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education

The Next Financial Crisis: Student Loans

In today’s job market, mass default?

86%. That’s the percentage of college graduates who in a Pew Research  poll said that college was a good investment. And, indeed, other surveys find that college grads earn around $20,000 more a year than those with only high school diplomas. And the unemployment rate is far lower.

But two-thirds graduated with college debt — an average of $24,000 last year — whereas less than half did in 1993. College debt, only $200 billion as recently as 2000, now exceeds $1 trillion — it’s now more than credit card debt.

The question is, in this high unemployment economy, which is likely to last a decade, what if those collegians can’t find a job? Or a job that pays well enough to cover their college debt payments? Much as the buying of homes with no money down and no proof of income led to the subprime mortgage crash, are we about to see hundreds of thousands of our newly-minted adults trapped by debt and unable to pay the government or the banks?

you can’t discharge a student loan

Because trapped they are. Even if you declare personal bankruptcy, you cannot shed a college loan owed to the government. Barmak Nassirian of the American Association of College Registrars and Admissions Officers, quoted in this Atlantic Monthly article, said, "You will be hounded for life. They will garnish your wages. They will intercept your tax refunds", and social security payments will be docked when you retire. That’s not all. Professional licenses can be revoked and you become ineligible for federal employment. Unable to pay, a key element of our society — our college-educated youths — will find themselves swamped by late fees and interest piling up insurmountably.

The reason for these vengeful measures is that the student has been handed taxpayer money and the government is obligated to get it back. But the government loan limit is

Compounding the problem
is the growing and reprehensible practice of U.S. businesses granting internships for which the student is paid nothing — students pressured by the competition for jobs after graduation to add these embellishments to their résumés, yet denied by these avaricious companies an opportunity to make some money to help pay their loans.
$31,000 and students also take out private loans. Lobbied and bought off by the banks, Congress, in an unforgivable act, made private loans irrevocable as well in the 2005 revision of the bankruptcy laws. There is absolutely no justification for the banks to have this special protection.

the root of the problem

Lured by the money to be had from student loans, a number of private colleges have arisen to take advantage of government largesse. The likes of the University of Phoenix, Kaplan University, Education Management Corp. (EDMC) — they are accused of being money machines, accepting under-qualified students in order to pocket the money from government loans that students take out to pay the college fees. Commissioned recruiters entice teenagers with “high pressure sales techniques and inflated claims about career placement” according to a New York Times article. Another unconscionable act by the 2005 Congress was to allow 18-year-olds to take out loans without parental knowledge or permission, an age when youths have next to no realization of what they are getting into.

The private colleges of this sort are also accused of delivering underwhelming educations, with questionable interest in preparing their students for jobs. That shows up in the statistics. Private colleges have grown to account for 10%-12% of all enrolled in higher education, soak up a quarter ($155 billion) of the student aid budget, yet go on to account for 50% of defaults on loans.

The college “industry” may have thought clear sailing lay ahead when Phoenix was fined $78 million by the Justice Department for its recruiting practices — a light touch given the money that rolls in — but then, after declining to pursue a dozen whistle-blower suits, the Justice Department has just followed up on a 2007 complaint by two former employees with a breathtaking suit against EDMC. The charge is that its multiple colleges — they go by the names Art Institute, Argosy University, Brown Mackie College and South University — were not not eligible for and must return $11 billion in federal and state aid that EDMC received between July 2003 and June 2011. The allegation is that they violated federal law by paying recruiters based on the number of students they enrolled rather than the required criteria such as whether students were qualified.

EDMC is 41% owned by Goldman Sachs. Its board chairman is Jock McKernan, a former governor of Maine, married to Republican Senator Olympia Snowe. Her financial disclosure form shows EDMC options worth $2-$10 million.

where does that leave the students?

Persuaded to over-extend themselves — many encouraged to borrow directly from the schools and at higher rates than federal aid — nearly a quarter of the students of for-profit colleges owed $40,000 or more on leaving, compared with only 6% of graduates from public colleges. If they cannot find jobs in an economy which is expected to remain at low ebb for a decade, these young graduates can expect to be burdened for years. They could find themselves still be paying off their college debt when it’s time to send their own kids to college.

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