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Aug 17, 2013

The New Company Store - The College Loan Scandal

When the Obama administration took over the college student loan system as part of healthcare reform, one had to wonder why. The privately run student loan system had worked well over the years. In fact, yours truly used student loans to pay for graduate school.

And before we dig in further, what is a company store you ask? Some coal companies provided employees with their own store. According to Wikipedia:

Company stores faced little or no competition and prices were therefore not competitive. The store typically accepts “scrip” or non-cash vouchers issued by the company in advance of weekly cash paychecks, and gives credit to employees before payday.

Unscrupulous companies would encourage these overpriced credit charges to drive up debt and turn an employee into a indentured servant/slave.

Rolling Stone issued a pretty detailed story on just what is happening with the student loan program: Ripping Off Young America: The College-Loan Scandal. I highly recommend you read the entire article. Let’s see if we can find some highlights.

Congress just past legislation to prevent student loan rates from doubling this year. However…

Congressional Budget Office projections predicted interest rates on undergraduate loans under the new plan would still rise as high as 7.25 percent within five years, while graduate loans could reach an even more ridiculous 8.8 percent …

Not only could students be getting hit with crushing interest rates, but they are already getting creamed with exploding tuition costs.

Moody’s released statistics showing tuition and fees rising 300 percent versus the Consumer Price Index between 1990 and 2011.

So who benefits from all this? Certainly not middle class students.

the federal student-loan system is essentially a massive and ongoing government subsidy, once funded mostly by emotionally vulnerable parents, but now increasingly paid for in the form of federally backed loans to a political constituency – low- and middle-income students – that has virtually no lobby in Washington.

the government actually stands to make an enormous profit on the president’s new federal student-loan system, an estimated $184 billion over 10 years, a boondoggle paid for by hyperinflated tuition costs and fueled by a government-sponsored predatory-lending program that makes even the most ruthless private credit-card company seem like a “Save the Panda” charity.

But wait, it gets better.

Not only has Congress almost completely stripped students of their right to disgorge their debts through bankruptcy (amazing, when one considers that even gamblers can declare bankruptcy!), it has also restricted the students’ ability to refinance loans.

That’s right, you can’t declare bankruptcy to get out of these loans. The ultimate loan shark, the US federal government, will have its pound of flesh no matter what.

So let’s take a quick look at the effect this has on real people.

Alan Collinge … graduated from USC in 1999 with a degree in aerospace engineering and landed a research job at Caltech. … lost his job and soon found himself underemployed and with no way to repay the roughly $38,000 in loans he’d taken out to get his degree.

… he went into default. Soon enough, his original $38,000 loan had ballooned to more than $100,000 in debt, thanks to fees, penalties and accrued interest. He had a job as a military contractor, but he lost it when his employer ran a credit check on him. His whole life was now about his student debt.

“I was 19 years old,” says 24-year-old Lyndsay Green, a graduate of the University of Alabama, in a typical story. “I didn’t understand what was going on, but my mother was there. She had signed, and now it was my turn. So I did.” Six years later, she says, “I am nearly $45,000 in debt. . . . If I had known what I was doing, I would never have gone to college.”

“Nobody sits down and explains to you what it all means,” says 24-year-old Andrew Geliebter, who took out loans to get what he calls “a degree in bullsh*!”; he entered a public-relations program at Temple University. His loan payments are now 50 percent of his gross income, leaving only about $100 a week for groceries for his family of four.

Another debtor, a 38-year-old attorney who suffered a pulmonary embolism and went into default as a result, is now more than $100,000 in debt. Bedridden and fully disabled, he accepts he will likely be in debt until his death. … After he qualified for federal disability payments in 2009, the Department of Education quickly began garnishing $170 a month from his disability check.

Only a few in Congress see the program for what it really is. And I usually would not agree with these two. :)

“Student-loan debt collectors have power that would make a mobster envious” is how Sen. Elizabeth Warren put it. Collectors can garnish everything from wages to tax returns to Social Security payments to, yes, disability checks. Debtors can also be barred from the military, lose professional licenses and suffer other consequences no private lender could possibly throw at a borrower.

“It’s basically a $185 billion tax hike on middle-income and low-income citizens and their families,” says Warren Gunnels, senior policy adviser for Vermont’s Sen. Bernie Sanders, one of the few legislators critical of the recent congressional student-loan compromise.

And I can attest to the despair of crushing debt. After graduate school at the University of Arizona, I owed over $20,000 in student loans and credit card debt. The first two years after school were devoted to putting 50% of my take home pay into paying off the credit cards. Fortunately, I was able to consolidate my student loans into a single low rate loan which made that debt much more manageable. I was fortunate enough to get all those debts paid in 5 years. Since then, I have never been in debt except for a car or house.

So what is my advice to students today? Do not borrow to go to school. Do do it! Here are my suggestions to get the job done in alternative ways if you are short of cash.

  • Look at junior colleges for the first two years of school. They are a lot cheaper and cater to students who are working.
  • Look at on-line programs from accredited schools that allow you attend when you can afford it. Locally, Colorado State University offers some nice programs. Also the University of Phoenix has good programs and is accredited.
  • If you do have to borrow, try to keep it to a minimum. Look at on-line loan calculators and only borrow what you can afford.
  • Save, save, save. If you can learn to have the patience to wait for stuff, you will have a much happier life.
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