In today’s mailbag . . .
“70k in student loans–feeling lost
When I graduated high school, I felt invincible. I was a smart kid, so I thought I’d definitely find a good career someday. I had lots of dreams of becoming a roboticist, doctor, dentist, or anything challenging that I could feel proud of.
Flash forward to 2020, I’m 25 years old. I have a Bachelor’s degree in math from a small, unknown school, and I’m working as a behavior technician–bringing in about $1200/mo. My loan repayment is $650/mo and once I turn 26, I’ll have to get health insurance (approx. $450).
I feel so screwed.
Yes, I know I can set my loans to a longer-term plan to have smaller monthly payments. But even with that, I still need money for a new car. I have no savings. No retirement.
I’m smart, and I have big dreams, but I feel so crushed right now.
I’m about to apply to grad school in clinical psychology. Hopefully I can get into an affordable program. Wish me luck. I hope I don’t drown in this debt.”
Dear Feeling Lost:
You got used by the Industrial Educational Complex. Yep, you wanted that college experience, and damned if you didn’t get one. 70k to get a generic degree in mathematics? I’m pretty sure math today is still the same basic subject it was 100 years ago. It’s a classic, and your knowledge could have been obtained for free just by reading library books and buying a few notepads. But you got scammed into believing that if you went to that magical kingdom of a small college that you would come away as this shinning knight the world would embrace. Yep, you got used. Welcome to life.
Okay, you have work to do, but it’s not that bad. You’re 25. (Dang, I’d pay you 70k cash if I could be 25 again, even with 70k of debt.) You are obviously a smart dude since math is no walk in the park. Your income is on the way up, and you now see the benefit of getting an advanced degree. But obviously you should be leery of taking on more student loan debt and I would advise that you try to pay for school without taking on additional debt. You could have got your math degree cheaply at a community college and I see no reason why your next degree should be expensive. Honestly, in 25 years only a handful of clients every asked me where I got my degree. It’s your personality and knowledge that matters, not where you got the diploma. Any accredited school will do.
OPTION #1: Refinance the Student Loan over 20 Years.
Most student loans are payable over 10 years. The name of the game is to keep the payment affordable. So, your best option is probably to consolidate all your loans into a Direct Loan issued by the Department of Education payable over 20 years. As your career advances and your income increases you can always pay more each month, but for now the goal is to keep the loan affordable and reduce principal each month.
OPTION #2: Income-Based Plan (IBR).
If you have federal loans, a popular option is to apply for an Income-Based Payment plan. In these programs all you to repay what you can afford over a 10 to 20 year period of time. At the end of the payment plan the unpaid balance is forgiven. The benefit of this program is that the monthly payment is based on your income and household size, and if your income is really low the payment can be zero. But, the danger of this program is that if you are not paying enough to cover monthly interest accruals, the balance of the debt actually goes up over time (what they call “negative amortization.”) Also, the vast majority of folks who enter these programs never complete them and they default at some point and wind up owing more than when they started. I’ve actually never met a person who completed this program, and the Department of Education has recently been involved in a scandal of not discharging loans for those who completed the 10-year Public Service program. So, I’m not a big fan of this program and in your situation I would advise against it.
College Career Counselors make Used Car Salesmen look honest.
It took a few decades, but eventually trial lawyers took down the tobacco industry for their lies about the harm of smoking. But what about colleges and universities, can they be held liable for mispresenting the income a graduate will likely earn to be able to repay student loan debts?
With only minor exceptions, colleges and universities have not been held liable for misrepresenting the economic value of their degrees. How long with this last? Courts have been slow to impose liability, but these schools are loading up young and naïve kids with debts they can never repay.
There is no underwriting in student loans (i.e., there is no standard analysis of whether the borrower can repay the loan.) There is no risk analysis at all. No federal guideline exists to protect students from loans that they will be unlikely to repay. Why is that? Our federal banking regulations go to great length to protect borrowers from unwise mortgage loans (a loan backed up by collateral), but virtually no regulations to protect 18-year-old kids from unsecured loans that often greatly exceed the cost of buying a home! How does that make sense?
The educational industrial complex is ruining young lives and is lying to students and parents about the value of their product and danger of incurring large debts.
Image courtesy of Flickr and Yutaka Tsutano.