Obama’s Student Loans Paid Off,
Obama’s Student Loans Paid Off, Will Yours?At a White House briefing for online personal finance writers last week, President Barack Obama was asked what money advice he himself had found most valuable. The President riffed on his Kansas born grandmother, who worked her way up from bank secretary to vice-president and taught him about the importance of saving and the “magic of compounding interest”. Then he segued to the value of “investment” —both by the federal government and individuals.
“When Michelle and I graduated from law school our combined debt was $120,000 and it took us 10 years to pay off. We were lucky because we’d gone to a law school where we knew we could earn it,’’ said the Harvard Law alum. “It remains smart to spend on things that are going to increase your productivity and your income over the long term. In the same way that law school paid off for Michelle and I,” he added.
Obama’s main point was political–namely that his deficit reduction planleaves more room than does House Republicans’ for domestic spending on stuff he deems investments, such as education, infrastructure and research. But for families, his observation raises an issue just as pressing as the $14.3 trillion federal debt: Is $35,000 in borrowing for a B.A. in philosophy, $50,000 for a master’s in journalism, or $100,000 for a law degree (not from Harvard or Yale) really a smart investment?
In 10 Steps To Make Your Kid A Millionaire, the cover story of Forbes’ new Investment Guide, William Baldwin suggests that parents encourage their kids to consider getting a cheaper B.A. by attending a less prestigious school that offers them more “merit aid” or by spending two years at a community college first. As for graduate school, he writes, calculations by Boston University economist Laurence Kotlikoff show that the extra debt and years of lost earnings don’t pay off in significantly higher lifetime consumption. Concludes Baldwin: “Pursue academics if you love hitting the books, Kotlikoff says. Don’t do it for the money.”
Fair enough. Don’t study just for the money. But what if borrowing for education leaves you worse off? That’s a real risk these days—and not just for low income students enticed to borrow big bucks to attend for-profit “career colleges” that don’t lead to jobs.
According to preliminary statistics from the Department of Education, 8.9% of students who were required to begin repaying their federally guaranteed loans in the year ended Sep. 30th, 2009, had already defaulted by Sep. 30th 2010.
Granted, that group got sucker punched by the Great Recession. Which is why a report by the Institute for Higher Education Policy on the five year repayment history of borrowers who entered repayment in 2005, is even more disturbing. (Technically, you enter repayment six months after leaving school, whether you have graduated or not.)
By the end of five years, 15% of the repayment class of 2005 had defaulted on their loans at some point, while another 26% had became delinquent, missing a payment deadline by more than 60 days, but avoiding default. Mostly, they dodged default by entering “deferment” or “forbearance”—in other words, by postponing repayment. So that’s 41% who had already harmed their credit records and an unknown number who may struggle with their debt for years.
But there’s more. Another 16% had entered deferment or forbearance based on economic hardship or unemployment, without first technically becoming delinquent. (In other words, they were conscientious but broke.) Plus, 7% had gotten repayment deferred because they were back in school—and possibly doubling down by taking out still more loans. Only 37% had been repaying their loans on time, without delay or hiccup, for the full five years.
Not surprisingly, students who went to two-year career colleges had the worst repayment record: 36% had defaulted and another 27% had become delinquent without defaulting. But even the most reliable borrowers–those who attended four year private not-for-profit colleges– were showing the strain. In that group, 8% had defaulted and 20% had become delinquent without defaulting.
On June 1, the Department of Education released final “gainful employment” rules designed to eventually bar career schools whose students don’t earn enough to pay off their debts from the federal guaranteed loan program. It’s worth noting that the rules were so weakened from an earlier draft, that stocks of such for-profit education companies as Apollo Group (which owns Phoenix University); Corinthian Colleges Inc., Strayer Education Inc. and ITT Educational Services jumped.
The new rules apply only to the for-profit sector, although in aprovocative article yesterday, Inside Higher Ed suggested that the idea of measuring higher education outcomes in terms of employability—and return on loan dollars invested—could one day spread to regulations affecting the rest of the higher education industry.
Let’s hope. But don’t hold your breath. The education lobby is powerful and the federal government has fueled the growth of burdensome (and too often unpayable) student debt, just as it helped inflate the mortgage bubble.
So for now, it’s student borrower beware. Just because the government is offering to lend you gobs of money, doesn’t mean it’s a good idea to take it. Remember, this isn’t free cash. Student debts are nearly impossible to erase in bankruptcy and even the government’s new “income-contingent” loan repayment program (which forgives some loans if you don’t earn enough to repay them) could keep you student loan-payment poor for up to 25 years.
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