The state of the economy over the past few years has called into question our cultural love affair with debt of nearly all types. The once unassailable notion that home mortgages in nearly any type and in almost any amount were “good debt” has all but crumbled. A mailbox stuffed with credit card pre-approvals – once seen not only as evidence of a sterling credit rating but also as a symbol of our status as solid citizens – is now considered a temptation on a magnitude not seen since the infamous apple caper in the Garden of Eden – resist we must! Could student loan debt be next?
Reversals in the job market and collapses in asset values have all served to bring home a point that seemed to be virtually ignored in recent decades: debt has to be paid back!
As had become our happy little way, debts were seldom extinguished outright by full payoff in the time honored way, but rather by rollover, consolidation or the sale of the securing assets. When those avenues are exhausted we’re left with two unpleasant options – payoff or default. OUCH!
Not all debts are created equal
But what about those most sacrosanct of good debts, student loans? What have we learned about those, or have we learned anything?
Placing the Blame as Students Are Buried in Debt (Yahoo Finance via New York Times, June 1, 2010) reported that students and “their families made borrowing decisions based more on emotion than reason, much as sub-prime borrowers assumed the value of their houses would always go up.”
The article focuses on the plight of a young woman whose carrying $97,000 in student loans but has been unable to find employment in her major field of study since graduating from New York University in 2005. While this might seem to be an extreme example, it goes on to report that “10 percent of people who graduated in 2007-8 with student loans had borrowed $40,000 or more”.
I’ll go a step further and say that those numbers understate the problem since college related indebtedness frequently originates outside of direct student loans, in the form of credit cards and second mortgages taken out by parents to cover some of the costs of educating their children. Students themselves often leave college with substantial credit card debt used for expenses not covered by student loans themselves.
OK, we can all agree that student loans aren’t like other debts in that they can facilitate the preparation of young people for survival in a complex world; but does that mean that they operate outside the realm of economics or the limits of good sense?
There are three rarely discussed aspects of student loans that make them potentially very dangerous debts to have:
- they’re unsecured
- they’re long term, and
- they generally can’t be discharged in bankruptcy.
Now if you land in a well paying job related to your degree right after graduation you may not give these caveats much concern. But in the highly uncertain employment environment we’re in now – and have been for the past several years at least – should we be paying as much attention to the pitfalls of student loans as we now see as only obvious with excessive credit card debt and no income verification and sub-prime mortgages?
The entanglements listed above are complicated by the fact that there are few qualifying safeguards in place with student loans – a student can borrow almost as much as needed, and do so without any form of qualification. They’re loans based exclusively on the borrowers future potential – isn’t that the same mindset preceded the mortgage meltdown?
It’s usually not until after the fact, when problems have clearly manifested themselves, that we see what was plainly staring us in the face all along. Only then do we ask ourselves the oxy-moronic question “what were we thinking?”—oxy-moronic because we weren’t thinking at all!
What are your thoughts on student loan debt?
Here are some questions for you…
- How much student loan debt is enough? How much is too much?
- Should there be some sort of metric to limit how much money a student and their family should borrow in order to finance a college education? With mortgages for example, the rule of thumb for decades was “28/36”—primary monthly housing expense should not exceed 28% of stable monthly income, primary monthly housing expense plus other recurring debt should not exceed 36% of stable monthly income. Should there be some sort of limiting guideline in relation to student loans?
- Have we reached the point of diminishing returns on a college education, that the state of the economy and of the job market no longer justify the cost of attendance at many colleges?
- Have student loans been driving the explosion in college costs, fueling a non-stop Catch-22 we’re bound to lose?
- Are there alternatives to high cost universities and high student debts that could be considered?
- Is it possible that student loans are acclimating college students to a lifetime of indentured servitude?
Am I off base with these questions? What do you think?