The fundamental goal of the Student Loan Sherpa is to be a resource for student loan borrowers. That means providing up to date insight and guidance as the rules change and evolve. It also means reporting the latest news and developments in the world of student loans.
Things get tricky as news articles age. On the one hand, these articles are a helpful resource for borrowers curious about how student loan rules and regulations came to be. The danger with “old news” is that it may contain student loan information that is no longer accurate.
The following news articles from 2013 have been retired. They have been preserved as a reference archive, but readers should know that in many cases later developments may change the accuracy of these articles. For example, since 2013, a new federal repayment plan has been created, and we now know far more about Public Service Loan Forgiveness.
As always, borrowers with any questions should feel free to ask.
H.R. 1330 The Student Loan Fairness Act – What it is and what it means for you
Originally Published March 25th, 2013
Here at the Student Loan Sherpa, our focus is about helping people manage there student loan debt in the most painless way possible. Every once in a while, news breaks that could have an impact on those dealing with student loan debt. Today I learned of once such bit of news.
Karen Bass (D) of the California-37th recently introduced legislation (House Resolution 1330 – The Student Loan Fairness Act) that would dramatically change student loan repayment, both for public loans and private loans. Her fundamental proposal calls for a 10-10 repayment plan. Under this plan, borrowers of Federal Student Loans would be expected to pay ten percent of their income for ten years. After those ten years, the debt is forgiven. It’s worth noting that there would be no public service requirement under this plan. Additionally, she calls for the public service forgiveness to be shortened from its current ten years down to five.
Bass’s proposed legislation addresses private loan debt in a couple of ways. First, it would limit the interest rate on all student loans, public and private, to 3.4%. Secondly, it “allow[s] existing borrowers whose educational loan debt exceeds their income to convert their private loan debt into federal Direct Loans.” Should this legislation pass, it would offer a tremendous amount of relief for individuals who are paying large amounts in private loans.
Finally, according to Bass’s website, the last component of the bill “promotes financial responsibility in higher education and incentivizes students to be mindful of educational costs and for colleges and universities to control tuition increases.” However, the specifics of this last component have not been explained on her website.
Though I am far from an expert on legislation (unless repeated watchings of the Schoolhouse Rock – How a Bill Becomes a Law makes me an expert), this legislation likely doesn’t stand a chance. It is currently in committee, and given how conservative the House is right now, it will probably never see a vote. Additionally, private loan lenders are currently making a fortune on student loans, so their considerable lobbying power would represent an enormous obstacle.
Opponents of the bill will likely argue that the country cannot afford to offer this much debt relief in the current economy and that this is the sort of legislation that promotes irresponsible borrowing while penalizing those who have sacrificed to pay off their student loans.
Please leave a comment if you have any thoughts on the legislation or anything questions about what it might mean for you.
The Case For H.R. 1330 – The Student Loan Fairness Act
Originally Published April 6th, 2013
The argument in favor of the Student Loan Fairness Act is not unlike those for the Wall Street and Auto Bailouts. If the government spends some money now and invests in recent graduates who are struggling with student loans, it will pay off handsomely in the long term. Right now, student loan debt continues to grow despite the recession. Student loan debt recently passed credit card debt in terms of the total debt owed by Americans.
It’s no secret that the burden of Student Loans is starting to cripple a generation. Borrowers who cannot keep up with their monthly payments increasingly face delinquencies. Not only is their huge stress associated with student loan delinquencies, but it has a devastating effect on one’s credit. People with delinquent or defaulted student loans are unable to purchase cars, get a mortgage, or even a credit card. This lack of consumer power hurts the economy.
Not only would assisting young people dealing with student loans be a boon for the economy, but many of these students were arguably duped into signing up for student loans without ever fully understanding the consequences. Given the emphasis American society places on a college education, for many students, there was no meaningful choice as to whether or not they went to school and took out loans. The escalation of college costs combined with the rise of the for-profit university has created a billion-dollar marketplace that preys upon unsuspecting 18-year-olds. The blame for the fact that this problem got as out of hand as it did rests upon society as a whole. Therefore, all taxpayers should bear some of the burden as part of the correction of these issues.
Those who say that HR 1330 is only a band-aid that does not fix the problem miss the point. Do we need to find a way to make sure that this doesn’t happen to others? Absolutely. However, a generation of recent grads is bleeding because of student loans. A band-aid is just what they need. Not only will it help them out, as a country, the United States will be better off because of it.
The Case Against H.R. 1330 – The Student Loan Fairness Act
Originally Published April 6th, 2013
The arguments against the new legislation proposed by Karen Bass (D-California) center around two main themes. The first argument is that this is the government sticking its nose where it doesn’t belong, and financing another bailout that the country can’t afford. The second argument is that the Student Loan Fairness Act is merely an expensive band-aid that doesn’t fix the problem of the high cost of a college education.
Our Country Cannot Afford H.R. 1330
One of the key components of The Student loan Fairness Act is that it limits the interest rates on private student loans and that it provides the opportunity for people to pay off their private loans with Federal Loans. From a legal standpoint, this is the government modifying the terms of a contract agreed upon by two private parties. Imagine if you sold a car to one of your friends and then the Federal Government said, “your friend cant afford the car you sold him, here is some of the money you planned on getting, but not all of it, by law your friend owns the car and owes you nothing.” This sort of activity sets a dangerous precedent and moves us one step closer to a Nanny State.
Not only is the government sticking its nose where it doesn’t belong, but we cannot afford this legislation. Right now Americans owe more in student loan debt than they do on credit card debt. Upon passage of the Student Loan Fairness Act, billions of dollars owed to private lenders would be eligible to become federal government loans. Given the generous forgiveness terms, much of the debt would never be paid off. In a way, this legislation is not much different than a politician saying, “Vote For Me, and I’ll help you pay off your credit cards!”
The fact is that our country spends far more than it brings in each year. This legislation is simply an expenditure that we cannot afford.
The Student Loan Fairness Act doesn’t solve the problem
The root problem with post-secondary education in this country isn’t that people have too many student loans (though it is a major problem), the root problem is that college costs way too much.
The Student Loan Fairness Act does not fix this problem. Today, millions of college students go to college because they feel it is a necessary step in life. They take out massive loans because it is necessary to pay for college. Only when they graduate do they realize how expensive their education truly was. Colleges and Universities are making a fortune, and it’s getting so expensive that it is nearly impossible to attend without student loans.
If the legislation proposed by Karen Bass were to become law, colleges would have no incentive to reign in college costs. In fact, they could keep increasing them. Students wouldn’t complain because most of them would never pay back the full cost of their education, the university makes a handsome profit, and taxpayers are left footing the bill.
Finally, this legislation fails to address the lack of consumer responsibility that plagues the United States. Repayment of Student Loans is something that every borrower agreed to do. They signed contracts that explained what was required of them. If the student loan bubble bursts as feared by some economists, it will be because people did not take the steps necessary to make sure they could pay back the loans. Just like the mortgage crisis, this is another problem caused by people not planning and relying on the government to bail them out. This is not the type of behavior our taxpayers can afford.
The Daily Show Weighs in on Student Loans
Originally Published May 13th, 2013
It’s no secret that many people are facing major student loan issues. Unfortunately, each year many more people will make decisions that they will regret for a long time when it comes to funding their college education. Here is the Daily Show doing what they do best:
51 Billion Reasons for Reform
Originally Published May 23rd, 2013
The non-partisan Congressional Budget Office recently released its 2013 Fiscal Year calculations, and the numbers are staggering. The Federal Government will make a profit of $51 billion on student loans for the year 2013 alone. To put this number in perspective, the most profitable company in the United States, Exxon Mobile, made a measly 44.9 billion dollars. If you combine the total profits of JPMorgan Chase, Bank of America, Citigroup and Wells Fargo for the last year you get a total of 51.9 billion dollars.
How is the government making all of this money? It’s because the student loan lending business is booming. College has never been more expensive, and the risk of default/bankruptcy on student loans is incredibly low. Even for loans that eventually default, the Department of Education estimates that they will get back between 76 to 82 cents on the dollar. In short, this is an investment with almost no risk and a fairly high upside.
Most interest rates, such as those on a mortgage, car, or credit card are based in part upon creditworthiness (the higher the probability that the loan will be repaid, the more creditworthy the borrower). Interest rates on student loans are not based upon the likelihood of repayment. Instead, they are based upon whatever rate Congress decides to set them at. At present, they are scheduled to jump from 3.4% to 6.8% on July 1, 2013.
Regardless of your politics, it’s apparent that something is wrong with the student loan system in the United States. Only the most extreme viewpoints would hold that the government should be making a huge profit when it assists the next generation to attain their educational goals. For those of you who think that getting loans through the federal government is the problem, the fact is that private loans are even worse than the federal loans.
The situation for perspective students and recent grads seemingly gets worse by the day. For-profit schools continue to appear and make money. Colleges are charging more than ever. Even the government is making a fortune on student loans. It seems everyone is getting rich except those that tried to put themselves through college.
One recent Congressional proposal is called the Student Loan Affordability Act, which is a bill to keep student loan interest rates at 3.4% for the next two years. However, it does not address the record-setting profits and is funded through highly contentious tax code changes. Other proposals seek to tie student loan interest rates to those that banks have when they borrow from the federal government. Those rates are currently set at .75%. However, this approach, proposed by Senator Elizabeth Warren of Massachusetts, applies only to certain loans and only for one year. Finally, a more dramatic overhaul has been proposed by Representative Karen Bass in the form of H.R. 1330 – The Student Loan Fairness Act. This blog has covered the advantages of H.R. 1330 and the arguments against H.R. 1330.
The sad part about the current state of events is that it appears there is no change on the horizon. Congressional bills seem to either lack substance or have no reach chance at passing. College costs show no signs of dropping. Ultimately, the current conditions require any prospective or current student loan borrower to do extensive research before making any student loan decisions.
Preying Upon Veterans: A For-Profit Scam
Originally Published May 26th, 2013
Memorial Day weekend seems like a fitting time to shed some light on a disgusting trend. For-Profit schools have been targeting Veterans for their GI Bill benefits, charging them 4x what a not-for-profit university would, and often they don’t leave with a degree or get any meaningful help finding work.
The For-Profit Problem
The issues with For-Profit schools are beginning to come to light. One whistleblower, a former admissions supervisor with the number two for-profit school corporation, filed a lawsuit alleging that the school’s employment statistics were lies. A recent government study shows that these schools charge up to four times more than at comparable community college or state university charges for the same education. Worse yet, graduation rates are significantly lower at for-profit schools than at comparable community colleges and state schools. Well over half of all students who start a degree program at a for-profit university will not leave with a degree (54% of Bachelors’s degree students and 63% of associate degree students do not graduate).
Recruiting at For-Profit universities is a huge component of their operation. For every job or career counselor, these schools typically hire ten recruiters. Visit the website of many For-Profit schools and compare the effort put into recruiting new students to the effort put into helping current students. Billions of dollars of Student Aid, in the form of grants and loans, go to For-Profit Universities. To combat the issues with these schools, the government crafted what is known as the 90/10 rule. In short, this rule requires For-Profit schools to generate at least 10% of their revenue from sources other than Title IV student aid. However, GI Bill funds are not included in Title IV funds and count towards the schools 10% outside source quota.
“Dollar Signs In Uniform”
Due to the huge financial incentives for the For-Profit school, much of their recruiting focus is placed on Veterans. Recruiters “have been known to actively recruit at Wounded Warriors centers and at veterans hospitals, where they can corner bedridden GIs and entice them with promises of free education and more.” The recruiters engage in high-pressure sales techniques and encourage Veterans to sign up for the school on the spot. In the industry, they are often referred to as “Dollar Signs In Uniform.”
Sadly, more than two-thirds of the veterans at the For-Profit schools do not graduate. They are often left with credits that do not transfer to other schools, heavy student loan debt, and they no longer have any GI Benefits remaining. Worse yet, they are left without a job.
Addressing the Issue
The men and women who bravely serve this country are often among the last to complain. To address this issue, two things need to happen. First, Americans need to spread the word; if you know a Veteran evaluating their options after deployment, do them a favor and share some information on this problem. Secondly, Congress must act to change the law so that there is no longer a huge financial incentive to prey upon Veterans.
Finally, if you are a Veteran or know a Veteran who has been affected by these devious and despicable practices, there is help available. Thanks to a partnership between the Iraq and Afghanistan Veterans of America, Scholarship America and The Kisco Foundation, Veterans can apply for up to $5,000 in loan relief from the Veterans’ Student Loan Relief Fund.
Happy Memorial Day Everyone!
Sallie Mae to Divide into Two Companies
Originally Published May 31st, 2013
This week Sallie Mae announced that they are splitting into two separate companies. One company will handle the federal student loan assets; the other will deal with their private loans and function as a bank. Two immediate questions about this news come to mind, why would Sallie Mae do this and what does it mean for the average borrower?
Why the split?
According to the CEO, who will be overseeing the federal student loan assets company, “We see ourselves as having two distinct businesses… These entities can better succeed as distinct and separate entities.” Translating this statement from CEO-speak into basic English, Sallie Mae thinks they will be more profitable as two corporations instead of just one.
Articles about the split in the New York Times and the Wall Street Journal do not shed any light on the fiscal benefits of the move. Based on the limited amount of public information about this transaction, we can only speculate about the reasoning behind the move.
Speculation #1: Different Regulations
One possible reason would be based upon regulations. With one company working as a federal student loan lender and the other as a bank, they will fall under different rules and be supervised by different federal regulators. It will be very interesting to see if and how these differences manifest themselves.
Speculation #2: The Firewall
With these two companies functioning as entirely separate corporations, the losses of one will not have any bearing on the other. This means that if one company goes bankrupt, its creditors cannot go after the assets of the remaining company. Sallie Mae could be reading the tea leaves, seeing a student loan default epidemic on the horizon, and protecting the good assets from the bad. Again, this is just speculation, and at this point, there is no indication that any of these assets are good or bad. However, if this is the basis, it could be a sign of trouble around the corner.
Speculation #3: Making the numbers look more impressive
In 2010, the federal government began eliminating the middle man when it comes to federal student loans. Before that time, federal loans would be given out by companies like Sallie Mae and guaranteed by the federal government (meaning if the student didn’t pay Sallie Mae, the government would). In 2010, the government decided to eliminate the middle man and just give the money directly to students. This move was not popular with lenders like Sallie Mae, but it still went into effect. Sallie Mae currently holds over $100 billion of these federal loans that are no longer being created. It’s a valuable asset, but they will not be getting any more.
On the other hand, the price of college continues to grow, and the federal undergraduate loan limits remain the same. The demand for private loans continues to grow as a result. The private student loan lending branch of Sallie Mae, which will be part of the second company, the bank, will be a growing asset. Currently, they do not have nearly as many private loans as they do federal loans. As the number of these private loans grows, the numbers will look much more impressive if they are not weighed down by the stagnant federal loans.
What does this mean for the average borrower?
Initially, it does not mean anything. The split is not scheduled to take place for 12 months. However, once these companies split, things will change for people who have both federal and private loans with Sallie Mae. Instead of paying just one company, and dealing with that company’s phone support, they will now have twice the hassle. Sallie Mae has said nothing about this split improving customer service. At best, it will remain the same quality that we have all struggled to deal with. In reality, things could get worse.
Another possible outcome for the average borrower is closely related to speculation number one. If the same rules do not apply to both companies, borrower’s rights could be affected, and in this case, limited. Again, Sallie Mae is becoming two companies to make more money, not less. For Sallie Mae to make more money, they must collect more from you the borrower. The exact way that this split will allow Sallie Mae to get more money remains a mystery. Until then, we are left to speculate.
Why the Interest Rate Debate Doesn’t Matter
Originally Published June 3rd, 2013
With federal student loan interest rates set to double July 1, there has been much debate over what should happen with the rate. However, the real issues facing those with student loans continue to be ignored.
The news and discussion regarding the student loan debate remind me of one of my favorite moments in Butch Cassidy and The Sundance Kid. Butch and Sundance are on the run, and they are trapped on a high cliff overlooking a river. Butch turns to Sundance and says, “lets jump.” Sundance refuses, finally admitting that he can’t swim. Butch maniacally laughs, “Are you crazy? The fall will probably kill you.”
Like the water below, the interest rates on Stafford loans are a real concern, but in the debate, we have lost track of the massive cliff that we are overlooking. In the case of student loans, there are three major problems that make up the cliff in which many Americans are perilously perched. If the government wanted to address the student loan debt crisis, they would focus on: 1) Lowering the cost of a college education 2) Helping reduce the aggregate student loan debt, and 3) Modifying bankruptcy laws to encourage responsible lending.
Problem # 1: The Rising Costs of College
A college education costs more now that it ever has before. According to the US Department of Education National Center for Education Statistics, the cost of a college education is nearly 600% more than what it was one generation ago (30 years). Adjusting for inflation, the average yearly cost of a college education in 1980 was $8,756. Thirty years later, the cost has nearly tripled to $21,657.
Not only has government funding for education dropped, but also the percentage of students attending college continues to grow. The increased demand for education and the reduced support from the government equals significantly higher costs.
Problem # 2: Massive Existing Student Loan Debt
The total student loan debt in the US has jumped to over 1 trillion dollars. That means Americans owe more in student loans than any other type of debt except mortgages. It has been argued that this massive amount of debt is the source of the next great economic crisis. Others argue that student loan debt is crushing the American Dream.
Regardless of the lens in which you look at student debt, it can’t be denied that for this generation of Americans, many are delaying things like marriage and home purchases. Not only is this bad news for the borrower who is forgoing many large purchases, but it is bad for the economy and the country as a whole. The recent recession has created a situation in which many recent grads struggle to find jobs, and those that do find jobs often find themselves under employed.
There is no shortage of student loan horror stories. Many of these borrowers are dealing with private lenders and their unforgiving terms. Nearly all of the solutions proposed, including those by President Obama, do not address the problems of private loan borrowers. For many, a slightly lower payment on certain loans is appreciated, but it is a drop in the bucket of a much larger and more substantial problem.
Problem #3: Bankruptcy Laws
While it is not impossible to discharge private loans through bankruptcy, it is exceedingly difficult and seldom happens. Not long ago, student loans could be discharged through bankruptcy after several years passed since graduation. The possibility of bankruptcy forced lenders to carefully evaluate potential borrowers before approving financing for any loan. Today, that is not a problem. If a student defaults on a loan, the lender can garnish wages and collect. There is almost no risk to student loan lenders. Even the federal government managed to make a profit of 51 Billion Dollars on student loans.
The problems associated with the lack of bankruptcy protection are very similar to those that led to the sub-prime mortgage crisis. Irresponsible lending puts the borrower in a position where it is nearly impossible to pay back their loan. In the case of the sub-prime mortgage crisis, it led to a recession. We have yet to see what will happen with student loans.
Arguments that say, “you took out the loan, you should accept the consequences” are not without merit. However, they miss two key points. First, bankruptcy laws in the US were created to give people a fresh start. If you get in trouble with car payments, a mortgage, or credit card debt, you can file for bankruptcy and work your way back. However, if you are saddled with too much student loan debt, there is no chance at a fresh start. Second, lenders are in a far better position to evaluate the risks of a potential loan. An 18-year-old recent high school grad has no idea what their earning potential is, nor do they know the risks associated with student loans. Lenders are in a far superior position to address these issues but have no incentive to be responsible due to the dangers of bankruptcy. Think about it this way, would a credit card company ever give an 18-year-old a $30,000 line of credit?
If the Federal Government were to take action to address any of the above three problems, it would make a meaningful difference for all borrowers, future and present. For example, if bankruptcy became an option, lenders would be encouraged to help borrowers find a way to pay back their loans. Better yet, if the costs of college were lowered, fewer loan funds would be necessary, and the need for bankruptcy would be lessened.
Ultimately, passage of legislation lowering the interest rates can be helpful to many borrowers across the county. But if your worries are limited to the Stafford Loan interest rates, you are only thinking about the water below. Its time to think about the fall.
The Senate Fails… Twice in One Day
Originally Published June 7th, 2013
With the interest rate of Federal Stafford Loans set to double from their current rate of 3.4% to 6.8%, the Senate voted on two pieces of legislation aimed at avoiding this rate hike. The Democrats proposed a plan that called for keeping the interest rate at its current 3.4% for the next two years. It failed. The Republicans proposed a plan that would set the interest rate on these student loans at the market rate of 10-year US Treasury Bonds plus 3%. It failed.
“I cannot understand why we have a problem with this,” Senate Majority Leader Harry Reid told reporters after the vote.
The especially troubling part of this failure of the Senate is the fact that this is one issue in which both parties agree in principle. Though their approaches are slightly different, they are not that far away from what should be an easy compromise. Let’s look at the next year as an example. The Democrats want to set the rate at 3.4%. The Republicans plan would set the rate at about 4.5% (The current 10-year treasury note is just over 2% and they want to add 2.5% to that number). If the two parties were to just meet in the middle, the rate would be set at just under 4% for the next year. Instead, because both plans failed today, the rate will increase to 6.8%.
Make no mistake, the interest rate debate is only a minor part of a much larger student loan debt problem. If the Senate cannot pass a bill when they for the most part agree, how are they going to address the issues of the millions in default? How are they going to fix bankruptcy as it concerns student loans? How are they going to make college affordable again?
In the words of Senator Lamar Alexander (R-Tenn.), “If we can’t agree on this, we can’t agree on anything.”
The Bottom Line
Student Loans are a trillion dollar problem in this county. The Federal government is making billions on these loans. For one particular type of federal loan, Democrats and Republicans actually agree: the rates are too high. The end result: July 1st the rates on these loans will double.
Thoughts and Lessons from the Interest Rates Doubling
Originally Published July 1st, 2013
It happened. There were months of debate. Representatives in the house submitted their plans. Senators offered their plans. Alarm bells about the dangers of the student loan crisis were rung. For a while, it even seemed that the democrats AND the republicans agreed that something needed to be done. In the end, nothing happened. As of today, July 1, 2013, interest rates on Federal Stafford Loans are now 6.8% – exactly double what they were just yesterday.
As I am neither a politician nor a political scientist, this entire student loan interest rate debate was a real education to me. I created this website to help people manage their student loans, and because this debate affected many of the people I seek to help, I have been a close watcher of recent events. Over the past few months, I have learned a lot about our government, its people, and the realities of the student loan debt.
Here are the lessons I learned:
- Even if all members of the Senate agree on something, it doesn’t mean that a bill will pass. Seeing how close to a consensus everyone was and how we ended up with a law that nobody wanted was especially difficult to watch.
- The change in the student loan interest rate could cost borrowers thousands of dollars. However, in many ways, it does not matter. The real problems facing higher education and funding are the high price of college and the absence of consumer protections in lending. Lower interest rates would not do anything to solve this problem.
- Last year the federal government made $51 billion on student loans. Today they doubled interest rates. Not only does this just seem like bad fiscal policy, it just seems wrong for the country to profit off of students trying to further their education. Even if you dispute the profit margin, the fact that there is a profit margin on these loans is bothersome.
- Good people are suffering because of this problem. It is devastating to see how people who seek only to live the American dream and do nearly everything right, can end up in such dire financial circumstances.
- I’ve been lucky to meet some amazing people. One of the awesome things about the internet is how fast great ideas and knowledge spread. Our government may have its flaws, but this country is full of greatness, and I have no doubt that we will find our way out of this mess.
Even thought the results were not what I would have liked to have seen, I’m looking forward to refocusing on guiding people who are trying to deal with their student loans. I’ve already begun the research on articles to help people get their loans out of delinquency status, and also for defaulted loans. I’m also working on an in depth analysis of how student loans can affect your credit and how your credit can affect your student loans.
Pay It Forward: Oregon’s Novel Approach to Student Loans
Originally Published July 10th, 2013
One of the sad realities about running a website dedicated to student loans is that much of my time is spent delivering bad news to good people trying to get by. Today is not one of those days. The government of Oregon, acting on a suggestion from students at Portland State University, has enacted legislation to create a fascinating new model that could forever alter the way college is funded. The plan is quite simple. Rather than paying tuition up front, students commit to paying 3% of their income for their first 24 years after graduation.
The Pay It Forward Plan
The Oregon Plan, appropriately named “Pay It Forward, Pay It Back” would allow Oregon students to draw from a fund to pay for their education. All that is asked of them in return is a tiny portion of their future earnings, specifically 3% for 24 years. The money paid back into the fund would pay for the education of the next generation of students. Though there would be significant start up costs (estimated to be $9 Billion), once Pay It Forward is up and running, it would be self-funding.
This remarkable solution would address many of the problems of the student loan crisis. Predatory lending would become non-existent. Sallie Mae would be eliminated from the process. Best of all, recent graduates would be more likely to afford things like a home or marriage. Such an outcome would be good for the students and the economy.
The biggest problem with this plan is that it has a long way to go before it ever sees the light of day. The fact that last week’s bill had overwhelming support in both the Oregon House and Senate is great, but all the bill did was create an exploratory committee to investigate the viability of the Pay It Forward Plan. If their findings are positive, it is possible that a pilot program could be started in 2015.
The other issue with the plan is that it would only cover tuition and fees. Students would still have to find a way to provide for the costs of housing and living expenses.
Finally, though this plan, in theory, would address almost all student loan issues, it does nothing for the people who currently owe a total of $1 Trillion in debt.
Even though the plan does not address all of the costs of education, it is a giant step forward. When the founders created a system where states acted independently of the Federal Government, they felt the states would be “laboratories of democracy.” This is a great example of a state experiment. If ten years from now, the youth are flocking to Portland to get the benefit of the “Pay It Forward” system, other states and possibly the Federal Government will follow suit.
Though this plan is far from becoming a reality, it represents tremendous progress. A small group of students has put together an innovative idea, and now it is part of the national discussion on student loans. As a nation, we now have another potential tool in our tool belt to deal with student loan debt, and we have a reason for hope and optimism about the future.
The New Student Loan Law: Its Terrible, Fantastic & A Non-Event
Originally Published July 25th, 2013
Yesterday the Senate, by an overwhelming majority (81 to 18), passed legislation lowering the interest rate on student loans. The President has endorsed the bill, and it is expected to pass in the house easily. Is this new law to be a good thing or a bad thing? It depends upon your perspective.
Just the Facts
Before the passage of this law, student loan interest rates were set by Congress. As part of the stimulus package, student loan interest rates had been lowered to 3.4%. Last year, these rates were set to expire, but Congress extended the lower rates until July 1, 2013. This year, after plenty of debate, July 1 came and went without a new law. As a result, the student loan interest rates were set to 6.8%.
Now, rather than Congress debating over the interest rate on student loans, rates will be set each year according to the 10-year treasury bond. The interest rate will remain fixed for the life of the loan. Undergraduates will be able to borrow at the 10-year rate plus 2.05% and graduate students will be able to borrow at the 10-year rate plus 3.6%. For the upcoming school year, undergraduate loans will have a 3.86% interest rate. Graduates will have a 5.41% interest rate. The bill caps rates at 8.25 percent for undergraduates, 9.5 percent for graduate students, and 10.5 percent for PLUS loans for parents who borrow to pay for their children’s college.
The New Student Loan Law is Terrible!
If you are an Eighth grader planning on going to college and the economy has a strong recovery, you will be paying a lot for your student loans. In fact, you may long for the days of the 6.8% interest rate. You could easily end up paying 8.25% on your loans, and if your parents take out loans on your behalf, they could be as high as 10.5%. That is nearly credit card interest rate territory!
Here are the projected interest rates for the next few years:
Though the above numbers are a projection that could easily change, one thing is clear. The stronger the economy, the worse this law is for college students. In short, if you are a college student in a strong economy, this law is terrible!
This New Student Loan Law is Fantastic!
High school graduates of the class of 2013, this is the law for you. Instead of being stuck with 6.8% interest rates, you will end up paying just over half that. As long as the economy continues to be stagnant, you will continue to pay low interest rates on your student loans. As someone who complained about the inaction of Congress, I am glad to see that they were able to reach some sort of compromise to prevent the rate hike.
The New Student Loan Law is a Non-Event
For the people of America who collectively owe over One Trillion dollars on their student loans, nothing has changed. Your bills will be the same, and the burden will be unaltered. The only difference is that now people in Congress may care slightly less about your troubles with student loans.
The cost of education continues to grow at a crazy rate, Congress will continue to profit off of student loans, and people struggling with debt will not get a lifeline. President Obama did mention that this was just the beginning, promising “aggressive” ideas and stating that “If college costs keep on going up, then there’s never going to be enough money.”
Respecting Great Journalism & The Best Analysis of the Student Loan Crisis Yet
Originally Published August 16th, 2013
As somebody who has both a ton of personal experience and writes extensively on the subject of student loans, I’ve taken great pride in the help and support that I have been able to provide many of you. If I take a hard look in the mirror, I’d probably have to admit to developing a bit of an ego when it comes to my expertise on the subject of student loans.
As part of my daily reading, I get a Google alert on student loans. Most days, this consists of reading about leaders in Washington without a clue, banks with no concern other than money, and borrowers who are in over their heads. Most stories are reported by members of the media who at times do a decent job of covering one aspect of the student loan crisis, but who all seem to miss the big picture. (I told you I had an ego about this stuff)
Today, I am happy to announce that a gifted writer has provided the most in-depth and comprehensive explanation of the student loan crisis to date. While I’m disappointed that it wasn’t me, I applaud Matt Taibbi of Rolling Stone for taking the time to get the facts right.
Not only does Mr. Taibbi get the facts right, but he does a fantastic job of explaining how the different issues all come together to create the giant mess that we have today.
If you or anyone you know has or is considering getting student loans, this is essential reading. If every high school student were to read this article, an entire generation could be spared the pain and heartache of being saddled with debt they never really understood.
Federal Government: Your Student Loans are Being Transferred
Originally Published August 19th, 2013
Last month the federal government announced that it was terminating the contract of one loan servicer (ACS) and transferring the loans to several different companies. A couple of weeks later, they announced that several other servicers would be transferred. (A loan servicer is a company that collects student loan bills on behalf of the federal government)
What does this mean for you?
Unfortunately, it is probably not good news. You will need to be diligent with making sure that you get credit for all payments submitted. You will also need to make sure that the new company has accurate records.
In theory, this should be an easy transfer of information, but as I have personally learned, sometimes errors are made. You can’t prevent an error, but you can make sure that an error doesn’t cost you any money.
It’s not clear exactly how many borrowers will be affected by these transfers, but you can be sure that some people may try to take advantage of this situation. Make sure that you don’t let yourself be a victim.
Just because your loan is being transferred, doesn’t mean the bill you received is legit. Fortunately, there is a resource to verify exactly where all of your federal government loans are. Log on to the National Student loan Database to verify exactly who is servicing your federal loans. If someone sends you a bill and they are not on this list, you will need to do some investigating. All legitimate lenders know they should appear on nslds, and finding out who is there and who isn’t is quite easy.
Don’t pay anyone to “help avoid the transfer.” The contracts of some servicers are ending, and others are beginning. It sucks, but there is nothing you can do about it. Don’t let anyone talk you into any service that will “help” you with this process. It would be a waste of your money… don’t let someone use this situation as an opportunity to take advantage of you.
This transfer should not under any circumstances cost you any money!
If you are wondering if you will be affected by this transfer…
What debt is going where?
If you were getting student loan bills from a company called ACS, they will now come from several different loan servicers.
If you had COSTEP, EDGEucation Loans, or EdManage; your loans will be transferred to MOHELA.
If you had KSA Servicing, your loans will be transferred to Aspire Resources Inc.
The Good News?
If there is any good news to be taken from these announcements, it is the end of the ACS contract with the federal government. Before I consolidated my federal loans, ACS handled a couple of my student loans. Their customer “service” people made Sallie Mae look like the red carpet treatment. When you called their call center, if you could hear over the static, you not only heard the person you were talking to but the people sitting next to them as well.
I know I am as guilty as anyone of assuming that any unexpected student loan change will be for the worst, but getting rid of ACS is probably for the best.
Obama Swings and Misses Again on Student Loans
Originally Published August 28th, 2013
Earlier this week President Obama announced his plan for making college more affordable. While I love the fact that President Obama’s solution uses some of the very same ideas I proposed in June, his new plan does not go far enough. First, no aspect of his new plan encourages more responsible lending. Second, it does not address the existing trillion dollars in current student loan debt.
Problems aside, the President’s newest proposal is a step forward. It is also a relief to know that he has not ignored the student loan crisis in the wake of the passage of the new student loan interest rates law.
What is the newest proposal?
The President hopes to create a comprehensive rating system for all colleges.
In his words:
“We need to rate colleges on who’s offering the best value so students and taxpayers can get a bigger bang for their buck.”
The idea here is to allow students to make a more informed decision when it comes to picking a college. This is certainly a reasonable goal and a necessary one. Many colleges have been the subject of lawsuits by former students who alleged that the schools inflated employment statistics. The theory is that if students have a better idea of the value of education, they will be better consumers.
The President’s rating system would include the following statistics
- Average tuition
- Average loan debt
- Earning after graduation
By 2015, we may see more detailed numbers and complex information, but the general idea is in place. With better information, students can make better decisions.
The Flaw in the Plan
Unfortunately, the government making statistics available and the 18 to 25-year-old population being aware of these statistics are two very different things. Think about all the catchy commercials that many colleges in your area run. How are statisticians with the Department of Education going to compete with million dollar advertising campaigns? Moreover, the general population of this country still operates on the mistaken assumption that student loan debt is good debt. Government statistics are not going to change the minds of the masses.
Some colleges are very good at misleading potential students. Even if the President’s proposal was to be fully enacted exactly as he wanted, schools would still have every incentive to continue to deceive students to encourage attendance. Lenders will still profit from student loans, and companies will still get rich.
A Necessary Tweak
To make a meaningful difference in student loan lending, the President needs to create a system in which lenders are encouraged to lend responsibly. The mortgage crisis taught us what happens when there are no repercussions to irresponsible lending. Why do car companies and credit card companies lend in a more responsible manner? Because if they give money to someone who has no shot at paying it back, they lose their investment to bankruptcy. The student loan laws have almost no bankruptcy protection for borrowers. Lenders have no reason to act responsibly.
If the President’s plan were to be combined with meaningful access to bankruptcy protection for borrowers, things would improve. Student loan lenders are in a far better position than a bunch of 18-year-olds when it comes to accessing the quality of a college and the “bang for the buck.” If they had a reason to act responsibly and access to the statistics the President wants to make available, we might be on our way to a solution.
Then all that would be left would be the trillion dollar elephant in the room.
Another Domino Falls… Are We Closer to the Student Loan Bubble Bursting?
Originally Published September 9th, 2013
Last week banking giant J.P. Morgan Chase announced they were getting out of the student loan market. Why would the nation’s largest lender by assets get out of the student loan market? According to J.P. Morgan Chase’s executive for auto and student loans, “We just don’t see this as a market that we can significantly grow.”
Even if their market share was stagnating due to increased government involvement in the student loan business, why would they stop lending on loans that are nearly bankruptcy proof?
The only logical explanation here is that they accessed the risk of further student loan lending and figured their money was better spent elsewhere.
Here is where things start to get scary…
Student Loans and Subprime Mortgages
The last time we saw large banks randomly decide to get out of major market segments was just before the recession.
In 2007, HSBC announced they were no longer lending subprime mortgages because “It’s no longer sustainable and not the right place to allocate capital in the future.”
A Lehman Brothers press release from August 2007 similarly stated that “market conditions have necessitated a substantial reduction in its resources and capacity in the subprime space.”
At the time, lenders were making a fortune on subprime mortgages, and many wondered why they would get out of such a profitable market segment. Their motives would not become evident until months later when the global recession started.
What other dominoes have fallen?
In 2009 Bank of America left the student loan market. In 2010, Citigroup decided to exit.
The major banks are not the only institutions to revise their student loan strategy. Many of you may remember when Sallie Mae restructured their company into two individual entities. One company now deals exclusively with federal loans, while the other handles their private loans. At the time, I speculated that Sallie Mae was protecting their assets if either the federal or private market crashes.
What does this mean for you?
My initial read on this situation is that this is good news for people with existing student loans. If the lenders are beginning to fear that they are not going to make money on their student loans, they may be more likely to work out feasible repayment plans and more borrower-friendly options. They may reach a point where they decide that some money is better than no money.
It is also possible that lenders are reading the tea leaves and foresee major changes in the student loan laws on the horizon. If the law changes and limits their rights to collect the debt, student loans won’t be such a great investment. J.P. Morgan Chase may have reached the point where they decided it is not a question of if the law will change, but when the law will change. This would be a shocking development given the substantial financial influence that these institutions have over Congress.
This is bad news for people who are currently in college or about to enter college. Market uncertainty can drive up interest rates, and lack of competition can drive up interest rates. Student loans may be getting more expensive. Then again, not getting a student loan and going to a cheaper college, may be the best possible outcome for many.
New Road Blocks to Getting Student Loans
Originally Published September 27th, 2013
Over the past year, the Federal Government has made getting Parent PLUS loans more difficult. Specifically, they now check to see if the parent (the borrower) has any unpaid debts or debts that have been written off. In short, it is now more difficult for parents to borrow money from the government to pay for their student’s education. At present, Parent PLUS loans are the only federal loans that do not have set limits for borrowing for undergraduate students. For many students, these loans are the only way to fund their education.
NPR recently did a piece about these changes (Note: this is audio only). They did a great job talking to many individuals affected by the policy change. Specifically, they discussed the changes with college students, administrators, and government officials.
One interesting aspect of these new regulations is that they seem to be hitting historically black colleges especially hard. A Howard University student explained that though her parents qualified when she was a freshman, as a sophomore under the new requirements, she could not get the loans she needed to attend school. She now attends a community college in New Jersey. Morgan State University attributes their lower enrollment numbers to the new policy.
Similarly, first-generation students have also been hit hard with the new policy.
According to Secretary of Education Arne Duncan, the government wants to avoid loaning people money that they won’t be able to pay back. He also said that the government’s goal was to give all students access to higher education. He noted that students who cannot get PLUS loans will qualify for many grants, which now are better funded.
Last month the education department began reconsidering some denials and plans on revisiting this issue in the spring.
What is this significant?
Even if you don’t rely upon Parent PLUS loans or have graduated college, there are some critical policy questions at play here.
The government financial aid system was created so that all Americans could have access to higher education. This goal has largely been accomplished. However, many argue that because so many people can go to college and because the money is so easy to get, prices have risen. These increased prices have created a situation where the cost of attendance is greater than the value of the degree. There are now over a trillion dollars in government loans alone, and many graduates cannot afford their large debt.
How should we handle this situation? If we make loans more difficult to get, students will be less likely to end up with debt they can’t afford. However,a stricter lending policy limits college opportunities. These changes seem to be hitting certain groups of Americans harder than others.
Senator Warren to Save the Day?
Originally Published October 1st, 2013
Senator Elizabeth Warren recently announced some fascinating proposals to fix the student loan crisis. You may best know Senator Warren as the Harvard Law Professor who helped create the Consumer Financial Protection Bureau. Today Senator Warren directed her focus towards addressing the trillion-dollar student loan problem. She set out several ideas that are both creative and practical.
Let’s take a look at these ideas one by one…
Bankruptcy from student loans has gradually been phased over the last few decades. Today, it is nearly impossible to discharge student loans via bankruptcy. Warren’s proposal is quite simple: make private student loans eligible for bankruptcy.
This idea makes sense for several reasons. First, it would provide an incentive for private lenders to work with borrowers. Second, it would provide an opportunity for many young people to get a second chance. As a country, we have bankruptcy to provide second chances for people who buy houses they cannot afford, run up credit card debt, or have businesses that fail. While it might be ridiculous to give a recent college grad a blank slate at no charge, there ought to be a path to bankruptcy for those that need it most.
Provide Federal Funding for State Colleges
One of the first things that colleges point to when asked about the ever-increasing cost of tuition is the fact that state funding for post-secondary education is on the decline. If the Federal Government were to provide a financial incentive for the states to put more money into education, tuition prices would decline. Lower tuition means fewer student loans. Everybody wins.
Eliminating Government Profits from Student Loans
There is some debate about the actual amount of money that the Federal Government is making on student loans. What is not up for debate is the fact that student loans have become a source of income for the Federal Government.
Warren didn’t elaborate on how she would return these profits to students, but this just seems like the right thing to do.
Punishing Colleges with Graduates who Default
I have a feeling that this one may be the most controversial, but I think it is a really good idea. She specifically mentioned that “schools that have a high number of graduates defaulting on their loans should pay back money to the federal government. That money could, in turn, be used to reward the schools that keep costs low.”
Some schools do a great job of finding employment for their grads and educating them for success in the future. Others focus their efforts on putting students in the classroom. Students go to college to build a better future for themselves, shouldn’t we encourage colleges to help them with this goal?
Having made a similar suggestion in a previous article, one reader astutely pointed out that he didn’t think it was fair to penalize colleges if they have grads who are not willing to pay their bills. It is a very fair point, but I think the issue is that many students are not able to pay their student loan bills. Colleges should be penalized if large numbers of their grads can’t afford their debt. If school A has a 5% default rate and school B has a 40% default rate, shouldn’t we be encouraging school B to get its act together?
Earlier Aid Package Notice
Finally, Senator Warren suggested that students know exactly what there government aid package is before they start applying to schools. This novel idea sounds like it could help out a lot of high school seniors. Many apply to college, hoping that the finances will take care of themselves after the fact. They get into their “dream” school and end up taking out debt they cannot pay back. If the student knew before they started applying, they would have a better idea of what schools were in their price range and the ones that were not.
In light of the government shutdown, this seems like an odd time to be suggesting student loan legislation. However, the fact that Senator Warren has chosen to make it a priority is good for everyone with student loan debt. These ideas may not ever become law, but the discussion alone has its benefits.
A Revolution in College Costs?
Originally Published October 7th, 2013
Georgia Tech recently unveiled an Online Master of Computer Science program. While the creation of internet-based education is hardly unique or special, this particular program offers a glimpse into a potentially brighter future for higher education in the United States.
The particular online program has been dubbed a form of MOOC (Massive Open Online Course). A MOOC is an online course aimed at large-scale interactive participation and open access via the internet. The Georgia Tech program is unique because its program is offered for credit at a fairly low cost.
Why is this special?
People who complete this program, which costs less than $7,000, will have a Masters’s degree from Georgia Tech in Computer Science. For those of you who may not be familiar with Georgia Tech, they are one of the top ten schools in Computer Science. Their program is more highly regarded than the likes of Harvard, Columbia, and Brown.
You can get a masters from a top computer science school for less than 7k!
Why would Georgia Tech do this?
Charles Isbell, a senior associate dean of the Georgia Tech College of Computing bluntly stated:
“We are doing it because we can and because we should… Rising student costs for higher education threaten enrollments at a growing number of institutions. Structural shifts in the economy have simultaneously created a sizable population of un- or underemployed workers in need of affordable education and training together with a strong demand for a larger technological workforce.”
Why does this mean for you?
If you have spent any time on this site or reviewed the student loan issue, you know that the ever-growing cost of college is a major contributor the student debt epidemic. Georgia Tech has a premier program in computer science. Instead of spending over 40k a year to attend the school from out of state, you can complete the program for a tiny fraction of the cost.
Even if you have no interest in Georgia Tech or computer science at all, this is an exciting development. If a top education can be had at such an affordable rate, other schools will have to compete. For the last couple of decades, we have seen tuition rates climb with no signs of stopping. This program offers a glimpse of hope for a future where colleges compete for students with lower tuition rates. In many ways, this is like Ferrari offering a new car for the price of a used Honda Civic. Even if you don’t want a Ferrari, such a move would shake up the auto market to the benefit of consumers.
Put yourself in the perspective of a talented computer science grad. If you could participate in this online program, wouldn’t you think twice before enrolling in a traditional program?
One of the main arguments against online programs has always been school reputation. That can’t be argued in this case. If traditional programs have to lower their prices to compete, then all future students will benefit.
If you are curious about this pilot program, here is Georgia Tech’s official FAQ.
Editor’s Note: I have no affiliation with Georgia Tech or any MOOC program. I just think this is a really exciting development in higher education.
The Debt Ceiling and Student Loans
Originally Published October 11th, 2013
One week from today, the United States is expected to reach its debt ceiling. This is the limit, set by Congress, which dictates how much money the United States is allowed to borrow to pay its bills. If Congress does not raise the debt ceiling, the only money that the government would have to pay bills would be the tax dollars that come in on any particular day.
Government Shutdown vs. Debt Ceiling
Presently, the government is shut down. It is important to note that the government shut down is a different issue than the debt ceiling. The government shutdown is a result of Congress and the President not being able to agree on the budget. The debt ceiling debate is about whether or not the US Treasury will be allowed to borrow the money necessary for the country to pay its bills. Further explanation of the distinction between these two issues can be read here. If you are interested in how the government shutdown is affecting student loans, much has been written on that topic.
What does hitting the debt ceiling mean for student loans?
Hitting the debt ceiling would both directly, and indirectly, affect student loans.
Indirect consequences: As we inch closer to the debt ceiling, the United States begins to appear less and less creditworthy. Hitting the debt ceiling would mean that the United States is much more of a credit risk. As anyone with student loans knows, the more of a credit risk you are, the higher your interest rates are. Failure to address the debt ceiling in a timely manner could result in higher borrowing expenses for the government. This would mean higher interest rates for college students who need student loans for next year. Why next year? When Congress passed its most recent student loan interest rate law, they tied rates to Treasury Bonds (the treasury bond rate is the cost at which the government can borrow money). The student loan interest rates are already fixed for the 2013-2014 school year, but next year is a different story. If treasury bond rates are up, the cost of a new student loan will be up.
Direct Consequences: Hitting the debt ceiling would mean that the government won’t be able to pay all of its bills. Some bills would have to go unpaid or at the very least, delayed. The people paying the bills on behalf of our government would be forced to make some very difficult decisions. As one professor put it, “Americans tend to be sympathetic to students… But if we have to choose between cutting Social Security from Grandma and cutting student loans for Jonny, it’s obvious who’s going to win.”
The Bottom Line
If you plan on getting student loans in the future, you should be rooting for a quick end to the debt ceiling debate. The longer it drags on, the worse things become for you.
Debt “Activists” pay off nearly $15 million in personal debt
Originally Published November 12th, 2013
The title you are reading is not a misprint. A group of activists, affiliated with the Occupy Wall Street movement, have purchased nearly $15 million worth of debt. In their words, they have “abolished” it. As the new holders of the debt, they have sent out letters to all the affected people saying that they no longer owe any money and that the debt has been forgiven.
One of the purposes behind this program, known as Rolling Jubilee, is to shed light on the “secondary debt market.” The organizers claim that they have been able to pay off all of this debt for $400,000. Though 400k is a lot of money, it represents less than 3% of the total debt that was paid off.
As some of you may already know, creditors can buy and sell existing debt. It is the reason the student loan bills can come from companies you have never heard of. When creditors struggle to collect on the debt, they will often sell it for pennies on the dollar. The $15 million that was “abolished” was comprised primarily of medical bills. When the creditors couldn’t collect, they sold the debt at a huge discount. Now a bunch of lucky people has their bills forgiven.
The $15 million in question is a very tiny fraction of the existing personal, consumer, and student loan debt in the United States. However, it does demonstrate a couple of very interesting concepts.
1) You have no say in who buys or sells your debt
Unless you have some sort of contract that says otherwise, you have no say in whether or not your bank sells your student loan debt to another organization. For those of you who considered customer service as a factor when you picked lenders, this can be especially frustrating.
The Occupy Wall Street people are not bankers, bill collectors, or any sort of financial institution; yet they were able to purchase millions of dollars in debt for pennies on the dollar. Luckily for the people involved, they had great motives. For some, their debt is sold to ruthless collection agencies. While there is some protection for consumers, such as the Fair Debt Collection Practices Act, it can still be brutal dealing with the collectors.
Seeing how easily all this money changes hands is fairly disturbing.
2) Borrowing money from a creditor is not like borrowing money from a family member
If you borrow money from a friend or family member, you want to pay back ever penny of it on time, and you want to pay it back with interest. Our relationships and our personal integrity are more important than money. Paying back the money you owe to your friends and family is the right thing to do.
If you have struggled paying back your debt and find yourself talking with a collection agency that now owns the debt, it is a different situation. It is entirely possible that they bought your account for a tiny fraction of what you actually owe. Even if you only ever pay back half of your debt and struggle with it for the next ten years, they may still have made a profit on you.
As described by a contributor to the project: “when you get called up by the debt collector, and you’re being asked to pay the full amount of your debt, you now know that the debt collector has bought your debt very, very cheaply as cheaply as we bought it. And that gives you moral ammunition to have a different conversation with the debt collector.”
Bottom line: Don’t let a debt collector try and convince you that sending them a huge check is a moral imperative. The reality of the situation is much more complicated.
People Hate Banks…
Originally Published November 15th, 2013
JPMorgan Chase, in an effort to reach out to the people, advertised that one of their top executives would be on their twitter account to answer questions. The advertising ploy went viral… just not the way that the bank hoped.
It turns out that the people of Twitter had a low perception of the bank that is currently the subject of at least eight different Department of Justice Investigations.
Here are some of the best “questions” asked to JPMorgan:
What is your plan to catch up to HSBC & Wachovia in laundering Mexican drug cartel money? #AskJPM
— Eric (@Talking_Monkeys) November 13, 2013
Every time another person loses their home to an illegal foreclosure, does a bell ring? #AskJPM
— Amy Hunter (@amy10506) November 13, 2013
How much blood do your executives consume on a monthly basis? #AskJPM
— phreak corps (@freakcorps) November 14, 2013
What’s your prefered instrument of torture for the ordinary serf, the ARM with a hidden balloon, or the variable rate CC? #AskJPM
— Amy Hunter (@amy10506) November 13, 2013
Needless to say, this idea did not go as planned for JPMorgan. As one person pointed out:
If you feel like a failure, imagine being the person who came up with #AskJPM
— Rachel Edelman (@rachelsedelman) November 13, 2013
Even JPMorgan had to admit that things didn’t go the way they hoped:
Tomorrow’s Q&A is cancelled. Bad Idea. Back to the drawing board.
— J.P. Morgan (@jpmorgan) November 14, 2013
Government Records $41.3 Billion in Student Loan Profit
Originally Published November 26th, 2013
Recently released records show that over the last year, the Federal Government made a profit of $41.3 Billion on student loans. To put that number in perspective, over the same period, only Exxon Mobile and Apple recorded larger corporate profits.
In May, this website first addressed the topic of the staggering profits that the Federal government is reportedly making on student loans.
Since that time, we have seen numerous student loan proposals made by members of Congress as well as the President, and we have even seen the law on student loan interest rates change.
A common critique of the reported profits of the federal government on student loans is that it does not accurately reflect the actual costs of the loans to the government. It has been argued that the government is much closer to breaking even than what these numbers would suggest. In the words of Education Secretary Arne Duncan: “It’s actually neither accurate nor fair to characterize the student loan program as making a profit.”
As I’m not an expert on accounting, I won’t try and pretend to understand the nuances between the various methods of calculating profits on student loans. It also seems strange to see such a precise figure because the government has no idea how many of the loans that they handed out this year will be paid back. With an unknown percentage of students who will eventually qualify for student loan forgiveness, how is anyone to know how much money was actually made on these student loans?
That being said, even if we don’t know how much money the federal government is making on student loans, people seem to have a legitimate gripe about the process. Earlier this year, after much debate, legislation was passed setting the interest rates for federal student loans. A surprising part of the debate was the fact that profits of the federal government were not discussed. The debate in Congress revolved around what was “fair” for students to pay.
From my perspective, and I suspect the perspective of many other borrowers, the federal student loan program should not be a profit center for the government. When Congress sets interest rates on loans, the discussion should be, at what percent interest rate can we break even?
Bottom line: Numbers suggest that the government is making billions each year on student loans. Even if it is not entirely accurate, as a nation, we ought to find a way to make sure that we are not profiting off of the young people who try and get an education.
Target announces massive credit card theft
Originally Published December 19th, 2013
Earlier today, Target announced that over 40 million credit cards had been compromised. Target revealed that hackers gained access to people’s names, credit card numbers, and CCVs (the CCV is the three digit security code on the back of most major credit cards). According to Target, the people affected were those who shopped in Target stores between November 27th and December 15th of this year. In their apology to customers, they made it clear that it was only customers who shopped in stores and not customers who made online purchases.
Target said that the people responsible for the theft accessed the information by hacking into the software that runs the store’s credit card readers.
If you think you have been affected, or are worried about credit card fraud, there are several steps you can take.
- First, Keep a close eye on all of your credit card transactions. If something looks off, call your credit card company immediately. Remember, it is the credit card company’s responsibility to prevent fraudulent charges, but you must be careful to detect them.
- Second, consider reaching out to the three major credit reporting agencies (Experian, Equifax, and TransUnion) and having a fraud alert put on your account. Doing so will make it much harder for a would be identity thief to open a new account in your name.
- Third, run your credit. You have the right by law to do so for free, once a year (Tip: when running your free credit report, be sure to pick a company that does not require a credit card number). If you don’t recognize an account call and ask about it immediately.
- Finally, if you want to prevent theft from your stolen account number, you can call your credit card company and ask them to issue a new card with a new number. Many identity theft experts recommend doing this on a yearly basis. If you do decide to go this rout remember to update the account information on any auto-debits that you have with your student loans, utilities, etc.
Student Loan Debt Slows Economic Recovery
Originally Published December 30th, 2013
Ask anyone who is sitting on a large pile of student loan debt, and they will tell you it slows down major purchases as well as their spending. Today the Wall Street Journal published an article quantifying the damage that student loans are doing to our economy.
Among the more interesting statistics:
- Undergraduate borrowers who graduated in 2012 owed an average of $29,400 in student loan debt.
- The $29,400 is up 25% from just four years earlier.
- Nearly 12% of all student loan debt is in default (and that number includes students who are still in school… meaning it will rise)
- The New York Fed estimates that 1 in 5 student loans that are due are in default
Despite these disturbing statistics, the author then concludes that the student loans won’t have the serious effects of the mortgage crisis because Americans owed $10 trillion in mortgage debt compared to $1 in student loan debt.
Even if the potential damage to the economy was limited to the fractional value of the mortgage debt, a crisis 1/10 the size of the mortgage crisis is still a huge deal. Let’s not forget that the mortgage crisis led to a worldwide economic recession. 10% of that problem is still a major problem.
It’s also important to remember that if your student loans are in default, you can’t buy a home. If you don’t have a high enough income relative to your debt, you cannot buy a home. For many Americans, student loans prevent them from buying a home.
Recent college grads used to make up a sizable portion of new home buyers. Student loans are eliminating much of this group from the market.
The fact that the Wall Street Journal is still discussing student loans is a positive sign. The more people who become aware of the issues they present, the higher the likelihood these problems will be addressed.
The bad news: the issues facing student loan borrowers are still framed as a problem of recent grads, not the country as a whole. If the sub-prime mortgage crisis taught us anything, it is that when a large enough portion of the country gets into financial trouble, it affects everyone. Until the media, Congress, and the American people decide that student loans are a major problem, the current system will remain as is.