The Student Debt Dilemma
January 8, 2009
Pedro de la Torre posts a trailer for a new documentary called Default:
I think the current student loan situation is uniquely dangerous for a few reasons.
First, I am fairly convinced that high school seniors are unable to make rational decisions about where to attend college because they suffer the problem of imperfect information. High school counselors push students to attend the most elite schools so that the high schools can market that fact themselves. When students visit different campuses, they go on cheesy guided tours; maybe the attend a freshman lecture or spend the night in a dorm, but the visit is a far cry from spending the next several years on that campus. Most high school seniors simply have no idea what they want to do for a career; I am sure there is a statistic that shows a huge percentage of undergraduates change their major multiple times. Upon graduation, some students will claim to have loved the time they spent at a particular school, others will have hated it, and a few will have transferred elsewhere. High school seniors may think they are making informed decisions, but in many cases it may be no more than a roll of the dice.
Second, high school students have little (if any) understanding of personal finance. Our schools fail to teach students the very basics about money; high school students typically work at minimum wage service jobs, if they work at all; and some see borrowed money as "free money" rather than a serious liability (as additionally evidenced by the excessive use of credit cards by college students).. The ability to understand the consequences of paying back these loans four or five years down the road seems nearly impossible. Plus, a person's career choice significantly impacts their ability to pay back these loans. Before the days of subprime and alt-A mortgages (and hopefully again in the future), whether you were a lawyer or a fire fighter made a significant difference in how much and and what interest rate you could borrow. Of course, since many students don't know whether they will work to become a chemical engineer or a middle school English teacher until well into their undergraduate education, the ability an appropriately assess the risk of borrowing is incredibly difficult.
Third, our parents never learned the hard way. Baby boomers and early Gen-Xers attended college at a time when tuition was cheap and government grants covered much of the rest. It wasn't until after they graduated that taking on significant debt became the norm. But even in the early days of student debt, an undergraduate degree meant the ability to earn more than enough to pay back the loan in a reasonable amount of time, and maybe even enough to take out a home mortgage and an auto loan to boot. Only recently has tuition skyrocketed and real wages remained stagnant to the point where the burden for some has gotten completely out of control. So while those interviewed in the documentary trailer may be able to influence where their own children go to college based on their own experiences with debt; our parents simply never lived it.
A lot of debates over the mortgage and housing crisis and government bail-outs center around the question of whether borrowers were deceived, tricked, or just plain bad at assessing risk. The irony, of course, is that mortgage borrowers should be (theoretically) more mature and more able to understand their ability to pay back borrowed money; but even if they can't, refinancing and bankruptcy at least provide options in a worse case scenario. Student borrowers, on the other hand, many of whom are only 17 or 18 years old at the time of the most important decisions, more or less get to choose their financial fate, and as the documentary trailer shows, some were not particularly good.
I think the current student loan situation is uniquely dangerous for a few reasons.
First, I am fairly convinced that high school seniors are unable to make rational decisions about where to attend college because they suffer the problem of imperfect information. High school counselors push students to attend the most elite schools so that the high schools can market that fact themselves. When students visit different campuses, they go on cheesy guided tours; maybe the attend a freshman lecture or spend the night in a dorm, but the visit is a far cry from spending the next several years on that campus. Most high school seniors simply have no idea what they want to do for a career; I am sure there is a statistic that shows a huge percentage of undergraduates change their major multiple times. Upon graduation, some students will claim to have loved the time they spent at a particular school, others will have hated it, and a few will have transferred elsewhere. High school seniors may think they are making informed decisions, but in many cases it may be no more than a roll of the dice.
Second, high school students have little (if any) understanding of personal finance. Our schools fail to teach students the very basics about money; high school students typically work at minimum wage service jobs, if they work at all; and some see borrowed money as "free money" rather than a serious liability (as additionally evidenced by the excessive use of credit cards by college students).. The ability to understand the consequences of paying back these loans four or five years down the road seems nearly impossible. Plus, a person's career choice significantly impacts their ability to pay back these loans. Before the days of subprime and alt-A mortgages (and hopefully again in the future), whether you were a lawyer or a fire fighter made a significant difference in how much and and what interest rate you could borrow. Of course, since many students don't know whether they will work to become a chemical engineer or a middle school English teacher until well into their undergraduate education, the ability an appropriately assess the risk of borrowing is incredibly difficult.
Third, our parents never learned the hard way. Baby boomers and early Gen-Xers attended college at a time when tuition was cheap and government grants covered much of the rest. It wasn't until after they graduated that taking on significant debt became the norm. But even in the early days of student debt, an undergraduate degree meant the ability to earn more than enough to pay back the loan in a reasonable amount of time, and maybe even enough to take out a home mortgage and an auto loan to boot. Only recently has tuition skyrocketed and real wages remained stagnant to the point where the burden for some has gotten completely out of control. So while those interviewed in the documentary trailer may be able to influence where their own children go to college based on their own experiences with debt; our parents simply never lived it.
A lot of debates over the mortgage and housing crisis and government bail-outs center around the question of whether borrowers were deceived, tricked, or just plain bad at assessing risk. The irony, of course, is that mortgage borrowers should be (theoretically) more mature and more able to understand their ability to pay back borrowed money; but even if they can't, refinancing and bankruptcy at least provide options in a worse case scenario. Student borrowers, on the other hand, many of whom are only 17 or 18 years old at the time of the most important decisions, more or less get to choose their financial fate, and as the documentary trailer shows, some were not particularly good.
You are right- Bad decisions come from bad information. Families have no idea what they're up against until junior or senior year in high school.
Because they were not prepared earlier by those who should know better, families feel there is no alternative to borrowing. It's quick, easy and painless. (They won't feel the pain until payments are due.)
Nobody seems to see the irony of a system where a federal student loan is counted as an "award" in a college aid package.
collegeloanconsultant.com
The global financial crisis and the high cost of food mean different things in different places. In those parts of the world where hunger is on the march, their impact can be measured in empty stomachs and blighted lives. That is why, during my recent visit to India, I traveled to a remote district called Chhatarpur in the central state of Madhya Pradesh (MP). I went there because I wanted to see for myself the plight of people in India’s hunger heartland.
I will be graduating college this year with virtually no loans. Why? My parents were extremely strict with me and forced me to attend one of my least desirable schools because I was offered a full scholarship. They refused to co-sign on any loans if I chose to go elsewhere, leaving me no choice but to listen. While this may not have been my first pick, I ultimately got a quality education and only had to pay a few thousand a year for some added fees.