Bloomberg has an article up today about the student loan bubble. It doesn’t mention the student loan bubble directly, and instead focuses on the predatory lending practices by private lenders on students (Students Pay SLM 9.25% on Exploitative Loans for College). Expect more of these articles as Democrats like Dick Durbin try to whip up support for a student loan bailout.
The article bothers me for several reasons. First, the title. I realize that the reporter Janet Loren is not responsible for this, but I would hesitate to call a loan “exploitative” at 9.25% while federally backed loans are currently 6.8% (Stafford) and 7.9% (PLUS). The article highlights the experience of Mirella Tovar, a 24 year old graphics designer who amassed $98,000 in debt to private lenders now making $730 a month part time as a waitress. The interest rate on her debt is 10.25%. The difference federally guaranteed loans and private loans is only $22,000 ($135k vs $157k). We are not talking loan shark rates here. Loren hedges a bit, writing, “private lenders feature mostly variable rates that can be more than twice what some people pay in the U.S. program,” – some people being those who acquired federally guaranteed loans prior to June 2006 when rates were half of what they are today. Ms. Tovar started school after those lower rates had expired in June 2006.
Secondly, it’s not just the lack of credit history that affects the interest rate students pay. Loren fails to mention that federally guaranteed loans cannot be discharged under bankruptcy while privately financed loans can (please correct me if I’m wrong here.) Shouldn’t private lenders be allowed a higher rate of return to balance this risk?
Finally, the Bloomberg piece suggests that Ms. Tovar would have been better off with federally guaranteed loans, “I tell them to take private loans as a last resort,” she said. “I wish someone would have told me that.” But then Loren does not mention that with federally sponsored loans, Ms. Tovar would not have been able to amass $98,000 in debt, because federally sponsored loans have a $31,000 cap.
My wife graduated medical school in 2006 with $210,000 in federally guaranteed debt. The word “doctor” conjures up dollar signs to some people, but the average salary of a family doctor is $130-150k which isn’t much when your minimum loan payments are $25,000 yearly, and taxes on that amount add an additional $8,000 making it roughly $33,000. By the time we pay off her loans in about 10 years, that $210,000 will have cost our family over $350,000 including taxes. Every month I pay the bill it’s not easy, but we chose this path and in the wife’s case I believe the investment has been worth it.
Is a $98,000 investment in Ms. Tovar’s career as a graphic designer worth it? The fact that she is working as a waitress leads me to believe not. But I happen to know several graphic artists who have built successful careers over the years and would be happy to put the Bloomberg reporter in touch with them for their perspective. Ms. Tovar needs to get in at the ground level of her field, and will likely have to move away from home to do it. Life entails risk, and while Ms. Tovar has proven herself to be a terrible gambler by amassing such a sum of debt, she still has opportunities to put her degree to use. It won’t be easy, but starting life as an independent adult will never be.
There is no doubt that there is a student loan bubble, but banks aren’t solely to blame. Like most complex problems there are complicated factors behind them and plenty of blame to go around. Politicians who score points by throwing taxpayer dollars around to look generous and gain votes, then write laws making it impossible for people to discharge the debt in bankruptcy. Universities which waste money on expanded facilities and questionable curricula. Parents who spend more time researching a new car instead of their child’s education choices. Students who have had everything handed to them and are shocked when the gravy train stops. Unfortunately the article missed all of that and does little to suggest a way out of this mess.
It is tempting to call for a bailout of students such as Ms. Tovar. But are you personally willing to pay for her poor career choice and financial sense? What about the millions of degree holders who took out student loans and paid them back? Is it fair to them? I put a sleeping child in the back seat every Saturday morning for a Summer to drive the wife to an early chemistry class, and waited late at night in a dodgy section of Philadelphia with him in the back for the train to arrive carrying the wife from her classes. In between I built a career to make enough money to support us while she attended school. Is it fair to us that Ms. Tovar should be saved by the federal government while we’ve been working hard and paying taxes while paying off student loans?
I opposed the bank bailouts and still do even though most economists argued they were necessary. I believe in personal responsibility whether its a graphic arts student or investors in a bank, and view the bank bailouts as creating a moral hazard where gains are privatized while losses are passed along to those of us paying taxes. While I would love nothing more than to rid my family of my wife’s student loan debt, I realize that it is our responsibility bear the consequences of our decision and what to see that philosophy applied fairly to everyone.