Debtor's Prison by Another Name
Beware, beware of debt that cannot be discharged by bankruptcy
When President Lyndon B. Johnson signed the Higher Education Act into law in 1965, he was undoubtedly envisioning generations of young adults that would be better able to pursue the American Dream.
He likely imagined scores of newly minted graduates and the higher-paying jobs that those graduates would obtain as a result of their education - plus their enhanced contribution to the broader U.S. economy.
He was undoubtedly NOT envisioning a future filled with 50-year-olds unable to buy homes, let alone plan to retire, as a result of their crushing student loan debt.
Millennials are typically the generation that comes to mind as synonymous with astronomical student loans (including my husband, who worked his butt off to repay his six-figure student loans before age 30), but a recent WSJ piece highlighted that in fact Gen X carries the highest average student loan balance of any generation: the six millionish borrowers aged 50 to 61 owe $47,857 each.
This means an average Gen X couple with student loans would thus be over age 50 and still owe about $100,000.
How is this possible?
Simple. Compound interest working in the wrong direction.
Even though the 55 year old NJ-based chiropractor featured in the article made enough payments over the past 25 years to cover the initial balance of his federal student loans (about $74,000) he now owes over $300,000.
This is due to a combination of predatory “advice” from Navient (which as of this writing is permanently banned from servicing student loans) to pause his federal loans so that he could focus on his business - plus the passage of time, the magic ingredient that makes all compound interest either work for us or very much against us.
Apparently, at no point was this poor guy informed that his loans would continue to accrue interest whether they were “on pause” or not.
Although the onus is ultimately on him for understanding the fine print of what he was signing up for, this “advice” is clearly off base. Why any loan servicing agent would recommend such a strategy (which only served to exponentially increase the amount that he owed) instead of recommending that he switch to one of many income-driven repayment plans (which would have enabled him to stay current on both principal and interest AND reduce his monthly payments at the same time) is inexplicable.
Inexplicable, that is, until you consider that student loans are the only form of debt that isn’t forgiven via bankruptcy. By enabling (instructing?) this borrower to hang himself with his own financial rope, Navient turned this guy into an indentured servant for life - and a profit center for them.
All of his choices are now limited by the payments he has to make every month forever on a $300,000 loan.
The math on this is so gross that it’s worth taking a guess at his monthly payment, which, if spread over:
30 years (let’s keep in mind he is already 55 years old) at 6.5%, are a whopping $1,896 per month. Over that 30 years, he will pay a grand total of $682,633 for the “privilege” of that $300,000 loan. $382,633 of it will be interest, or straight profit back to the lender (in this case the federal government).
15 years at the same 6.5%, will see his payment increase to $2,613 per month. At least (?) he’ll only pay $470,398 over that time period, $170,398 of which will be interest.
No matter what the ultimate repayment terms look like, this is an awful scenario for a father of two trying to keep his head above water and provide for his family.
You might be thinking - wow. Surely there must be an exception to this?
As it stands today, not really. The only way a student loan borrower can have their debt forgiven via bankruptcy is if they can successfully prove “undue hardship.” This outcome is vanishingly rare, time consuming and expensive (unless you can find an attorney to take your case for free. Good luck with that).
Said another way, you are shackled to these loans for life regardless of your financial situation or ability to pay.
Currently, the only guaranteed way to discharge student loans is via death (thanks a lot, FAFSA!), which is not a super compelling alternative for someone looking for a proverbial fresh start. Especially not for someone that is already 55 years of age.
So, what to do?
First and foremost, research the cost of the degree you’re considering compared to the compensation that graduates with a similar degree have earned after completing it. Note that this does NOT mean relying on the facts or figures that the school publishes (of course they’re going to say all of their graduates are successful and earn more than the median salary - looking at you, Trump University). Use LinkedIn or request read only/redacted access to an alumni database and ask to talk to some folks that are currently working in the field you’re interested in! Even if its just a ballpark range, knowing compensation figures will help you evaluate whether the cost of the degree you’re pursuing is going to pay off over the long run.
Before enrolling, take the time to understand upfront exactly what your post-graduation employment prospects are. Ideally, look for an undergraduate school that facilitates internship programs with area employers so you have a running start on a job before you even graduate. There’s no iron-clad way to guard against a recession or other event hampering your job prospects as a new graduate. However, you certainly stand a better chance of gaining employment if you’ve already proven yourself someplace and have a couple of friends there that you could ask about upcoming opportunities - including ones that haven’t been posted publicly yet.
Don’t assume that a college degree is a guarantee of anything - except apparently the “opportunity” to take on debt that is only dischargeable via your own death. Be shrewd. If you’re footing the entire bill yourself, do NOT assume that federal student loans are “free money” to cover expenses associated with school and life during your years pursuing higher education.
If you aren’t sure what you want to do? At a minimum, do NOT max out the student loans available to you while you “figure it out” at an expensive school. Because of the way the student loan system is currently designed, this could result in you being trapped for life. Instead? There is zero downside to exploring technical or apprenticeship programs where you can get paid to learn a skill or trade (carpentry, phlebotomy, et al). When you finish, you’ll have a skillset that’s not subject to disruption by AI, plus an income while you figure out what’s next.
Contrast this with someone that’s taken on six figures of student loans assuming they’d land a high-paying job at graduation, who instead finds themselves knee-deep in a global recession with no job prospects in sight (this was the experience of a lot of my fellow graduates in June of 2008). And who knows - maybe you love the trades! You’d be wise to consider them given the pending shortage of skilled workers (2.1 million by 2030, to be precise) that can do things like plumbing, carpentry, electrical work and so on that in addition to being in high demand in the short run, will be forever useful when it comes to working on your own residence.
In short: be skeptical of any student loan offering, particularly federally subsidized student loans. Don’t view loans as a ‘gift’ from the government, and certainly don’t view them as a potentially good deal for you.
Like credit cards, student loans should be viewed as potentially deadly to your financial future. They are not a ticket to the promised land - they’re potentially a ticket to a zero-option future.
And if you think about it? From a risk perspective, credit cards and student loans are actually not all that different.
Credit cards carry high interest rates because the underlying debt is inherently risky. There’s no associated collateral (eg, if you stop paying, the credit card company doesn’t get to repossess your car and sell it to cover the payments that you owe). They simply send the debt to collections, ruin your credit score in the process, and write the balance off as a loss.
Similarly, a loan to a teenager or early twenty-something with no associated collateral (except supposedly the future value of the skills that will be learned at university) is inherently risky. The only real collateral to go after? The future wages of that borrower. Forever.
If nothing else, remember that your future earnings are what’s at stake here. This is what student loan servicers will take from you - until death do you part.
Borrower beware!