February 29, 2016

Students owe more than $1 trillion in loans

An economic bubble occurs when the cost of a product exceeds the value of that product. So if a person purchases an education that is worth $100,000 only to end up with a job that pays $10 an hour, the product of that education is far less than the cost of the education itself, when this happens to millions of people a bubble is formed. This in essence is the student loan crisis.


$1,300,000,000,000.


That is the amount of money students owe to the U.S. government and private banks, as of Feb. 2, 2016, according to Bloomberg.com.


Sallie Mae, the U.S. government’s student loan provider, owns about $1 trillion of the student loan debt. It ended up with this problem because of a simple idea — the same idea that led to the subprime mortgage crisis — everyone should get a college education.


The U.S. Government formed Sallie Mae in 1973, with the idea that everyone should have the opportunity to receive a loan and get a higher education in the field of his desire. While getting that education, students would owe nothing on the loan and when they graduated or quit school, they would have six months to find a job and start making payments on the loan with interest.


This worked well for a while until recently. Now, students are graduating from college in fields that do not have entry level positions or those entry level jobs do not pay enough for graduates to live on their own while making loan payments.


The blame can be placed on various places. One of the biggest problems are the students who sign up for these loans.


“Eighteen-year-olds are walking out of high school with a diploma, enrolling in extremely expensive schools and taking out massive loans without knowing the terms of the loan, the interest rates of the loan, or even how much they borrowed,” Mary Ann Lawrence said. Lawrence, a professor at Cleveland State University, was a senior vice president of Credit Risk Review Department (CRR) for KeyBank and has worked in banking and loans for 37 years.


A study done by Brookings Institute, an independent research organization, in 2014 surveyed 599 undergraduate students about their student loans. Thirty-eight percent were able to identify how much money they borrowed; 19 percent underestimated their total loans; and 28 percent overestimated the figure.

Brookings also found that only 52 percent of students knew how much they were paying in room and board at school.


A 2016 study done by Lendedu, a company that provides information about refinancing loans, found 6 percent of the 477 Bay Area students surveyed knew how long they were going to be repaying their loans and 8 percent knew the interest rates of their loans.


“Students need to start asking questions before they sign the loan,” Lawrence said.


The students are not the only ones to blame; colleges themselves are just as guilty.


According to Jessie Columbo, a writer for Forbes and specialist on financial bubbles, the number of colleges that are charging $50,000 for tuition have risen 25 fold (250 percent) with tuition rising 439 percent since 1982. The schools are also charging the same amount of tuition for most programs.


“Yale has an early childhood education program that costs the same amount for a degree as the engineering program,” Lawrence said. “The difference is engineers can make a decent wage coming out of college while early education teachers make very little.”


Students have problems finding jobs right out of college to help pay the crippling debt for many reasons. They are entering a job market where the unemployment rate is nearly 10 percent and is two to three times harder to become employed than it is for older workers to get a job, according to a 2011 article in the Atlantic.


Lawyers and medical doctors are two of the toughest professions to practice and require years of expensive schooling that can lead up to $200,000 or more of student loan debt. The debt causes these graduates to become underemployed, often working in jobs that don’t require degrees and do not pay nearly as much as jobs that require a degree, just to make loan payments.


The government is also to blame for giving loans to people who do not have the equity to pay them back. In the same way Fannie Mae and Freddie Mac were handing out mortgages to everyone who wanted to buy a house no matter their credit, Sallie Mae wanted everyone to go to college.


The difference between housing loans and student loans is that if a person cannot pay their mortgage they can declare bankruptcy, lose the house and build their credit back up. With a student loan, you can declare bankruptcy, but the loan will not disappear.


“There is over an 11 percent default rate on student loans. At the height of the housing crisis, the default rate was over 9 percent,” Lawrence said.


If a person cannot pay the loan back, the government will garnish the wages of that person for up to 15 percent of their income.

In 2007, Oklahoma passed a bill that forced high schools to teach students about personal financing.

Students must demonstrate an understanding in banking, taxes, investing, loans, insurance, identity theft and eight other areas to graduate, according to The Oklahoman.


“The colleges need to advise students to major in something they can get a job in, if they are going to follow their dreams,” Lawrence said.


Schools such as Baldwin Wallace University, give students the opportunity to major in high demand fields such as music and broadcasting, with the understanding they will also major in something more practical like business or marketing.


“BW let me major in theatre with the understanding that I would also take classes and graduate with a major in economics as well,” said Vince Orlandi, a 2010 graduate of Baldwin Wallace.


The U.S. government can help by being more selective on who can get funding and explain to students the difference between a grant and a loan.


A grant is a non-repayable sum of money that is given to a person to pursue an idea or in this case, college. Grants are available through many companies, organizations and non-profits. Loans must be paid back.


“There is the beginning of an education bubble, but it is not a full fledge bubble yet and depending on your political opinions, there are ways to solve it,” Lawrence said.


Democratic Senators Bernie Sanders and Elizabeth Warren have been at the forefront of solving the student loan crisis, with Sanders even making it a key part of his presidential campaign, but this is far from over and only time will tell if a solution is in the works.



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