Because I had some extra time at work today, I was doing some internet “research” on youth and debt, especially in the form of student loans. We don’t do student loans, but it seemed relevant to something we are doing. I’m not sure how I imagined student loans to work, since I’ve never actually had one (thanks to parents and public university), but was surprised by how they can, in fact work. The part I could have known if I’d bothered is that these are (sometimes) enormous unsecured loans, generally made to people with little credit history. You can sort of get that from the title “student loan.” Apparently how that works out in reality is partly that the government guarantees the loans because they want people to be educated, partly that some such loans have hidden catches that can end up doubling or tripling the initial price over time, and partly that, unlike other loans, they cannot be “discharged” (I didn’t know before that that’s the appropriate word for this context) in bankruptcy.
This presents a problem. If a young person who has always been told to go to college can’t afford it, they’re told that this is a good way to defer paying for their education and attend university full time, after which they’ll probably be eligible for a higher wage. Being young and inexperienced, they probably don’t know what to look for in the contract they’re signing. If it says that upon graduation they’ll be paying $1,000 a month for 10 years, and there are all sorts of penalties for failing to make payments, but that’s not explained, then it might never register fully in their consciousness until their $20,000 has grown to $30,000, at which point they could have bought a car with all that interest and penalties. We generally know that there are loan sharks out there (one article I read alleges that the collections agency at Sallie Mae literally installed a salt water shark tank in their lobby…); here in Santa Fe there are apparently payday loan places that charge 200% interest, which seems excessively scroogian — the same people might get 15% interest at a reputable credit union (yeah, like the one I’m working for). Still, we can be rather trusting about student loans, because they’re ostensibly for the good of the student and to promote an educated citizenry — that’s why the government backs them, one imagines — and don’t look through the contracts with a fine-tooth comb. However, poorly considered student loans have been known to double in cost if not paid off exactly as specified by the lender. Like if the student can’t find a good job right out of college. This isn’t by little payday lenders — this is by Sallie Mae, etc (they’re apparently the biggest offender).
According to the Chronicle of Higher Education (BTW, sorry for my terrible lack of data here, I’m writing this from memory, and it’s by no means meant to be academic. Here and here are some obvious places to look), about 1/5 of student lendees eventually default on their loans, which results in a 25% cost increase, in addition to things like terrible credit, garnished wages, no tax return, and being sent to a Dickensian debtor’s prison. Ok, so I made that last one up. And, as mentioned earlier, these loans stick around even after bankruptcy — they can grow to be worth more than a comfortable house, and generally wreak havoc in one’s finances for decades.
My conclusion (small government sort of gal that I am), is not primarily to spend a lot of governmental money on this. If anything, it sounds like they’re making things worse by providing a false sense of security. I don’t have many thoughts on the regulatory side of things at all, since it seems to operate mostly on the law of unintended consequences (try to encourage people to go to college by providing “financial aid;” end up with soaring tuition and angry, ill-used graduates). What I would advocate is to lose some of the glowy “college is appropriate and necessary for every 18 year old regardless of interest, ability, and financial solidity” tendency we as a society have, and be very clear on what terms the loan is being given (and apparently some of these loans are even exempt from truth in lending disclosure requirements), and what kind of financial gamble is being entered into (if repayment is deferred for a year while you’re looking for work, what will you be facing after that?); and perhaps even the value of education even if it leaves one somewhat poorer at 30 than if one had started out in minimum wage jobs at 16 and never gone to college.