Tuesday, June 9, 2009

Student Loan Defaults At Their Highest

Student loan defaults are at their highest rate since 1998, and likely will go higher. And though federal student loans offer some payment modification options, private loans are far more onerous, because even filing for bankruptcy rarely wipes out the debt.... The cost of going to college or graduate school is rising. On average, the public college experience cost a student $6,585 this school year, up 6.4% from last year. Private tuition costs $25,143 on average, up 5.9%. - USA Today
I actually think the cost is much higher. Tuition might be $25,143 on average - but add in the cost of room and board and books and you are staring at some pretty big numbers after 4 years of college.

This is really sad. Our kids are saddled with such enormous debt after college. But on the other side of the coin - they should have fully understood what they were getting into, and should have had in mind that they would need a job after school to support the payment of that debt. Sadly, many kids have not done this and find themselves in a very ugly financial predicament.

Even so, others who have amassed substantial debt and have a good job after college still struggle to climb out of the financial hole that they dug. They become what is now known as "Poverty Professionals". They make a good living - but basically work to pay off their loans and only have a small bit left to live on. They can't afford a house or to start their own families, and many might even still have to live at home with mom and dad for quite awhile.

Kids have to choose a marketable major. Underwater Basketweaving and Contemporary Women's Literature are fine things to study, but they shouldn't expect to pay back $70,000 in loans with those majors. The jobs market is very tough, many good jobs are also being shipped overseas. Lots of kids end up not using their degree at all.

Of course Obama and legislators like Sen. Dick Durbin, D-Ill. want to reform the student loan system, but even if Congress adopts changes, it won't help the graduates who already have found themselves underwater. Sen. Durbin says he plans to re-introduce some legislation that stayed in the Judiciary Committee last year. The bill would turn back the 2005 change in bankruptcy law and allow private student loans to be discharged. So exactly how will allowing massive bankruptcies help the financial institutions in this country, or the kids who will be starting life out with a bankruptcy? Merely forgiving student loans will be a large hit to institutions that lent the money in the first place.

Another question which looms large is why is college so expensive to begin with? Perhaps if so much government loans weren't dispensed so freely - which actually enables higher college price tags - the cost of college would come down. Colleges would drop tuition if no one could "afford" to pay the fees. Some people believe that the government wants college to remain unaffordable so that kids will go join the army. Indeed many kids go into the army just to get the tuition benefits.

Many kids are simply opting for cheaper college choices such as community college - or they are skipping college all together. There's some financial wisdom in those choices too.

The bottomline is that if you are planning for college, you'd better consider how it will be paid for, and not just rely on accumulating debt. If you are going to rely on debt to finance your way then you better have a well paying field of study and plan to have credentials that you can use to pay back that debt later on.

Student debt is yet another bubble that is in the wings and will affect our financial institutions at some point, especially if these kids cannot find suitable employment. As far as the stupid Obama summer jobs program, it is not even a worthy short term band-aid solution to really help recent college graduates across the country - because it doesn't help everyone.