Changing everything you know
By Mark Kantrowitz, (Washington Post, November 19)
Many of the Occupy Wall Street protesters are struggling to repay student loans and want their debt to go away. An online petition calling for cancellation of all student loans has gathered more than 600,000 signatures over the past 11 weeks. President Obama responded, in part, last month with an improved income-based repayment plan, but most of the protesters and petitioners will not qualify for it. The increased attention on education debt has also brought attention to many misconceptions about how people borrow to pay for school.
1. Forgiving student loan debt would help stimulate the economy.
People who want all student loan debt forgiven argue that getting rid of monthly loan payments would lead to increased consumer spending, thereby providing a quick boost to the struggling U.S. economy. However, only about 40 percent of all outstanding student loan debt is actively being repaid. The remaining borrowers are still in school or otherwise not paying their loans back, so they wouldn’t immediately benefit from forgiveness
And a “forgiveness stimulus” would have a limited impact. According to my calculations based on data from the Education Department’s Direct Loan Program, annual payments and default collections total about 5.6 percent of these outstanding direct loans. If this proportion is similar for other kinds of education debt, then forgiving the nearly $1 trillion in outstanding student debt would inject at most $56 billion per year. Not a paltry sum, but certainly small compared with more significant stimulus efforts.
2. All education debt is good debt.
Certainly, taking out loans to pay for college is an investment in your future and a key to a better-paying job. So it’s good debt. But too much of a good thing can be bad for you.
Students who graduate with high debt often must abandon certain career aspirations. I’ve spoken to hundreds of borrowers who are behind on their student loans, and they tell me they have delayed major life events, such as buying a car or a home, getting married, having children, or saving for their children’s college education or for retirement. According to a recent survey by Monster Learning, about a third of recent college graduates have to move back in with their parents to save on living expenses.
A good rule of thumb is that students’ total debt at graduation should be less than their expected starting salary — ideally, a lot less. This will allow them to repay their loans in 10 years. Otherwise, they will need to use an alternate repayment plan, which reduces the monthly loan payment by stretching it out over 20, 25 or even 30 years. This means that when their own children start college, some of these people will still be paying off their old loans.
3. If you declare bankruptcy, your student loans go away.
Neither federal nor private student loans can be discharged in a bankruptcy unless the borrower files an “undue hardship” petition — which often involves a very harsh and high standard that was set in a New York state case more than 20 years ago. It requires that the borrower cannot maintain a minimal standard of living while repaying the loans, that the circumstances that prevent repayment will probably persist for most of the life of the loans and that the borrower made a good-faith effort to repay the loans. In the words of one bankruptcy judge, a successful undue hardship petition requires a “certainty of hopelessness.”
According to the Educational Credit Management Corp., a guarantee agency that manages the student loans of federal borrowers with an active bankruptcy filing, about 72,000 federal student loan borrowers filed for bankruptcy in 2008, but only 29 succeeded in obtaining a full or partial discharge of their loans. That’s 0.04 percent. You’re more likely to die of cancer or in a car crash than to have your loans discharged in bankruptcy.