The Subprime Crisis of Student Debt

[Cees Binkhorst]

REPLY TO: D66 at nic.surfnet.nl

Wat zouden onze politici doen in zo'n situatie?
Ook wettelijk regelen dat een studielening buiten een faillissement blijft?
Ik zie het Hirsch Ballin en Donner nog wel doen eerlijk gezegd, en Rutte
ook.

Groet / Cees

May 28, 2010
The Subprime Crisis of Student Debt
http://www.nytimes.com/2010/05/29/your-money/student-loans/29money.html
By RON LIEBER

Like many middle-class families, Cortney Munna and her mother began the
college selection process with a grim determination. They would do
whatever they could to get Cortney into the best possible college, and
they maintained a blind faith that the investment would be worth it.

Today, however, Ms. Munna, a 26-year-old graduate of New York
University, has nearly $100,000 in student loan debt from her four years
in college, and affording the full monthly payments would be a struggle.
For much of the time since her 2005 graduation, she’s been enrolled in
night school, which allows her to defer loan payments.

This is not a long-term solution, because the interest on the loans
continues to pile up. So in an eerie echo of the mortgage crisis, tens
of thousands of people like Ms. Munna are facing a reckoning. They and
their families made borrowing decisions based more on emotion than
reason, much as subprime borrowers assumed the value of their houses
would always go up.

Meanwhile, universities like N.Y.U. enrolled students without asking
many questions about whether they could afford a $50,000 annual bill.
Then the colleges introduced the students to lenders who underwrote big
loans without any idea of what the students might earn someday — just
like the mortgage lenders who didn’t ask borrowers to verify their incomes.

Ms. Munna does not want to walk away from her loans in the same way many
mortgage holders are. It would be difficult in any event because federal
bankruptcy law makes it nearly impossible to discharge student loan
debts. But unless she manages to improve her income quickly, she doesn’t
have a lot of good options for digging out.

It is utterly depressing that there are so many people like her facing
decades of payments, limited capacity to buy a home and a debt burden
that can repel potential life partners. For starters, it’s a shared
failure of parenting and loan underwriting.

But perhaps the biggest share lies with colleges and universities
because they have the most knowledge of the financial aid process. And I
would argue that they had an obligation to counsel students like Ms.
Munna, who got in too far over their heads.

How many people are like her? According to the College Board’s Trends in
Student Aid study, 10 percent of people who graduated in 2007-8 with
student loans had borrowed $40,000 or more. The median debt for
bachelor’s degree recipients who borrowed while attending private,
nonprofit colleges was $22,380.

The Project on Student Debt, a research and advocacy organization in
Oakland, Calif., used federal data to estimate that 206,000 people
graduated from college (including many from for-profit universities)
with more than $40,000 in student loan debt in that same period. That’s
a ninefold increase over the number of people in 1996, using 2008 dollars.

The Family

No one forces borrowers to take out these loans, and Ms. Munna and her
mother, Cathryn, have spent the years since her graduation trying to
understand where they went wrong. Ms. Munna’s father died when she was
13, after a series of illnesses.

She started college at age 17 and borrowed as much money as she could
under the federal loan program. To make up the difference between her
grants and work study money and the total cost of attending, her mother
co-signed two private loans with Sallie Mae totaling about $20,000.

When they applied for a third loan, however, Sallie Mae rejected the
application, citing Cathryn’s credit history. She had returned to
college herself to finish her bachelor’s degree and was also borrowing
money. N.Y.U. suggested a federal Plus loan for parents, but that would
have required immediate payments, something the mother couldn’t afford.
So before Cortney’s junior year, N.Y.U. recommended that she apply for a
private student loan on her own with Citibank.

Over the course of the next two years, starting when she was still a
teenager, she borrowed about $40,000 from Citibank without thinking much
about how she would pay it back. How could her mother have let her run
up that debt, and why didn’t she try to make her daughter transfer to,
say, the best school in the much cheaper state university system in New
York? “All I could see was college, and a good college and how proud I
was of her,” Cathryn said. “All we needed to do was get this education
and get the good job. This is the thing that eats away at me, the
naïveté on my part.”

But Cortney resists the idea that this is a tale of bad parenting. “To
me, it would be an uncharitable reading,” she said. “My mother has tried
her best, and I don’t blame her for anything in this.”

The Lender

Sallie Mae gets a pass here, in my view. A responsible grownup co-signed
for its loans to the Munnas, and the company eventually cut them off.

But what was Citi thinking, handing over $40,000 to an undergraduate who
had already amassed debt well into the five figures? This was, in
effect, a “no doc” or at least a “low doc” subprime mortgage loan.

A Citi spokesman declined comment, even though Ms. Munna was willing to
sign a waiver giving Citi permission to talk about her loans. Perhaps
the bank worried that once it approved one loan, cutting her off would
have led her to drop out or transfer and have trouble paying back the loan.

Today, someone like Ms. Munna might not qualify for the $40,000 she
borrowed. But as the economy rebounds, there is little doubt that plenty
of lenders will step forward to roll the dice on desperate students,
especially because the students generally can’t get rid of the debt in
bankruptcy court.

The University

The financial aid office often has the best picture of what students
like Ms. Munna are up against, because they see their families’
financial situation splayed out on the federal financial aid form. So
why didn’t N.Y.U. tell Ms. Munna that she simply did not belong there
once she’d passed, say, $60,000 in total debt?

“Had somebody called me and said, ‘Do you have a clue where this is all
headed?’, it would have been a slap in the face, but a slap in the face
that I needed,” said Cathryn Munna. “When financial aid told her that
they could get her $2,000 more in loans, they should have been saying
‘You are in deep doo-doo, little girl.’ ”

That’s not a role that the university wants to take on, though. “I think
that would be completely inappropriate,” said Randall Deike, the vice
president of enrollment management for N.Y.U., who oversees admissions
and financial aid. “Some families will do whatever it takes for their
son or daughter to be not just at N.Y.U., but any first-choice college.
I’m not sure that’s always the best decision, but it’s one that they
really have to make themselves.”

The complications here go well beyond the propriety of suggesting that a
student enroll elsewhere. Colleges don’t always know how much debt its
students are taking on, which makes it hard to offer good counsel.
(N.Y.U. does appear to have known about all of Ms. Munna’s loans, though.)

Then there’s a branding problem. Urging students to attend a cheaper
college or leave altogether suggests a lack of confidence about the
earning potential of alumni. Nobody wants to admit that. And once a
university starts encouraging middle-class students to go elsewhere, it
must fill its classes with more children of the wealthy and a much
smaller number of low-income students to whom it can afford to offer
enormous scholarships. That’s hardly an ideal outcome either.

Finally, universities exist to enroll students, not turn them away. “Aid
administrators want to keep their jobs,” said Joan H. Crissman, interim
president and chief executive of the National Association of Student
Financial Aid Administrators. “If the administration finds out that
you’re encouraging students to go to a cheaper school just because you
don’t think they can handle the debt load, I don’t think that’s going to
mesh very well.”

That doesn’t change the fact, however, that the financial aid office is
still in the best position to see trouble coming and do something to
stop it. University officials should take on this obligation, even if
they aren’t willing to advise students to attend another college.

Instead, they might deputize a gang of M.B.A. candidates or alumni in
the financial services industry to offer free financial planning to
admitted students and their families. Mr. Deike also noted that the
bigger problem here is one of financial literacy. Fine. He and N.Y.U.
are in a great position to solve for that by making every financial aid
recipient take a financial planning class. The students could even use
their families as the case study.

The Options

The balance on Cortney Munna’s loans is about $97,000, including all of
her federal loans and her private debt from Sallie Mae and Citibank.
What are her options for digging out?

Her mother can’t help without selling her bed and breakfast, and then
she’d have no home. She could take her daughter in, but there aren’t
good ways for her to earn a living in Alexandria Bay, in upstate New York.

Cortney could move someplace cheaper than her current home city of San
Francisco, but she worries about her job prospects, even with her N.Y.U.
diploma.

She recently received a raise and now makes $22 an hour working for a
photographer. It’s the highest salary she’s earned since graduating with
an interdisciplinary degree in religious and women’s studies. After
taxes, she takes home about $2,300 a month. Rent runs $750, and the full
monthly payments on her student loans would be about $700 if they
weren’t being deferred, which would not leave a lot left over.

She may finally be earning enough to barely scrape by while still making
the payments for the first time since she graduated, at least until
interest rates rise and the payments on her loans with variable rates
spiral up. And while her job requires her to work nights and weekends
sometimes, she probably should find a flexible second job to try to
bring in a few extra hundred dollars a month.

Ms. Munna understands this tough love, buck up, buckle-down advice. But
she also badly wants to call a do-over on the last decade. “I don’t want
to spend the rest of my life slaving away to pay for an education I got
for four years and would happily give back,” she said. “It feels wrong
to me.”

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