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May 18, 2012

The Student Loan Crisis, the Loans You Will Not Pay Back, and Why the Crash Will Be Catastrophic

I was paid $20,000 to go to college.  I had a full scholarship to a state university and received grants on top of that.  Between 2001 and 2016, average state university costs are set to rise at least 100%.  Scholarships are being cut, federal/state funding is being dropped, prices skyrocket (the jerk that tells you “I paid for my school out of my own pocket and hard work back in the 90s- you should be able to do the same”- that guy literally doesn’t know what millennium he is in).  I went to school for free. I could not do that today.  In fact, instead of making $20K by starting college in 2004, if I were starting at that same school today I would likely take out at least $40K.  And that’s just undergrad at a 2nd tier state university.

Here is the first thing you need to know about student loans: nobody understands the current system.  Not you.  Not your parents or spouse or fellow students.  Not your financial aid advisor.  Nobody.  But I’m going to give you a few numbers to show how ridiculous the system is at the moment.

Even if they did understand, laws are being rewritten fast.  Many of the current student loan rules are an expansion of Bush-era holdovers that were  tucked into the 2010 health care act.  Even if the Supreme Court doesn’t knock the whole thing over this summer 2012, an army of ravenous politicians that don’t give a shit about the sick or students will be waiting to take the regulations apart however they can.  And if the crisis comes down to cutting grants and loans to students, or raising taxes a couple of percentage points- you know what way they will go.

There is a certain large segment of the population that thinks the solution to the student loan crisis is “Those kids shouldn’t have taken out that money- didn’t someone tell them they’d be paying it back?!”  Aside from the mind-numbing reduction of a highly nuanced crisis in such an answer, the second thing you need to know about student loans is that you won’t necessarily pay them back.  In fact, if student cost trends paired against default and employment trends continue, paying back your loans will put you in the minority before too long.

They want you to pay back student loans over ten years.  If you take out $10K or $30K, you can do that.  But federal loans have a lifetime cap at $138,000 and GRADplus loans for graduate students can continue being taken indefinitely at approx. $20,000/year.  There is theoretically no limit to how much you can take out in student loans if you are in school long enough (say, like me, you go to college, get a master’s, and then a Ph.D.-  I’ll do that in 11 years total, but that is abnormally fast and every additional year means the student gets more GRADplus funding). 

By the way, the debt calculators I'm about to blow your mind with are all here.  Check it out for yourself.

If you go to a shitty state school or online college, you don't need $138,000.  But if you want to be competitive, you will graduate from a ranked university plus graduate school afterward.  You can reasonably expect student life today to cost $25K/yr.  For 6-8 years.  Let give it a very conservative estimate of $130,000 total.  Unless you get all that covered by parents or scholarships, you are responsible.  So how much are your monthly repayments on the standard 10 year plan you will be advised to use by your lender?

 

$1,496 per month?! Well, you are fucked.  Or, would be.  Lucky for you, they’ve added several repayment options.  Let’s talk about just one of those options.  And here is where it gets really interesting:

Let’s go with the income-based repayment (IBR) plan.  Like the name suggests, the repayments have more to do with your salary than your loan balance.  Under this plan, you pay a minimum payment for 20 years (10 if working at a 501c3), and then the remainder is dropped, regardless of how much you still owe.  In other words, with a high enough principle and a low enough salary, you might not even pay all the interest, much less the principle.  Remember what I said earlier about those people who mistakenly think “everyone should know they’ll have to pay loans back”?  Not so.

I’m married, so lets say my wife and I have a $130,000 debt from my school and, by some completely unrealistic miracle, only have $20K from her's.  So, $150K total.  And let’s say we have no kids.  And let’s say that we make $70K/yr right out of school without even having to try (which is $25,000 above the average U.S. income).  That’s just starting out in our new life post-education.  What are the IBR repayments for our $150K loan?

 

Comebined $590 per month.  That’s doable. 

 Let’s say we struggle and only made $50,000 our first year.  What is my repayment on $150K then?

 

$340K/mo. 

 OK, OK, here is the most interesting part of all of it.  Let’s say I made that $70K salary again.  But instead of a loan debt of $150K (repaying $590/mo) I decide I want a ton of student money and take out an extra $100,000 just because I can.  So my debt is a quarter of a million dollars, but I only make $70K/yr.  What are my monthly repayments now?

 

Oh, still just $590 per month?  So I pay that same amount (more or less depending on salary) over 25 years (again, only 10 if I work at a nonprofit), whether I stick to a razor-thin budget or take out an extra $100K that I don’t need?

OK, OK, OK.  So we have a job market that encourages high education, and costs for education are skyrocketing.  There isn’t enough political pressure to simply provide public education, so we come up with a student loan program instead.  The program encourages people to take out more money than they will ever pay back.  The program will not penalize me if I take out a $100K extra that I don’t need, and my repayments will be the same as if I were responsible and took a lower loan.  And that’s if I follow all the rules- unlike the 10% of people that have defaulted (simply stopped paying back loans altogether) since graduating in 2009.  That’s my college class.  Default is going to become the norm.  Watch it happen. 

And there are very few consequences for defaulting.  Your financial aid advisor does not tell you this.

But in the meantime, even if you choose to pay back those student debts (because I hope I’ve demonstrated how much of a choice it actually is- and I only demonstrated 2 of the options they offer), the system is designed to crash.  It only stays afloat- like so much of the economy- because nobody really understands it.

Hey, remember that time banks were giving housing loans to people they knew wouldn't pay back- but the banks were still lending money because there were no consequences if the federal government had their back?  Remember how it fucked up the economy and the only thing that saved us was federal intervention?  So what happens when the creditor in trouble is the entity that is supposed to fix these problems?

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