Saturday, December 26, 2015
Student loans and a stagnant economy
Student loans are an interesting category of debt. It's one of the few debts that cannot be discharged through bankruptcy. Doesn't matter how dire your circumstances, you can't get out from under the burden of that debt. Ever. If you can't pay, you'll go to your grave still owing money to the lender. And then they'll try dunning your heirs for the balance. In some cases I've read about, survivors have been dunned because they co-signed the loans, making the debt collection legal if not in particularly good taste, but in others? If the student was the sole signatory on the loan, when he or she dies, the lender can make a claim against the estate, but, let's face it, if someone dies still owing student loan debts the odds are the "estate" has no assets. Ergo, the debt should die, too.
But that's kind of a long digression from what I was actually thinking about. I've been wondering for quite a while now just how much of a drag on the economy all the student loan debt is responsible for. You know, the cost of college keeps climbing so students are taking out bigger and bigger loans. They're graduating with loan balances that will result in monthly payments that make car loans and mortgages look trifling in comparison. And then they look around and realize that in many cases the only jobs they can find are ones that (a) pay just above minimum wage and (b) have absolutely nothing to do with what they went to school for. Or, even worse, they figure out that in order to do what they really want to do, the 4-year degree they just went into massive debt to obtain isn't good enough. They have to earn a Master's. So they sign up for another two years of indebtedness.
And, yes, I know no one is twisting people's arms and forcing them to take out loans, but higher education in this country has reached an interesting point. It's become so massively expensive that if you want to get a college education, it's hard not to graduate without some debt. Oh, it's doable. One option is to enlist in the military, serve the required period of time, and then use veterans' benefits to pay for college. Another is shop around and find a school you can come closer to affording than attending a high dollar one. Figure out a way to be a commuter student, i.e., live at home with your parents so you're not stuck with dorm fees and meal plans (not as easy to do as one might think, incidentally, many universities have a requirement that freshmen live on campus and it can be hard to get a waiver). The trouble is many of the students taking out the loans are, to put it kindly, young and naive, and their parents can be almost as bad. Too many of them view the options noted above as "last resort" rather than as first choices. If you're a reasonably bright student and you've spent most of your high school years (or maybe even earlier) with both you and your parents fantasizing about you attending (to use an Atlanta example) Spellman or Morehouse you're not going to be real happy about hearing a suggestion you go to Georgia State University or, even worse, do a year or two at Perimeter College instead. Given a choice, even a hideously expensive choice, you and your parents are going to opt for Spellman. Besides, you and the parents are thinking, once you've got the degree from the elite school, paying off the loans will be no trouble at all.
So let's say that the typical student does actually manage to find a steady job once he or she graduates. What then? We hear a lot about the rising default rate for student loans, but what about the unintended consequences of people who are making their payments? How could that possibly be a problem? It is. Think about it. If you're making monthly loan payments of many hundreds of dollars, that's money that isn't going into the economy. You're not buying a car, you're not buying a house, you're not hitting the shopping malls for the fun of it. You're scraping by, probably sharing a rental of some sort instead of being able to live on your own. At a time when you should be celebrating becoming an independent, gainfully employed person by replacing your POS used car with something new, you're actually wondering if you should give up the car and start biking to work because a bike doesn't require insurance. You're shopping at Goodwill instead of Nordstrom. And that's your life for the next 10 or 20 or 30 years. You're not helping to grow the economy by being a good consumer; you're just barely scraping by while servicing a debt.
Granted, servicing a debt isn't quite a negative -- it's not like you're actively sucking money or jobs out of the economy. Banks employ people. Somewhere someone gets to verify the data when you make a payment, someone hits an occasional key to keep everything running smoothly, and someone gets to man the phone banks that make the calls reminding people they're drifting into default. But the multiplier effect of a dollar sent to Sallie Mae for a loan you took out ten years ago has to be a lot smaller than the multiplier effect of you being able to buy a new car now. End result? If not a drain on the economy, at least a drag.
Whenever the subject of student loans comes up, without fail someone who attended college 30 or 40 years ago will mention that he or she didn't have to go into debt way back when. This is quite true. I personally had the experience of attending the University of Wisconsin back in the 1960s. I dropped out pretty quickly because I had no idea what I actually wanted to do with my life back then (I still don't, come to think of it), but I do recall that between the scholarships and a work study job (10 hours a week in the Student Activities Office) I had enough money to pay for tuition, books, and room and board -- and that work study job meant I had money coming in every two weeks. By the time the Younger Daughter went off to college in the 1990s, that was no longer true. No-strings-attached financial aid packages shrank, tuition climbed, expenses in general were higher. Loans were becoming a fact of life, and it's gotten worse since then.
Then toss in creeping credentialism (jobs that you could get 20 or 30 years ago with just a high school diploma now require a college degree) and you've set up a situation where student loan indebtedness is inevitable. Kids get told that if they don't go to college, they'll end up working at McDonald's. So they go to college, acquire massive debt, and then discover that they're still going to end up working at McDonald's (or the equivalent) because the part of the economy that's growing is the service sector. . . and unless you're a nurse or a plumber, service sector jobs don't pay much. I cheerfully predict that the student loan default rate is going to continue to rise because I don't see any way that it can't. More and more debtors have decided to just say, screw it, I'll default and learn to live with the specter of collection agencies garnishing my wages.* The New York Times ran an op-ed piece not long ago from a person who's made a conscious decision to default. I wonder how many other people are now planning to do the same thing? After all, what's the worst that can happen? They repossess the degree that hasn't helped you find a job?
*Waiting for garnishment can sometimes ease the burden. There are legal caps on the percentage of a person's wages that can be taken through garnishment, and those caps can result in having much lower monthly payments than trying to work directly with the lender. You can also petition the court for hardship relief where you make a fairly small payment as a token of good faith. Judges can be a lot more understanding than collection agencies. End result may be that the loan never gets paid off, but at least you've now got a payment you can live with.