College Loans and Defaults
I had a discussion recently with GoLocalProv.com writer Dan McGowan after his article on college loan debt and we got onto the topic of whether that debt might ever be dischargeable through bankruptcy.
I do think we’ll see a time when bankruptcy clears out loan debt and if Obama returns to the White House, he could be the one to do it. But it’d be wrong.
With everything else in bankruptcy there is something tangible to repossess when the payments stop, whether it is a house or a car. One obvious exception is credit card debt. That’s the risk that those banks take and they hedge that risk with the ridiculous interest rates on slow payers. That covers the defaults and write-offs from people using plastic.
If someone gets an education and can walk away from the debt through bankruptcy, why would anyone pay for college? You have the diploma, you have the education, you have the knowledge, what can they take away from you? They can’t make you “unlearn” those things. Sure, they can deny you ever attended, but a smart employer doesn’t care about diplomas. All they should care about is “can you do the job?”
The problem and the fix is on both sides. Students and families need to do a better job thinking about what they’re doing and finding the right value. I don’t just walk into the Ferrari dealer and sign the note and take the car. I actually think about whether I can
afford the payments on the Ferrari, or do I actually need to get a Chevy? Too many people go for the Ferrari cost of education when all they can afford is the Chevy. At the same time, I want schools and banks to make the student sign something showing what the repayment will be, even from day one.
For example, let’s say for fall of freshman year, I need to borrow $10,000. That’s pretty small to pay back, maybe $60 a month. No big deal. But what if I need to borrow that for the next seven semesters, or maybe a little more to cover the increased cost that the
school is charging. Maybe when I graduate, my real monthly cost will be $500 or $600 a month. Students need to know that going in. I should probably even know that before I matriculate. If I know what my need is to attend each college and I can calculate what the final monthly payment will be, will I be able to afford that? Can I get a job in the field that will pay me that?
Do I really want to get a bachelor’s degree in Medieval Studies and have a $700 a month college loan bill, along with rent, car loan, insurance and some of the other things like an iPhone and the ability to go out on a Friday night? What do those jobs pay? Are there any jobs? That all should be taken into account, but rarely is. When I took out my college loans, I had no idea what my final monthly debt would be.
Lastly, I also see an attitude in some of these articles about the hardship that these college graduates and other former attendees. Some have an attitude that they’ll “never” be able to pay back the entire loan. I’ve even read this kind of attitude from people who owe $20,000 or less. Seriously? That’s a car loan. A car loan is normally paid back in five or six years. College loans give at least ten and have a lower interest rate. Anyone with the attitude that it’s impossible to pay back a $20,000 college loan really never should have gone in the first place and likely never had any intention to pay it back.
Now that I and most of my friends are in our forties, many of us are finally getting out from under our college loans. Yeah, it’s taken about twenty years for some. That’s how long it can take. That’s the deal we agreed to. It might not look like you’re making progress by sending that $500 a month out and the balance seems to never drop, but it does. (Just wait until you get a mortgage if you want that kind of depressing monthly update!)
Presumably, you went to college to get an education that you’ll use to make money for forty years or more. To use ten to twenty years to pay for it sounds like a pretty good tradeoff. Things don’t just happen overnight.