And all of these came with a price that was passed along to stu­dents despite the vast hold­ings in endow­ment funds that most col­leges have.

Third, the fed­eral gov­ern­ment — directly and through inter­me­di­aries like banks — guar­an­teed loans to stu­dents who were accepted into uni­ver­si­ties. The last time I checked — when I took a loan for my M.B.A. pro­grams — under­grad­u­ates could bor­row up to $7,500 a year and grad­u­ate stu­dents could bor­row up to $20,500 a year in fed­eral loans. Any remain­ing bills would need pri­vate loans or fam­ily contributions.

Now, imag­ine that you’re the pres­i­dent of a uni­ver­sity. You want to increase your prof­its. You know that each stu­dent could eas­ily bor­row tens of thou­sands of dol­lars a year with a few clicks of a mouse. What would you do? Increase tuition — because you can, after all. (And as jour­nal­ist Anya Kamenetz notes, peo­ple are increas­ingly upset at the cost of col­lege.)

Each of these fac­tors — an increase in demand, increased costs, and the avail­abil­ity of easy loans — led to uni­ver­si­ties rais­ing tuition at rates that far sur­passed inflation.

Fam­i­lies were increas­ingly unable to pay for tuition, so either they or the stu­dent took out stu­dent loans. Uni­ver­si­ties said that all stu­dents who were accepted would receive finan­cial assis­tance — but they neglected to empha­size that the assis­tance would gen­er­ally take the form of loans (which need to be paid back) rather than schol­ar­ships and grants (which do not). Besides, my gen­er­a­tion entered col­lege dur­ing the eco­nomic hey­day of the 1990s, and few peo­ple could have seen the hard times that would begin in 2001 and con­tinue through through today. Large loans with low interest-rates? What could be the prob­lem? It likely took a finance degree to fig­ure it out.

At a time of intense unem­ploy­ment and lower wages for those who have jobs, here is what the WSJ arti­cle describes as the end result:

After com­plet­ing her fel­low­ship in 2007, Dr. Bisutti jug­gled other debts, includ­ing her credit-card bal­ance, and was hav­ing trou­ble mak­ing her $1,000-a-month student-loan pay­ments. That year, she defaulted on both her fed­eral and pri­vate loans. That is when the “col­lec­tion cost” fee of $53,870 was added on to her pri­vate loan.

Mean­while, the vari­able inter­est rates con­tinue to com­pound on her bal­ance and fees. She recently applied for income-based repay­ment, but she still isn’t sure if she will qual­ify. She makes $550-a-month pay­ments to Wells Fargo for the two loans she hasn’t defaulted on. By the time she is done, she will have paid the bank $128,000—over three times the $36,000 she received.

She recently entered a reha­bil­i­ta­tion agree­ment on her defaulted fed­eral loans, which now carry an addi­tional $31,942 col­lec­tion cost. She makes monthly pay­ments on those loans—now $209,399—for $990 a month, with only $100 of it going toward her orig­i­nal bal­ance. The entire bal­ance of her fed­eral loans will be paid off in 351 months. Dr. Bisutti will be 70 years old.

Of course, these are extreme exam­ples (which jour­nal­ists love). But the fact remains that, as I men­tioned ear­lier, a major­ity of student-loan debt is cur­rently not being repaid. Banks are suf­fer­ing from bad mort­gages and credit-card debt, and stu­dent loans may be the next shoe to drop. Look at the stock price of Sal­lie Mae, one of the major student-loan lenders — it has sunk from $58 in 2007 to $12 today. Finan­cial insid­ers — those who gen­er­ally know where to bet their money — know that the com­pany is fac­ing problems:

If I had writ­ten this post a few years ago, I prob­a­bly could have made a for­tune by short­ing the com­pany. How­ever, the prob­lem does not end there.

Many of Sal­lie Mae’s loans are guar­an­teed by the U.S. gov­ern­ment. When more and more young peo­ple are unable to pay their loans — as I believe they will — the fed­eral gov­ern­ment will be oblig­ated to pick-up the cost. Since the U.S. government’s present lia­bil­i­ties amount to $59 tril­lion — how much more bank­rupt will the United States become when stu­dent loans, not to men­tion other debt-bailouts in the mean­time, become a major prob­lem for the over­all economy?

This issue is just another symp­tom of the gen­eral ill­ness that has plagued the U.S. econ­omy for the past sev­eral decades: peo­ple, cor­po­ra­tions, and gov­ern­ments liv­ing beyond their means and sub­sti­tut­ing debt for the dif­fer­ence. There is no easy solu­tion for a prob­lem that is more than twenty years old. Barack Obama can­not solve it in a few years, and nei­ther could John McCain if he had been elected.

Today, opti­mists cite GDP data to pro­claim that the Great Reces­sion has ended even though the ben­e­fits would not be seen by aver­age Amer­i­cans for a long time since employ­ment is a lag­ging indi­ca­tor. Pes­simists like Vox Day believe that the United States is in the begin­ning stages of a sec­ond Great Depres­sion. I am some­where in the middle.

I would posit that the United States — if not the entire West­ern world — is in the mid­dle of the Great Delever­ag­ing. If the macro­eco­nomic prob­lem of the past few decades has gen­er­ally been an over­abun­dance of debt, then the only cure will be the oppo­site. This process will be chaotic with ups and downs, and it will occur over years, if not decades — but it will occur. (I do not want to be intel­lec­tu­ally dis­hon­est — I have heard the term “Great Delever­ag­ing” some­where before. I just can­not remem­ber where.)

The long-term solu­tion is for every bad debt to dis­ap­pear, be writ­ten off, voided in bank­ruptcy, or any sim­i­lar term of choice. The entire coun­try is strapped with more debt than it can han­dle. Home­own­ers with mort­gages that they can­not repay will default. Peo­ple who used their credit cards irre­spon­si­bly will declare bank­ruptcy. Stu­dents who can­not repay their loans — like those men­tioned in the arti­cle — will stop pay­ing them when the choice becomes food-and-shelter ver­sus student-loans. I am not assign­ing blame — and there is enough to assign to con­sumers and busi­nesses alike — I am merely stat­ing the real­is­tic outlook.

But the worst-case sce­nario is that bank­rupt, state gov­ern­ments — and per­haps even the U.S. gov­ern­ment — may have to default as well. And this would start a domino-effect that may lead to unknown night­mares. Still, just like an alco­holic might need to pass out and almost die in an alley before seek­ing pro­fes­sional help, per­haps the United States needs to hit rock-bottom before real­iz­ing its own addic­tion (to debt).

Now, what would be result of a mass-reset of the debt held by U.S. con­sumers, busi­nesses, and gov­ern­ments? One of the first things I learned in my jour­nal­ism career was that one must “fol­low the money” to get to the bot­tom of a story. So, to whom exactly, does the coun­try as a whole owe money — and what would be the effects of any unfortunate-but-necessary defaults? That’s for a future post. (Stay tuned.)

In the end, this cul­ture of debt — and its cur­rent con­se­quences — hurts my gen­er­a­tion the most. As Kamenetz first noted in “Gen­er­a­tion Debt,” our gen­er­a­tion — we are the same age, accord­ing to Wikipedia — are the most indebted in U.S. his­tory. This is true in the British econ­omy as well:

In the worry about the shift of resources from the increas­ingly work­less work­ing class to the increas­ingly unleisured leisure class some­thing new and impor­tant is being missed, says David Wil­letts, a Tory MP and one of his party’s rel­a­tively few acknowl­edged Deep Thinkers. It is the mas­sive and crip­pling shift in resources to retir­ing baby-boomers from the slim­mer gen­er­a­tion com­ing after them. Britain is ever more divided by age…

Young peo­ple have lit­tle chance of build­ing up sim­i­lar wealth. They are strug­gling to get on the hous­ing lad­der, though close to a fifth of peo­ple between 50 and 59 years old own a sec­ond home. Jobs for the young were get­ting scarcer even before the crash. Yet more and more older peo­ple are work­ing and earn­ing more, rel­a­tive to young work­ers, than before.

In the United States, I have pre­dicted the rise of inter­gen­er­a­tional war­fare because the Baby Boomers are not step­ping aside to let Gen­er­a­tions X and Y suc­ceed. The younger gen­er­a­tion is trapped in debt and inside a work­place cul­ture in which older man­agers refuse to retire and let those below them advance to start their own careers and families.

The entire sit­u­a­tion — from crush­ing debt to a lack of jobs — is just one rea­son why my gen­er­a­tion is quite upset.

Want to get your web­site on the top of Google? Visit My SEO Soft­ware! See Sam’s rec­om­men­da­tions on the Mid­dle East, eco­nom­ics, dat­ing, and more as well!