Comments on: Time to Turn Attention to a Different Debt Limit: Downsize Federal Student Loan Programs

By: The author responds ... Tom Parker

The author responds ... Tom Parker — Fri, 09 Sep 2011 20:14:54 +0000

I agree with "Craigie" that banks estimate cash flow over the life of the loan to determine the value of the asset. If their estimates are mistaken, especially with regard to default rates, the asset can turn negative. Part of my argument is that the federal government is underestimating future defaults in the asset class. These are, after all, loans to young people with little or no credit history, and there is no physical collateral. A better argument is that the real asset is the aggregate gain in higher education attainment, a collective national asset worth more than any negative cash flow generated by the loans.

This collective positive must be then be weighed against the negatives encountered when the education received by the individual is not useful in earning enough money to pay back extensive debt. Income contingency can help with this problem. The Thai government (which I have consulted for in the past on student loan issues) recently announced that student loan defaults have become such a budgetary strain that they will begin to combine income contingent loans with a plan to make student loan availability dependent in part on a student's projected future employment prospects.

I have noticed that even though the website asks commentators to identify their institutional affiliations or special interest in the topics at hand, no one seems to do it.

Tom Parker

By: Craigie

Craigie — Fri, 09 Sep 2011 12:50:12 +0000

When a bank lends someone $5,000 to expand a small business or buy a car, that is not a loss. It is an asset on the bank's books. Similarly, Direct Loans are assets for the federal government and taxpayer. Just like a bank, there is a reserve for bad debts. However, if banking was pure loss, there would have been no banks over the past few hundred years! A bank estimates the repayment cash flow over the next few decades and that is the basis for calculating profit.

By: mike ranger

mike ranger — Tue, 23 Aug 2011 03:17:03 +0000

I think it should be noted that the author is a consultant to First Marblehead - an organization that pioneered private student loans. Through financial contributions and lobbying, the student loan industry was able to get John Boehner and Buck McKeon to successfully push to have private student loans exempt from bankruptcy meaning that your private student loans that have absolutely nothing to do with taxpayers or the government, cannot be discharged in bankruptcy.

The student loan scandals showed huge payoffs and corruption. In 2005, then First Marblehead CEO Daniel Myers resigned in disgrace when it was revealed that he had "gifted" a loan officer at Bank of America to the tune of $32,000.
http://www.boston.com/business/articles/2005/10/04/bank_drops_loan_deal_with_first_marblehead/

Student Loan Reform helped to eliminate many of the shady deals and even shadier characters. Sallie Mae, in one fiscal year per SEC filings, made more money from fees and penalties associated with defaults than they made servicing loans - guess that helped pay for their three corporate jets, the CEO's four mansions and the CEO's personal and private 18 hole golf course.

Stay as far away from private debt/private student loans as you possibly can!!!!

By: Shelley Honeycutt

Shelley Honeycutt — Wed, 10 Aug 2011 14:08:39 +0000

When you are allowed to be unclear with consumers you will always find problems. If a student’s “average student debt” was really $24,000…even at 6.8% this is manageable debt. However they are typically juggling private loan debt at double or triple their Federal debt! I see them everyday in my office- crying.

Oh and Mom and Dad can’t help them out because they were allowed to over-borrow for all of their children at 7.9% with 4% fees which they deferred repayment for FOUR years.

Here is a solution:

1. Make colleges quote actual “average debt” for their graduates. Not just Stafford debt. Now the consumer can make a clear decision with honest data.
2. Make PLUS loans immediate repayment loans at a reasonable rate. Also require that the borrower make enough to cover the monthly payments. This will help parents only borrow what they can afford.
3. Change Federal consolidation terms from 30 years to 20 years maximum. 30 years of debt is life-long debt and overwhelming.

Most of us would never finance a car at these terms never mind a college education. Parents and students have a bad case of bumper sticker syndrome. They want to put a brand name college bumper sticker on their SUV and it is costing them their retirement and life-long debt for their students.

By: Eileen O'Leary

Eileen O'Leary — Wed, 03 Aug 2011 16:04:38 +0000

Tom Parker and Paul Combe both present rational and thoughtful comments on the state of student borrowing. The real issue on the table is what is reasonable when it comes to borrowing for higher education and, if borrowing is necessary, what is the best way to provide that funding. As a financial aid administrator at a private institution for nearly 3 decades, I can speak from the position of one who interacts with families on a daily basis to discuss this exact issue.

Tom is suggesting that reductions in government student/parent loan programs for education is a reasonable way to put downward pressure on the trend of increasing costs for tuition, or at least moving students to more affordable institutions. Some older studies have shown that the availability of student loans does put moderate upward pressure on the cost of education. But we must also acknowledge that there are simply not enough seats nationwide in the public education sector to absorb all of these students who are currently being denied access as state governments reduce their commitments to public higher education.

Moveover, the underlying reality is that borrowing does not deter enrollment for many/most students, and if federal loans are not available or are insufficient, they will turn to the private education loan market. These loans have higher fees and interest rates, and no options for forgiveness, forbearance, or other humane to assist them through difficult repayment times. I predict, with experience as my teacher, that a reduction in the federal education loan programs would result in a mirror increase in private education loans that would be extremely detrimental to those who would continue to borrow to finance their higher education. If we think government loans present challenges in repayment, we should never purposefully or otherwise push students to the private education loan system as an alternative.

By: Dr. Anthony G ZIagos, Sr.

Dr. Anthony G ZIagos, Sr. — Wed, 03 Aug 2011 15:10:06 +0000

I agree with Mr. Parker's observations. It is refreshing to someone
revising their misguided past. The cost of education has far exceeded the quality of the delivery system and the content.

By: Paul Combe

Paul Combe — Mon, 25 Jul 2011 18:04:58 +0000

Mr. Parker has clearly identified the consequences of our debt-based funding of college access. The Higher Education Act’s original principles of “college access and choice” are slowly being eroded by tight budgets, increased costs, the reliance on loans, and the fear of debt. But while the best form of debt management is no loans, the best form of college access is one with student choice. Certainly, all students and parents should enter into college borrowing with eyes wide open, aware of their responsibilities and the future ramifications of the debt. But to reduce students’ options based on their “financial fit” would threaten the gains we’ve made in college access over the past 50 years, and would create an even further divide between the haves and have-nots in our society. While we need to control costs, develop more grant funding and reduce our reliance on loans, we also need to do a better job of proactively helping borrowers manage their education debt. Congress has supplied many remedies to help federal student loan borrowers manage their debt (Income-Based Repayment, Public Service Loan Forgiveness, hardship deferments, etc.) but they have supplied no effective way of communicating these programs. With the right combination of information, personal responsibility and federal assistance, federal student loans most often can be managed successfully. Before downsizing the federal student loan program, we should increase the program’s proactive communication to teach borrowers how to maximize their rights and make the debt more manageable.