Student drinking and debting

Among the many paradoxes that face seniors finishing high school is this: you can sign student loan papers for tens of thousands of dollars in debt for you and your family — debt that is virtually impossible to discharge — but you can’t have a glass of wine at your graduation dinner.

Now this may be commentary on the absurdity of our alcohol laws. But at least with booze we are upfront that while moderation is tolerated, drinking to excess is bad for you and can put many of the people around you at risk.  With student debt, there is not much disclosure and very little analysis, as many students go into fields of study (such as teaching) where they are unlikely to make enough money to repay large debt loads.  We have a measurement of blood-alcohol content for responsible drinking; shouldn’t we have an expected debt-income ratio for student loans?  For as I’ve covered previously, student debt can have devastating effects both on students and on their families (particularly loan co-signers).

Today’s NYT chimes in on both the mounting debt and the collection efforts

As the number of people taking out government-backed student loans has exploded, so has the number who have fallen at least 12 months behind in making payments — about 5.9 million people nationwide, up about a third in the last five years.

In all, nearly one in every six borrowers with a loan balance is in default. The amount of defaulted loans — $76 billion — is greater than the yearly tuition bill for all students at public two- and four-year colleges and universities, according to a survey of state education officials.

To get the money back, the Department of Education last fiscal year paid more than $1.4 billion to collection agencies and other groups to hunt down defaulters.

The details on the collection efforts are remarkable; what is somewhat buried is that the efforts to change the paradigm — in this case by offering programs that do not have fixed amount, but take a percentage of future income — are being underused:

One consequence is that a government program called income-based repayment has fallen short of expectations. Under the program, borrowers pay 15 percent of their discretionary income for up to 25 years, after which the rest of their loan is forgiven. But participation has lagged because borrowers are either not aware of the program or are turned off by its complexity. […]

Introduced in 2009, income-based repayment was supposed to help change that by allowing borrowers with high levels of debt but modest incomes to make relatively small payments over a long term. But many borrowers were never told about the income-based option, and many others have been frustrated by the onerous requirements. So far, 1.6 million borrowers have applied for income-based repayment; 920,000 are active participants and another 412,000 applications are pending.

In theory at least, I’m a big fan of income-based payment, particularly for students who plan to pursue careers in fields that traditionally have low compensation, such as social work and teaching (and yes, I’d like to see teacher compensation changed as well).  For the disparity in the cost of some teaching credential programs compared to the salaries available to teachers can be enormous (see some of the detail in this post).

But we need to do more to make sure students understand the consequences of excess student debt in much the same way we have educated generations about the dangers of too much drinking. Alcohol related deaths in the US have been cut in half since 1980, at the same time, students are borrowing twice as much as a decade ago, outstanding student loans now total over $1 trillion, and while it is difficult to get a handle on the true increase in student loan defaults, they are clearly rising.

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