During a White House briefing for online personal finance editors last week, President Barack Obama was asked about the financial advice he himself had found most valuable. The president laughed at his Kansas-born grandmother, who rose through the ranks from bank secretary to vice president and taught him the importance of savings and the “magic of compound interest.” – both by the federal government and by individuals.
“When Michelle and I graduated in law, our combined debt was $ 120,000 and it took us 10 years to pay it off. We were lucky because we had gone to law school where we knew we could win it, ”said the Harvard Law alum. “It’s still smart to spend on things that will increase your productivity and income in the long run. The same way law school paid for Michelle and me, ”he added.
Obama’s main point was political, that his deficit reduction plan leaves more room than House Republicans for domestic spending on things he sees as investments, such as education, infrastructure and research. But for families, his observation raises an issue just as urgent as the $ 14.3 trillion federal debt: Is the $ 35,000 borrowed for a bachelor’s degree in philosophy, $ 50,000 for a master’s in journalism, or $ 100? Is $ 000 for a Law Degree (not Harvard or Yale) Really a Smart Investment?
In 10 steps to make your child a millionaire, the cover of Forbes’ new investment guide, William Baldwin suggests that parents encourage their children to consider earning a cheaper bachelor’s degree by attending a less prestigious school that offers them more “merit aid” or by passing. first two years at a community college. When it comes to graduate school, he writes, calculations by Boston University economist Laurence Kotlikoff show that the extra debt and years of lost income do not pay off in significantly higher consumption over the course of time. of life. Concludes Baldwin: “Get further education if you like reading books,” says Kotlikoff. Don’t do it for the money.
Fair enough. Don’t study just for the money. But what if borrowing for education leaves you worse off? That’s a real risk these days — and not just for low-income students who are pressured to borrow big bucks to attend for-profit “career colleges” that don’t lead to jobs.
According to preliminary statistics from the Department of Education, 8.9% of students who were due to start repaying their federally guaranteed loans in the year ended September 30e, 2009, had already been missing on September 30e 2010.
Admittedly, this group was hit by the Great Recession. This is why a report by the Institute for Higher Education Policy on the five-year repayment history of borrowers who began repaying in 2005 is even more disturbing. (Technically, you go into repayment six months after leaving school, whether you graduate or not.)
After five years, 15% of the 2005 repayment class had defaulted on their loans at some point, while 26% had become past due, missing a payment deadline of more than 60 days, but avoiding default. . Most of the time, they dodged the default by entering “postponement” or “forbearance”, in other words, postponing the repayment. So that’s 41% who had already damaged their credit report and an unknown number who could struggle with their debt for years.
But there is more. 16% of them were suspended or abstained due to economic difficulties or unemployment, without first becoming technically delinquent. (In other words, they were conscientious but broke.) Additionally, 7% had gotten a deferral of repayment because they were back in school — and maybe doubled their stake by contracting even more of loans. Only 37% had repaid their loans on time, without delay or setback, for the full five years.
It’s no surprise that students who went to two-year career colleges had the worst repayment record: 36% had defaulted and 27% had become delinquent without defaulting. But even the most reliable borrowers – those who attended private, four-year nonprofit colleges – were showing the pressure. Of this group, 8% had defaulted and 20% had become faultless delinquents.
On June 1, the Department of Education released final “paid employment” rules designed to potentially ban career schools whose students do not earn enough to repay their debts from the federal guaranteed loan program. It should be noted that the rules were so weakened from an earlier version that shares of for-profit education companies such as the Apollo Group (which owns the University of Phoenix); Corinthian Colleges Inc., Strayer Education Inc. and ITT Educational Services surged.
The new rules only apply to the for-profit sector, although in a provocative article yesterday, Inside higher education suggested that the idea of measuring higher education outcomes in terms of employability — and return on loan dollars invested — could one day spread to regulations affecting the rest of the industry of higher education.
Hopefully. But don’t hold your breath. The education lobby is powerful, and the federal government has fueled the growth of heavy (and too often unpayable) student debt, just as it has helped inflate the mortgage bubble.
So for now, it’s student borrower beware. Just because the government is offering to lend you money doesn’t mean it’s a good idea to take it. Remember, this is not free money. Student debt is almost impossible to write off in bankruptcy, and even the government’s new “income-dependent” loan repayment program (which cancels some loans if you don’t earn enough to pay them off) could prevent you from paying off a loan. student up to 25 years old. year.
For the Forbes 2011 Investment Guide, click here.
For tips on deducting interest from student loans, click here.