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Sunday, May 13, 2012

Another Huge Problem Just Below The Radar!!

Student loans are now larger than all credit card debt!!  Now that is not as large as home owners debt, but it is deeply troubling for three reasons.

1)  About half of all recent graduates have no jobs whatsoever, and their ability to pay back those student loans is extremely limited.  And compound interest just makes the loan grow and grow.

2) As people (see L.A. Times story below to understand we are not just talking about people in their twenties) pay down their debts, that is money that cannot be used to buy new cars, to get married and start a family, to buy a new house, and on and on.  Remember that 70% of our economy is driven by consumer purchasing so this inability to spend is a significant drag on our recovery.

3)  Lower income students are simply being priced out of the market and won't finish college.  Since there is zero co-relation between  parent's income and IQ, we will be losing a significant resource among young people who could make real contributions to society.

So what is the real problem? The  Times story makes it clear that rising tuition and college costs are the root problem.   So what do we do about that?

Here is real source of the problem.  In twenty-five years at a public university, I have NEVER seen anyone, at the department level, school level or university level, who was willing to set priorities.  Everybody behaves like children in a sand box.  Everyone wants everything they want and they want it now.  And nobody wants to pay for anything.

One small example:  once, the state government of California awarded grants of $5 million to individual campuses to create video capabilities.  Since it had to do with electricity, the dean appointed me to a campus wide committee that was supposed to decide what to do with the money.  I sat through two meetings where the discussion ranged from what was the most advance video equipment we couldbuy to how we would assign somebody to run the whole thing.  After about five hours of this "conversation", I asked one simple question, "What are we trying to accomplish here?"  They never invited me to another meeting.  They spent the money on expensive equipment, hired a couple of people to work the equipment, and ABSOLUTELY NOTHING  was ever done with the facility.  After a couple of years, the equipment just disappeared and the two employees were let go.

While this is a trivial example, I have seen it happen over and over and over.  And I have worked at a number of universities and it is the same everywhere.

So the solution is to get accountability from a lot of children pretending to be adults.  And I have no idea whatsoever about how to do that.  Your suggestions are invited.

And now the Times story.

Student loan blues

More Americans can't get on with their lives because they're still paying for college years after graduation

By Walter Hamilton, Los Angeles Times
May 13, 2012
Brenda Small didn't think twice about taking out student loans to pay for nursing school in the late 1980s. She figured she could easily pay off the $20,000 bill — until an injury a few years later left her permanently unable to work.

Her dreams of working in her chosen profession vanished, but not her student debts. Including interest and penalties, the 59-year-old Los Angeles woman now owes more than $39,000 and can't afford to pay the debt from a disability income of $1,234 a month.

"It's just unbearable to have that type of weight on you and you can't do anything about it," Small said.

Despite the perception of educational debt as a twentysomething phenomenon, Americans of all ages are on the hook for student loans that in some cases were taken out several decades earlier. And many middle-aged people are taking out new loans as they go back to school or finance their children's educations.

Of the estimated 37 million Americans with outstanding student loans, nearly 5.5 million are 40 to 49 years old, and more than 6.3 million are 50 or older, according to the Federal Reserve Bank of New York.

"Student loan debt is now no longer isolated to young people," said Rich Williams, a higher-education advocate at U.S. Public Interest Research Group. "It's now across the board."

The burden on older people is one element of a growing debate about the effects of student-loan debt on Americans of all ages.

In addition to the often significant financial effect on students and their parents, experts worry that rising education indebtedness among all age groups has wider social implications.

"People aren't buying houses or starting families until later on and progressing on what we as a society see as the steps of life," said Radhika Singh Miller, a student-debt specialist at Equal Justice Works, a nonprofit advocacy group in Washington.

Paying for college has been on the minds of millions of parents and students in the last few weeks as incoming freshmen decided which schools they would attend.

"Many students were waiting down to the last day because costs were a big part of the equation," said Deborah Fox, founder of Fox College Funding in San Diego, which advises families on how to finance their educations.

"They were trying to get schools to add a little more money at the last minute [to an aid grant] or parents were trying to figure out a way to make it all work," she said.

The financial benefits of college still outweigh the costs, according to studies.

One found that lifetime earnings of college graduates average $650,000 more than that of their counterparts who completed only high school. Another concluded that the average annual take-home pay of college graduates is nearly twice that of high school-only graduates — $38,950 versus $21,500.

Steadily rising tuition and steep government cutbacks have pushed more students to borrow increasing amounts of money.

Two-thirds of college seniors graduated with loans in 2010, compared with fewer than half in 1993, according to the nonprofit Project on Student Debt in Oakland. Total debt loads have been rising about 5% a year, with the average graduate now on the hook for $25,250.

Last year, students took out $117 billion in new federal loans, pushing the total above $1 trillion, according to the Consumer Financial Protection Bureau.

A heavy student-debt load also weighs on decisions about careers. Celeste Knight, an 18-year-old UC Berkeley freshman, is considering becoming a social advocacy lawyer, but she worries that student loans could force her to look for a higher-paying job.

"I don't think everyone should be choosing a job based on 'Will my income be high enough to pay off my student loan?'" Knight said. "A whole generation of students is already so far in debt that even if you get a great-paying job, you're not going to live this great American standard of living."

Such concerns resonate even more acutely with older students such as Tressie McMillan Cottom.

Cottom, 34, went back to school in 2010 to get a doctorate in sociology at Emory University in Atlanta and has already racked up more than $55,000 in loans, with more than two years to go.

"We make jokes about the way it influences our life choices," she said. "My best friend said she chose her husband because he was the one without student-loan debt."

For Brenda Small, the situation is bleak. Her inability to repay her loans hangs "like a millstone around my neck," she said.

The U.S. Department of Education, which guaranteed her loans, briefly garnished part of her disability payments until a legal aid lawyer got them reinstated.

Educational debt also burdens many older Americans who took out loans to put their children through school.

Ellyn Herb, a 59-year-old San Jose psychologist and college professor, and her husband owe $132,000 on college loans they took out for their two sons. The couple have cut expenses and moved to a cheaper home but still have had to defer their loans for one son while paying off those incurred for the other.

"Many of us had kids late," Herb said. "We're headed toward retirement, but we can't retire because we have all these loans."

Unlike most other forms of debt, student loans funded or backed by the federal government are virtually impossible to discharge through bankruptcy.

The government frequently garnishes paychecks, Social Security payments and other forms of income of people who haven't paid their loans.

Yet the sluggish job market is making it difficult for many recent graduates to avoid the government's hammer.

A study released Thursday by Rutgers University showed that only half of recent college graduates are working full time.

And paychecks don't stretch as far as they used to: The 6.4% average annual rise in college costs since 1981 far outstrips the 0.4% annual income growth, according to ConvergEx Group in New York.

"Even if you do everything right, you might find it harder to pay back your loans than you thought," said Lauren Asher, president of the Project on Student Debt's parent organization.

College funding has become a flash point in the presidential election and in Congress, with lawmakers sparring over the proposed extension of subsidies that have kept a lid on federal student-loan interest rates.

President Obama and Mitt Romney, the expected Republican nominee for president, both said they oppose letting the current 3.4% rate on one type of federal loan double to 6.8% on July 1. But Democratic and Republican lawmakers are clashing on how to pay for the subsidies.

Rising costs make it even more important to make smart financial choices.

Most people should save as much as possible as early as possible, experts say, and should consider investing in a 529 college savings plan, which allows investment earnings to be disbursed tax-free for tuition and certain other school expenses.

People who have to borrow should favor federal loans, borrowing directly from the government, rather than private loans, which are made by banks or other lenders, experts say.

Federal loans have fixed rates and more flexible repayment options than private loans, which typically have variable rates.

"Rising student debt is cause for concern for a variety of reasons, but it doesn't mean you shouldn't go to college or borrow," Asher said. "But you have to shop around, borrow wisely as to what kinds of loans and how much, and know your repayment options."

And if you want even more, and personal, stories about this problem, try today's New York Times at this link.

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