Hey, Uncle Sam! Bank on Students to Stabilize Our Economy. ~ Sarah Rosenberg

Via on May 21, 2013

193/365 - f-you uncle sam.

Student loan repayment:  a modern-day debtors’ prison?

Today’s students in the United States owe a combined total of over a trillion dollars in educational debt, more familiarly known as student loans. For those of you not accustomed to working with trillions, a trillion dollars is a thousand million dollars, and this figure represents more than twice the outstanding credit card debt in this country. In other words, that’s a lotta dough.

What’s more, things are about to get a whole lot worse for student borrowers in the coming months. Student loan interest rates, set by the Federal government, are slated to double in July, and this impending reality frightens me, even though my only current student experience is that recurring stress dream I keep having where I’m supposed to sit for a final exam in a class I never attended.

While it’s been decades since I took out my last student loan, I’ll be paying off that puppy (and its litter mates) well into the next century if I’m still around to hold a bank account. I went to graduate school back in the day when student loan interest rates were high (before they dropped to an all-time-low and shot back up again when the economy tanked), and, like so many others, I suffered what I now know to be the natural consequence of taking out loans for my tuition–a lifelong commitment to repaying the government for my three years of graduate tuition.

At the ripe old age of 23, I was accepted into law school. Newly out of undergrad with no income to speak of, and at a time when no sane lender would consider, even for a moment, giving me money to underwrite the purchase of a house, I was able to borrow $65,000 to finance my education. In essence, I mortgaged my future to further my education, and at an interest rate significantly higher than what was being offered to home purchasers in that era. But I was grateful for that money because it enabled me to pay my way through school, and it would allow me to access higher earning power through my post-graduate career.

Or so I believed at the time.

After completing law school, I was fortunate to land a job in my field with a law firm that paid a high enough salary for me to service my loans as scheduled. However, after a few years practicing as an attorney, I became deeply disenchanted with my choice of career path, and I decided I wanted to leave the law. Thereafter, I got a “regular” job, and my “regular” salary no longer tolerated the repayment schedules dictated by my institutional lenders, both federal and private.

Weighing my options, which were not many, I consolidated the group of my federal loans in order to bring the payments down to what I was able to afford. Loan consolidation involved negotiating with private lenders to purchase my federal loans.  Consolidation benefited me in the short run in that I could stretch out the payments over a longer period of time, thereby reducing the individual payments. But, in the long run, it amounted to my racking up years worth of interest and losing some of the benefits offered by the federal lenders (like hardship forbearances, which allow borrowers to press the pause button on the repayment schedule, even though interest continues to accrue, during periods when their income doesn’t sustain the repayment of the loans).

All the while, I continued to pay down my private loans which already bore higher interest rates, thinking I was being smart by paying off the higher-rate loans more aggressively. It wasn’t too long before I could no longer keep up with all the payments, and I applied for and received forbearance (the pause button) on my consolidated federal loans, which were then held by a private lender, while I serviced the original private loans. Just a few months shy of completely paying off my original private loans and then being able to begin the repayment process on the forborne private loans, the private lenders pulled the plug on my forbearance, and no amount of reasoning or begging with them could persuade them to forestall putting me into default on the  loans I held with them.

This is how the past two decades of my financial life have looked—steeped in a morass of failed attempts to negotiate with the holders of the key to my financial rehabilitation.

Initially, in my first decade of repayment, I failed in my attempts to negotiate with myriad federal lending institutions who told me my only option for lowering my loan payments when I left the law was to consolidate the loans. Later, in my second decade of repayment, I failed in my attempts to negotiate with the private lending institutions with whom I consolidated my federal loans when they refused even to consider lowering my interest rate when the prevailing interest rates bottomed out at a third of the rate I was paying. Finally, after twenty years of engaging in educational lender politics, I failed again in my attempts to negotiate with federal lending institutions when my consolidated private loans went into default and the government ultimately bought them back.

Unfortunately for me, after my loans were repurchased by the federal government after my default, and even after repaying nearly half of the original principal on those loans, once all the fees and penalties were added in, I owed the government over $100,000 for the $30,000 it had original loaned me, $15,000 of which already had been repaid.

So that’s a sad story and all, but what what’s that got to do with the price of tea in China, you ask?

Well, think of it this way.

If I had purchased a house at the age of 23 and taken out a $65,000 mortgage, not only would I have been able to deduct from my taxes all the interest I paid on that home loan for as long as I was repaying that loan, but I would also likely have been able to discharge the debt for that house in bankruptcy by giving the house back to the lenders. Why? Because the government wants to stimulate the economy by encouraging people to own homes, and secured debt is generally satisfied by allowing the creditor to convert the security (in this case, by taking back the house) to offset the debt.

If I had racked up $65,000 in credit card debt or gambled my way into a $65,000 hole at 23, although the interest on that debt would not be tax deductible, I would likely be able to discharge it in bankruptcy. Why? Because there is so much consumer debt in our country that if none of it was dis-chargeable, our economy would fold under the weight of the impossibility of consumers actually having to repay all that debt.

However, when I was 23, student loan interest was not deemed by the IRS to be tax deductible, and student loans were not and still are not, to this day, dis-chargeable in bankruptcy. Why? Because the government wants to strengthen the economy by . . . discouraging people from furthering their education?!?!

How does this make sense?

How do student loans get lumped in with child support and criminal restitution as the kind of debt that attaches to a debtor and remains permanently affixed until fully repaid, regardless of the debtor’s financial circumstances?

What kind of message does this send to our children about how much our society values their education when it lumps them in with people who have made bad decisions with their own and others’ money?

Alas, in my case, my own student loan debt fate is already decided.  The government owns my loans again twenty years later, and I owe four times what I borrowed from them in the first place, just because the loan went through private lenders’ hands in the meantime. The private lenders have been made whole by the government who paid them the uncollected principal and interest when they took over my loan. Adding insult to injury, in the course of my defaulting on my consolidated private loans, the private lenders charged me over $20,000 in collection fees which they collected when they sold my loans back to the government, thereby earning back their principal and the interest and a tidy profit to top it off.

The best case scenario for me will be to pay as much as is required of me over the course of the life of the loan (which is the next twenty years), at which time the government will “forgive” the rest of my outstanding debt. While this sounds like a great deal (the word “forgiveness,” after all, implying a generosity of spirit and kindness), there remains a gnarly catch:  whatever amounts are forgiven (in my case, likely to be close to $100,000, given the interest that will continue to accrue over that time on the unpaid principal) will be taxable to me as income, and the creditor (in this case, the government) will write off the amount of the loan as a cost of doing business.

You see, in the United States, any cancelled debt, unless specifically excepted in the Federal Tax Code, is considered taxable income to the debtor who, while no longer owing the original debt to the creditor, must pay the government a tax as if the debtor had received that money as income. In other words, right about the time when I’ve reached retirement age from the workforce, I’ll be free from my $100,000 in educational loan debt but Uncle Sam will be into me for close to $30,000 in taxes in exchange for that debt-freedom.

It’s a classic “out of the frying pan, into the fire” scenario.

My reality is that I’ll never be free from this debt. Because just like student loan debt, individual tax liability is also not dis-chargeable in bankruptcy. No matter how you slice it, not unlike the perennial guest of the infamous Hotel California, a debtor of the U.S. government is forever indebted until the earlier of total repayment or death. And even after death, the debtor’s estate must repay all outstanding student loan debt as well as income taxes less than three years old.

Ben Franklin had it right when he said, “The only things certain in life are death and taxes.” For those of us who borrow money for school, we can add “indefatigable loan repayment” to the list of life’s certainties.

However, as inextinguishable as this debt-induced wildfire is for those of us already engulfed in it, the situation may not be so grim for today’s students hoping to fund their secondary educations with federal financing. There’s a piece of legislation currently before the Senate introduced by none other than my hero, Elizabeth Warren. This bill, called the Bank On Students Loan Fairness Act, proposes that students who are eligible to borrow money under federal student loan programs be able to borrow at the same preferred rates at which big banks are able to obtain loans from the Federal Reserve.

At present, big banks are borrowing money from the Federal Reserve at a discounted rate of .75%, whereas the average interest rate being offered to students for educational loans will be at nearly 7% as of July 1.  Now, while I was no math major, even my calculator tells me that today’s students will be paying nearly nine times more in interest than what big banks are paying the Fed.

In essence, the passage of this bill would convey a strong and critical message that the education of our country’s youth is at least equally as important as funding big banking institutions (notably, the same banking institutions that hobbled our economy in recent years and then received billions of dollars in government bailouts to survive their own self-orchestrated misfortune). Isn’t this the least we can do as we try to create a better future for our children, especially since we’ll still be struggling to pay down our loans long after they’ve applied for their own?

Treat yourself to six minutes of logic, and decide for yourself.

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sarah rosenbergSarah Rosenberg runs with scissors, eats with her fingers, and encourages her dogs to kiss her on the mouth. She lives and breathes as the grateful shepherd of her nearly-nine-year-old daughter, whose old soul belies her young bodily incarnation. Sarah’s writing creates fissures in her seemingly hard surface, allowing slivers of brilliant light to shine out from within. She is a sheep in wolf’s clothing.

 

 

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Ed: Kate Bartolotta

 

 

 

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6 Responses to “Hey, Uncle Sam! Bank on Students to Stabilize Our Economy. ~ Sarah Rosenberg”

  1. Allyson S. says:

    Though I agree wholeheartedly that the problem needs attention, having worked in banking (as a regulator for the Dept of Treasury, investor/operator, and as a consultant), comparing an interest rate on a mortgage and an interest rate on a student loan is like comparing apples to oranges. For example, compared to a mortgage, a student loan does not have a tangible asset such as a house to back it as collateral. Rather, the repayment is based on a student's ability to leverage that education (intangible asset) into a salary that will *hopefully* service the debt incurred. As for allowing student debtors to borrow at the same rate as the banks borrow from the Federal Reserve, the same fundamental issue arises: banks have much more collateral to put against such loans than student debtors typically have.

    I would like to see the problem addressed on multiple fronts, but I'm not sure that lowering the interest rates to such an extent is the best option. I would prefer to see student loan debt payments taken out of pre-tax dollars much like 401k plans are designed, health savings accounts, and even some metro transit subsidy programs. Further, I think we owe it to the next generation to educate them on various financial instruments (student loans, mortgages, car loans, credit card debt, etc) in junior year of high school before they sign up for college loans. In addition, I think that the government needs to pull back from subsidizing the cost of education AND schools need to stop ratcheting up the cost of tuition (which according to a recent WSJ article seems to have happened — school tuition costs on mass have plateaued this year). Government intervention has created an enormous asset bubble around student loan debt. The more it has tried to make college affordable, the less it seems students are able to repay the debt (not exactly a winning track record). Last, more to your point, I think that a reduced interest rate is prudent (and I would prefer to see it fixed so that student loan payments are not subject to future rate fluctuations) but I do not support going as low as the Fed Funds rate.

  2. sarah e rosenberg says:

    allyson, thank you for your thoughtful comment. i absolutely agree that it's not the most elegant comparison to put student loans (unsecured debt) side by side with home loans (secured debt), but the notion that a young adult (most students going into college are between the ages of 17 and 19) would qualify for that level of debt burden and that somehow the promise of a college or graduate school education would be sufficient leveraging tool is not realistic.

    i agree wholly with your statement that the present system "has created an enormous asset bubble around student debt," and i would go one step further to state that this asset bubble has snowballed (to the extent a bubble can snowball) at a breakneck pace, subsuming all in its path. the cost of higher education in this country has risen to the level at which only the extremely wealthy can afford to take advantage of it without having to resort to seeking outside financing, and the rest of us are at the mercy of the federal governmental entities who at once set the interest rates and make the profit on the interest payments.

    something's gotta give.

  3. Mark Ledbetter says:

    One of the best but most impossible suggestions I've heard for how to fix politics is this:

    "Liberals should define the problems and conservatives should solve them."

    Sen. Warren is good at defining problems, bad at solutions. A bit late, but here's an excellent article: http://finance.yahoo.com/news/dear-class-13-ve-sc

    Liberals once decided that housing was too expensive for the poor and decided to fix the problem with low interest govt. guaranteed loans. The result should have been obvious: housing costs through the roof and an eventual bubble that came close to bringing down the economy (though, in fact, the jury is still out; the economy might yet be brought down).

    Liberals decided education was too expensive and decided to fix the problem with low interest govt. sponsored loans. The result should be obvious: skyrocketing costs of education and another economy-threatening bubble.

    If only we had let liberals define those two problems and conservatives solve them. Unfortunately, it'll never happen. Each side fervently believes that the other is ignorant and probably immoral. So we are fated to have the liberals, including Sen. Warren, propose ridiculous solutions and conservatives to continue in their blindness to the problems.

    Btw, some excellent practical points, Allyson.

  4. sarah e rosenberg says:

    thanks, mark. i liked the article you recommended.

    there are many reasons why this system isn't working. i don't have any solutions. i can see that simply reducing the student loan interest rate to match the rate for banking institutions will not solve the problem, but i do appreciate that warren is willing to call the government out on its favoritism in this arena.

  5. Natali_78 says:

    It’s hard to say how many young people across the world are struggling with their student loans. The education has never been so expensive. How can you be financially independent if you graduate with thousands dollars in college debt? People spend years to pay off their loans. Debt just paralyzes your real life – you can’t buy a home or a car because you already have your student loan debt and if you will increase borrowing then you’ll simply drown in debt. Furthermore, in the US and Canada the job market is quite weak and there are thousands of students who сhoose taking out short term paydayloan in Canada to buy all the necessary things because the wage they get doesn’t allow to cover all the necessary expenses and proceed making payments on college loans.

  6. apple loans says:

    Hey,Great, like most people mentioned, pack lunch, reduce eating out, live with parents. All great ideas, but isn't that why we go to college. If I wanted to work as a car mechanic living in mom's basement, I wouldn't have went to college. I'm not blaming a single student on here for their problems, they have great intentions to get an education, and an educated populace makes a great country, but at some point the next generation will all realize, a better quality of life is not going to college.Thanks you….Marian HS

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