Subprime loans, part 2: The college edition
Posted
Oct 06 2008, 10:50 AM
by
Donna Freedman
Rating:
The front-page headline in Sunday's Seattle Times was an attention-grabber: "Young, educated and drowning in debt." The accompanying article told some scary, scary stories. One young couple in med school will finish with more than half a million dollars in loans between them. A man who graduated with $152,000 in debt finds that monthly payments eat up one-third of his salary -- and he has a good job.
Gargantuan loans taken out with no clear idea of how they'll be repaid. Sound familiar?
Actually, there's a crucial difference between subprime mortgages and student loans. You can't return your diploma to the school and walk away from college debt. In fact, such debt can't even be discharged in a bankruptcy. Student loans are with you until you pay them back.
Some of the people in the article made costly mistakes, such as choosing a pricey faraway university over cheaper local options. But such decisions aren't made in a vacuum. They're made because the students grew up in a society that encourages us to go after the top-drawer stuff -- homes, cars, gadgets, education -- whether or not we can actually afford it. Or whether we actually need it.
Buy now, pay for decades?
Once upon a time, college loans were worth the pain because a degree qualified you for higher-paying jobs. But that's not as true as it once was, according to an MSN Money article called "Is college worth the money?"
"Bottom line: College, particularly an expensive private college, is a high-risk investment which, for many, won't pay," personal-finance columnist Scott Burns writes.
Yet what I've heard, and also read on MSN Money message boards, is that high school students are routinely urged to apply to the "best" schools. Sure, you'll have to take out loans, they're told, but everybody does that.
More and more of those loans are from the private sector. Tuition has risen fivefold since the early 1980s, according to the Seattle Times article, and federal student loans can't keep pace. That's why private loans now account for 22% of all college financing, compared with only 5% in 1997.
These loans are often marketed directly to students, with no advice or oversight from the schools they select. Yes, I know that you're technically an adult when you graduate high school. But for heaven's sake, picture yourself at age 18. If you were lucky, your parents had tried to instill an idea of the true cost of any loan. But that doesn't mean you really understood it.
I'd be willing to bet that a majority of 18-year-olds are so naïve, so trusting of what their guidance counselors told them and, yes, so dazzled by the prospect of Harvard or Stanford or Vassar that they simply sign on the dotted line. After all, a diploma from one of the "best" schools always translates to a huge salary after graduation. They'll pay it back then.
Besides, some parents aren't warning their kids away from debt because they've bought into the hype, too. They may truly want what's best for their children and think that a "name" school is always preferable. Or they may just like the fact that Junior is going to Princeton. Worst-case scenario: They take out loans to help pay their kids' tuition, neglecting their own financial well-being.
Lives put on hold
I believe that American high-schoolers are being sold a bill of goods -- Top schools mean top dollars later on! -- that's damned difficult to pay for. That $152k debtor in the Seattle Times article makes $40,000 a year before taxes. His loans run him $1,000 a month.
And what about the ones who don't luck into decent jobs? They do temp work or pull coffee for $9 an hour while applying for jobs in the fields for which they studied. They either share a place with as many roommates as zoning allows, or land back with Mom and Dad.
How will this group of people manage to buy cars or homes? Or have families? Or fund retirement?
Just as with the subprime loan mess, it's tempting to dismiss drowning-in-debt students as a bunch of nitwits. They knew the cost going in. Why in the world would they sign up for loans they may not be able to afford?
Because that's the American way: Buy now, and don't worry about the "pay later" part. Just buy. If you want it, you should have it.
To all of you parents of teens: I am begging you to read MSN Money's "Family and college finances" articles. Discuss them with your kids. If they're still bent on "dream" schools, be very clear about what you can and cannot contribute. Help them decide whether four years of prestige is worth 10 or more years of grueling repayment.
And hey, all you high school seniors: Can't wait to get out of the house, huh? Imagine coming back to your childhood bedroom at age 22. That room might seem a little suffocating. Or possibly that's just how a hundred grand in debt feels to someone who hasn't yet earned a dime.
