Monday, March 3, 2014

Student Loan Program Running Amok

Come one, come all, get money without standards, merit or real recourse. Borrow government money to live on. Once you get into a hole too deep to get out then defer the debt bomb by borrowing more. All the while, grease the pockets of Elizabeth Warren's cronies -- we have talked about this before.

The latest data are highlighted in today's Wall Street Journal.

The debt continues to skyrocket, now near $1.1 trillion. Student loan delinquincy rates are bumping up against twelve percent, which understates the degree of the problem due to hundreds of billions of repayment obligations being held in abeyance.

Today's story is that student loans are being used to pay for non-educational needs (I worked to support myself, except for a few months, throughout my seven year college career, and had an excellent, even outstanding academic record). And students are re-enrolling to rack up new debt in order to suspend paying previously incurred debt that could not be paid. The student loan program is throwing bad money after bad.
Some Americans caught in the weak job market are lining up for federal student aid, not for education that boosts their employment prospects but for the chance to take out low-cost loans, sometimes with little intention of getting a degree.
Take Ray Selent, a 30-year-old former retail clerk in Fort Lauderdale, Fla. He was unemployed in 2012 when he enrolled as a part-time student at Broward County's community college. That allowed him to borrow thousands of dollars to pay rent to his mother, cover his cellphone bill and catch the occasional movie.
"The only way I feel I can survive financially is by going back to school and putting myself in more student debt," says Mr. Selent, who has since added $8,000 in student debt from living expenses. Returning to school also gave Mr. Selent a reprieve on the $400 a month he owed from previous student debt because the federal government doesn't require payments while borrowers are in school.
The essential flaw is that colleges and universities decide who gets the money and how much. Yet they have a conflict of interest because they are ultimate recipients of most of the trillion dollars of loan money outstanding.  There is no recourse available against the colleges and universities when the loans are not repaid.    

If this system is to be retained the institutions who approve and administer the loans should be required to cover the defaults and backstop delinquincies.   That will clean up the mess, pronto.

1 comment:

  1. When someone starts a claim with "obviously" you know it's not. There are plenty of capable poor students who can get value from an education and pay back their loans. If you want to give away money to poor students the absolutely wrong way to do it is through an indiscriminately administered loan program that is subject to massive abuse (including many state schools at this point who intensively push students to build up debt, it's a racket for all). This comment is old school real estate thinking -- loan most everyone what they say they need without regard to value or prospective earning ability -- the model that drove the financial meltdown in 2008. Someone who studies engineering will most likely be able to pay back a loan -- a theater arts or gender studies major not. Social objectives do not justify financial or fiscal insanity.