How To Fix the Student Loan Debt Problem
… and make college cheaper for all.
My wife and I graduated college in 2005 with about $30k in student loan debt. We found modest paying jobs, learned to live within our means, and paid off our loans. I feel we are the lucky ones. Our school had low tuition costs and our degrees were in demand so we could eventually pay our loans off.
Others are not so lucky.
According to Nerd Wallet, there is 1.6 Trillion in student loan debt. You cannot remove student loan debt with bankruptcy, as anyone behind in their student loan payments may realize if they try to consider their financial options — that there are none really. You must pay that money back or have it forgiven.
This is the problem. But first some history.
TL;DR:
- After 1978, you couldn’t discharge government backed student loans.
- After 1984, you couldn’t discharge non-profit backed loans.
- After 2005, you couldn’t discharge private for-profit bank backed, loans.
Thereby, all student loans become a government backed loan, by law.
This is the problem with the student loan industry. Banks will loan money to anyone, any degree, without verifying that the degree will enable them to pay back the loan. This means the person(s) taking on the loan must understand their ability to pay back that loan before choosing the degree, and what forgiveness programs are available to them if they will not be able to do so. It seems for most high school graduates, their parents, and school counselors this is NOT discussed and it’s probably the greatest disservice to the middle class so far in the 21st century.
Luckily for me, my father knew what career fields paid livable salaries (this was before the Internet was in every house) — he was an aerospace engineer with a masters degree in business, being a federal worker we were middle class by most measures. I wanted to major in music, play drums for a living, and I talked to him about my ambitions in the 10th grade. He knew I was a good percussionist in high school, but in college I would be mostly average. Pragmatically he said “Do you like to eat?” He pointed to a friend that was a highly gifted percussionist but was studying to be an Ophthalmologist while playing in the college marching band. As they used to say in the NCAA commercials about student athletes, he was going to pro is something else. While there are musicians that make a living actually playing their instruments (not teaching others to play), based on my skillsets, I think he helped me make a better decision down the road.
How much loan is too much?
I made a formula to help you think about the problem and your options:
“Total Student Loan” x 2= “Salary needed to pay off your loan comfortably in 10 years”
Why times 2? Let’s do some simple math.
You graduate school at 22, start a job making $40k a year, and you have $40k in student debt. Depending on where you live, with cost of living (food, housing, clothing, etc…), you are already behind the curve even by FinAid.org’s own calculator. All this assumes you don’t already have a large mortgage, car payments, day care, and kids.
And this is if you only have $40k in student loan debt. For millions of Americans they have a mortgage payment for their student loan. Over $350 Billion in student loan debt is held by 2.5 million people.
How to we fix this?
While 2020 presidential candidates are trying to win votes with paying off student loans, this doesn’t fix the underlying problem and it is this:
Law makers have unknowingly created a predatory lending system by not allowing someone to default in good faith (through the courts) resulting in easy money thereby raising college costs through high demand.
Therefore to fix this problem, we must allow for student loans to be cleared in bankruptcy proceedings especially for for-profit backed loans. If the laws were to change, for-profit institutions would do their own due diligence and not loan $50k+ to someone that will never make more than $50k in the height of their career.
One side affect of easy money not being available, potential college students would re-think college and perhaps prefer more vocational based training. Even my own degree has little to do with my current line of work. With less demand for college perhaps we would reverse the trend of college tuition outpacing inflation.
