We’ve entered an age where financial experts are declaring there’s a new American dream. Your house should be your home, not an investment, they now say. Reject the old truths that a student loan is always a good investment, they now warn.
Never mind that these are some of the same experts who, when the economy was roaring, said you couldn’t go wrong with real estate. They said it was okay to borrow for college because it would pay off with great salaries.
But there is no new American dream. No new money class, either. Many folks have found themselves in economic trouble because they let their dreams overshadow financial reality. They wanted what their income and class status couldn’t support.
The lessons I learned from my grandmother, Big Mama, have always been applicable no matter the state of the economy. There’s no new truth. It was always bad advice or downright deceptions that were presented as smart financial moves.
So you don’t have to give up on the American dream. Just face the truth.
Save up for your wants. Spend less than you earn. Despise debt — any of it, including student loans — so that you borrow as little as possible.
I thought about these basics while reviewing a new report from the Institute for Higher Education Policy that every parent and college-bound child should read. The report has been released at just the right time, as high school seniors across the country have received or will soon be getting their college acceptance letters. This is timely for the out-of-work or underemployed who feel it’s necessary to borrow to better their financial situation.
“Delinquency: The Untold Story of Student Loan Borrowing” found that for every student loan borrower who defaults, at least two more become delinquent without default.
“We were surprised and shocked by the magnitude of delinquencies,” said Alisa F. Cunningham, a co-author of the report and the institute’s vice president of research and programs. “We are not capturing these borrowers in the current data that is used in policy debates. Often there are more of those borrowers than defaulters.”
For the report, researchers examined data from five of the nation’s largest student loan guaranty agencies. Although the data included more than 8.7 million student borrowers with nearly 27.5 million federal student loans who began repayment between Oct. 1, 2004, and Sept. 30, 2009, the study primarily focused on 1.8 million students who entered repayment in 2005, following them for five years.
You have to understand why this study is so groundbreaking. It puts the debt that people are accumulating in perspective — looking not just at borrowers who default but also at the hundreds of thousands who are struggling to keep the debt from financially crushing them. By just focusing on default rates alone, there’s a false appearance that many more people are managing their debt.
Student loans are like no other loans. Lenders and debt collection companies can come after federal loan defaulters with a vengeance. Loan payments can be deducted from a borrower’s wages, income tax refunds can be snatched, or the account can be turned over for collection, which of course means more fees added to the loan. Federal benefit payments for defaulters, including Social Security benefits, can be taken. Borrowers can be sued for the entire amount of the loan, and there is no time limit for collection on federal student loans. They are liable for any collection or court costs; and they might not be able to renew a professional license. On top of this, it’s nearly impossible to erase the debt in bankruptcy.
The report also highlights another distressing fact about student loans. Twenty-three percent of borrowers kept default and delinquency at bay by postponing repayment of their student loans through deferment or forbearance.
A deferment allows borrowers to stop making loan payments if they meet certain criteria, such as an economic hardship. Lenders may also grant a forbearance that gives borrowers permission to stop making payments for a set period of time. But forbearance is generally a more expensive option than deferment because interest continues to accrue, even on federal subsidized loans.
Here’s the moral of this story, the authors of the study say. Their research confirms that far more students than generally recognized begin to pay off their loans but then have to resort to repayment options that increase their overall debt.
As a society, we bought into the fantasy that student loan debt was always a good investment.
But this report should make us face the ugly truth: Student loans come with more risk than many people can handle.