By Professor Doom
Most people are entirely unaware of how serious the student loan problem is, so allow me to put it in context. Smoking tobacco is universally agreed to be a very bad thing to do. We have almost 38 million smokers in this country, and over 80% of smokers regret taking up the habit.
We have about fifty million people in this country with student loan debt, and round a third of them regret going to college and getting those loans.
While student loans aren’t quite as much a public concern as smoking, it’s clearly a big issue. While we’re warned literally on every box of cigarettes about smoking, and certainly told often enough about it, we get very few warnings about student loans, and certainly no warnings appear on student loan checks.
Of course, those cigarette warnings only appear due to government force. Why are there no commensurate warnings about student loans? A recent article answers this question, while looking at an extremely predatory student loan lender:
--I guess the title gives it away.
Part of what makes the student loans so deadly is their inescapability, the latter provided through government force. You can’t get out of them through bankruptcy, and even so-called “loan forgiveness” programs generally have no forgiveness for 99.5% of applicants.
New research from Adam Looney and Vivien Lee of the Brookings Institution illustrates just how out-of-control the parental loan program has grown. In 2014, the average parent borrower held $38,812 in Parent PLUS debt at the conclusion of her child’s education—an increase of more than $17,000 from just three years prior.
Wow, a 78% increase in 3 years. If that keeps up, the average borrower would have well over a billion dollars in debt in less than 60 years. I’ll leave it to the gentle reader to check my math there, but bottom line it’s very clear this can’t keep going forever, there’s just no way our economic system will tolerate loaning out a billion dollars each to thousands of people like that. I hope.
Because the federal government effectively imposes no caps on Parent PLUS lending, the program gives colleges broad latitude to raise tuition…
This is exactly the problem we have: no matter what tuition is, the loan will be made to cover it. While I’m confident this problem will be fixed before a four-year degree costs a billion dollars, what’s this “great government program” doing to people today?
Despite slower rates of repayment, parental loans actually make money for the government. Taxpayers net 13 cents for every dollar disbursed, and parent loans are the only category of federal student loans to turn a profit. This profitability is because parents pay higher interest rates (currently 7.6 percent) and are ineligible for several loan forgiveness programs that student borrowers can access.
In case the reader missed it, it’s the government that’s the predatory lender here, and it’s clear the government is making money off this. I trust now it’s clear why there are no government-enforced warnings on student loans.
This profitability is because parents pay higher interest rates (currently 7.6 percent) and are ineligible for several loan forgiveness programs that student borrowers can access.
I dispute the success of the programs alleged above, but there are a great number of ways students can delay/defer repayments of loans, the most common being simply going back to school, as well as “income based repayment plans.” Both end up trapping students in mountains of unpayable debt, of course.
Here’s the real problem with these loans:
In 2015, 18 percent of families receiving a Parent PLUS loan had an expected family contribution of zero. In other words, the federal government determines that hundreds of thousands of parents can contribute nothing to their children’s college education, and then turns around and gives those same families tens of thousands of dollars in high-interest loans.
To summarize: the government knows the parents can’t afford to pay, but loans them the money anyway. How is this not a recipe for financial disaster?
I really should mention: I have no problem with private banks making private loans to students. I think it unwise, but as long as there’s no government system forcing the parents to pay it back, I suspect many of these loans would not be made…tuition would not be allowed to skyrocket…and the loans wouldn’t be necessary in the first place.
Of course, having the government involved changes everything:
If parents fall into default, the government has the power to garnish their wages and seize their tax refunds, charging collection fees of up to 20 percent along the way. And other questionable practices abound; a New America study found that financial aid award letters sometimes do not even make it clear to families that Parent PLUS loans are loans.
If any entity but the federal government were making loans on these terms, it would be labeled a predatory lender and incur the full wrath of regulators at every level of government.
It isn’t simply that our government is a predatory lender, it’s also that there’s no way to stop it. While a business engaging in these practices would be shut down, that’s just not an option for our government (Trump’s activities aside, though his “shut down” isn’t nearly good enough for anyone with Libertarian leanings).
As always, I submit that we need to end these government loan programs, as this would do more for our citizens, and for our system of higher education, than anything else. The article knows such a helpful idea will take as much Herculean effort to implement as building a border wall:
But eliminating Parent PLUS loans with no replacement is a nonstarter in a divided Congress. It probably wouldn’t go far even under a united Republican government, given that the GOP’s 2017 proposal to overhaul the federal role in higher education did not eliminate Parent PLUS loans and still could not attract any Democratic supporters. Ending the predatory parent loan program will require compromises.
Indeed, stopping the student loan scam is a political nonstarter…but if things continue, the average loan per parent in this system will be over a billion dollars. Stopping the student loan scam may be impossible politically, but eventually it will stop in reality.
Please let it be soon.