A Student Loan System Stacked Against the Borrower
nytimes.com
nytimes.com
At this level it's a scam.
As anecdotal evidence, my father went to Berkeley when there was no student loan structure, and the community was considered a poor real estate investment, since it was commonly known as a 'Student Ghetto'. A term which has since disappeared as rents in Berkeley are among the highest in the East Bay. All on the back of the students financing their housing costs on student loans.
Again, it's a scam.
The students don't get a better education than my father, and while the housing might be nicer, it's debt that they have to pay well into their later years, as opposed to being able to graduate debt free.
My father thinks this is directly attributable to the death of the student free speech movement and other student political enterprises, since being forced to accommodate ones debt takes priority over trying to change the world, or fix the system. In short it becomes a type of indentured servitude, where lower and middle class people are unqualified for good paying jobs without the debt, and with the debt, they are forced into high level debt maintenance, and can't have any other discussions about where society is going, or how it is getting there.
I don't see how any explicit fraud is happening. I also don't see how things will ever get better without tighter regulation of rents. Well I guess we could turn down loans and kill the demand ...
Besides rent control, one option could be for the Fed to cut debt issuance slightly and to explicitly fund school-owned student housing. This would cut out the greedy landlords without having an especially negative impact on local economies-- the schools would still pay to maintain the properties. Doesn't help private schools much, but a lot of for-profit private schools are abusing student loan availability too.
http://money.cnn.com/galleries/2012/real_estate/1203/gallery...
http://www.investopedia.com/articles/mortgages-real-estate/0...
1 in 4 are delinquent or in default. Read that again.
This situation is a failure mode, and is only fail-safe for the lenders who forced it there. This means that on some level, the lenders knew their interest rates were impossible to keep up with, yet knowingly went forward anyway because they knew they could get away with it. The USA's system is utterly bought out against the common good. At this point, I think we'd be better off with a widespread boycott of student loan payments in order to bankrupt the lenders. They can't call collections on all of us, and there would be riots if they tried.
I know that a lot of people are jaded as a result of societal failure to address the student loan crisis. These intentional failures for the sake of profit have long term consequences, as nearly everyone can blatantly see.
"Some 41 million Americans owe $1.2 trillion in student loan debt. The median debt burden among borrowers was $20,000 in 2014, up from $13,000 in 2007."
This is an entire generation worth of people that have been cursed to start their adult lives with an anchor around their neck. As though the brutally competitive ultra-hostile economic depression they graduated into wasn't enough to weigh them down to begin with.
To top it off, the boomers find a way to hold us in contempt.
If there has been illegal acts, they should be rectified. But saying "I really don't want to follow through on what I agreed to" just because minds changed is not justifiable, and sets a an ill-advised precedent.
See that's funny. That mentality _is_ part of the scam. When banks break the law and get a fines as a slap on the wrist, that seem like a joke, and those fines seem to just be a caclulated risk they expected to handle, vis-a-vis the profits that operation made then it's "just business".
If a person desides, fuck it, this doesn't make sense, the downside of defaulting on (house, student loan, other contract) seems to be better than keep paying, then it is "moral outrage", "serious character flaw issue", the label "criminal" is thrown around and so on.
_This_ is one of the fundamental elements of the scam -- to apply moral blame and personal character flaws to less empowered individuals but to selectively choose to not apply those to large business entities.
I remember during the housing crisis, there were a few cautionary articles in high brow economics journals, about how the real shit will hit the fan when high income people, who are not showing distress signs on being able to pay their mortage, will nevertheless, put the keys in an envelope, mail it to the bank and walk away from their million dollar mansions. Simply because they'll see they are under water, and numbers simply don't add up business-wise to keep paying that interest rate on that property. So there was this fear that some of these more "rational" actors will well ... start acting.
Anyway to make long story short, it seems to me your comment that is "dangerous" is coming from the same propaganda mentality.
The propaganda of implying we should have debtors prisons in this country is foul.
Another commenter points out that this is a business contract, not a morally codified vow.
However, even if you want to assess the moral implications of the agreement, and the matter of whether to renege is justifiable, remember that the students who took these loans weren't fully informed of the circumstances that lead to their issue.
A college education was presented as a smart choice whose free market value had risen as the result of insatiable demand. However, we now know that public colleges - arms of the governments of which these students are constituents, colluded with private lenders to increase fund availability and force tuition prices up.
If the entirety of the deliberations between these groups had been known, as is proper in matters of public policy, students might well have made a different choice.
Great attempt at a moral hazard. It's a business contract. Default on the contract, face the consequences. There is no "right" or "wrong" about it.
If at anytime you can default on a debt without consequence, or minimal consequence, it behooves you to do so.
You can't default on student loans, right? So we're all good.
No. As this article clearly shows, and as was the case with the subprime lenders, many of the originators and the servicers acted illegally, it's not a simple argument about 'what I agreed to'. There are two parties to that agreement, and if anyone acts contrary to the contract, the other party has a right to respond, and not be morally required to follow through on their end of the agreement. In fact, they are morally required to respond to those changes by the people on the other side of the negotiating table.
Lastly, these loans were not just provided for fun. They were provided to the students with the promise of higher income. If that doesn't happen, and the jobs and income are not there to support it, that promise becomes false, and both parties to the agreement have to face the consequences, not just the student.
Have you ever heard the term 'caveat emptor'?
Which is exactly why these borrowers should default. The risk of default is priced into the interest rate. Tough love time for lenders.
Discover Bank paid $18.5 million without admitting or denying wrongdoing."
These fines are just a calculated cost of doing business for companies like Discover, Sallie Mae, etc. They take the likelihood of getting caught breaking the law, multiply it by how much they'll have to dish out when they get caught, and subtract that from what they'll make by extorting their "customers."
In this case, Discover made a good financial decision on their part. Hooray for creating value for the shareholders.
The first few lines of this article sums it up completely as to why.
"Between misdirected payments by one of the companies servicing his loan and the abusive collection tactics he encountered when he fell behind ..."
These companies that bought the loans on cheap from the secondary market, make more money from penalties they they do from loan servicing. And they have as many tricks up their sleeves as they can discover to help make that fact true.
They are the true sharks in the whole equation, with guaranteed support from the government and the tax payers.
I recommend that every last student default as things are now. If I were in charge of writing new laws for new student loans, which I am definitely not, I would allow them with three additional conditions. 1. They qualify for personal bankruptcy like any other consumer or investment loan, 2. they could NOT be sold off but would be held in a public trust fund, initially funded by public money, and topped up as needed, and 3. (Scandinavia does this) make repayment a modest surcharge in one's income tax. Make a lot, pay a lot and pay off fast. Make a little, pay a little and maybe never pay it off.
You can't do this, nobody will pay them back. I'll take 7 years of shit credit for 200k cash, thank you very much.
See UC Davis, where they are building a huge new Art Museum, to compete with the one being built right now in Berkeley. Here's the thing, UC Davis is NOT an art school. It's an ag school and should be focusing its resources on that. But no, building an art museum justifies the salaries of all the people that are involved.
Why should student loan originators get a free ride, when other consumer or investment loan providers don't?
A loan for which no collateral can ever be repossessed necessarily has a different economic profile than a personal loan and even moreso than a real property loan.
Absent those protections, you would see a very different (read: people who need loans won't qualify) student lending market.
Whether that's good or bad is a matter of which there will be a variety of opinions.
The differences in bankruptcy are not relevant; for student loans the lender can easily be unable to pay for the rest of their lives, thus it's classified as unsecured loan.
Student loans are 8%. And that's bullshit. Theyre making 8% on us for absolutely nothing. And they get guaranteed repayment, since default risk is 0 due to garnishments.
So if somebody is making 8% for doing "absolutely nothing", can you explain why somebody else isn't taking them to the cleaners by offering to do the same nothing for 7.9%?
In essence, there's no reason to.
There are plenty of people who just don't pay their loans and make so little money there is no realistic recourse for the banks.
There are probably many people making their living attempting to estimate the relative likelihoods of student loan defaults, distilling this paper into tranches and repackaging them into bundles to be resold to investors.
A college education is unlike all the other kinds of assets that individual humans tend to "own". The only thing they could meaningfully repossess is the sheepskin.
Not getting the lowest rate is a direct function of propensity to pay. Getting a college degree in anything does not always mean more money for the borrower. The rates reflect that reality.
These are government-backed loans. If they go into default, the government pays the loan in full, automatically. And the lender can still go after the borrower!
After being fully reimbursed for the loan, they keep going after the student who defaulted, who can't get that loan discharged in any but the most extreme circumstances (i.e. can't work and will never be able to again).
What a scam.
Please cite something that explains this fully. The government does back and will pay the loan on default, but then it is the government that attempts to collect. The lender is not getting paid twice.
My problem with all the complainers of student debt is that everyone who took that loan knew what they were signing. I'm tired of hearing the sob stories of people who go to an out of state school, do not work, live completely on loans in order to have the 'college experience' and end up 100k in debt. No private lender would ever lend an 18 year old money for that and it is only possible because of government backing to start with. The government wants to recover at least of portion of that money, hence the rules.
Pretty common to sell loans to others to service them. At no point is the company getting paid twice though.
>Please see the article about the number of times his loan has been sold.
Shouldn't impact the borrower at all.
> And people willingly buy them because they can make a boat load of money of late fees and other penalties, and because they are 'backed' by the government.
Late fees and penalties only come into play if people are not paying. Backed by the government is most likely the only reason the loan was written at a certain rate to begin with.
The point, no one who writes the loan is getting paid by the government in full and then going after the borrower and getting paid again in full. It is the government going after the borrower through some intermediary.
However, I never had trouble regarding the loans being sold to different services. I had mine switch three times and got multiple emails and physical letters. It was a little shocking the first time I logged into my account and my loan was "paid off", but it quickly became apparent what had happened.
Plus, as mentioned above, it sets the interest rate for all the loans. I'm not sure how often at a more or less favorable rate, and if that's part of the incentive, to consolidate lower interest loans into a large higher interest one. I could definitely see them pushing this at different times, which was also something that came up in the article, that available repayment options were withheld when they were favorable to the banks and servicers.
E.g., the government backs a Sallie Mae loan, you default, the government pays Sallie Mae, the government wants to collect, the government sells the debt to Sallie Mae to collect it.
It's this that gives at least the perception that the originator of the loan has it in their best interest to have at least a portion of their loans go into default, as they can then purchase the debt from the government.
Edit: I think some of this has changed post Sallie Mae's split into Naviant and Sallie Mae, but perhaps this perception still exists?
And even with all that jargon, we still haven't covered what it actually means to own debt.
the problem with discharging such loans is that people will game the system. so what do you do if suddenly they come into money or have the means to pay them?
I can see putting them off without interest for a set period of years but it is debt they willingly took on.
Regardless of the payoff, the weird thing is that stories in this genre really disproportionately mention people with degrees in some art / design field, like MFA-in-puppetry guy.
http://www.thenation.com/article/audacity-occupy-wall-street...
In which case, the solution is still the same one, don't let to the second-tie schools get loans, and force them to become more affordable, competing on price with first-tier programs, or if there are not enough students interested in low cost second tier programs, force them to shut down.
Once you've lost control of the money, you've lost the dispute. The money is the only leverage you have in the dispute.
Lenient default terms compared to what?
Government assistance for the borrowers in what form?
And stacked against the borrowers due to the rapacious secondary market servicers. More money can be made off late fee and penalties than off simply servicing the loans, so they do everything in their power to make that the case, including misdirecting funds, misstating loan amounts, requiring burdensome documentation, while at the same time setting penalties on accounts.