The New York Times has several great stories this week that have nothing to do with a certain "embedded" reporter. (Yes, I am extremely immature.)
I loved Tamar Lewin's article on parents who are in hot water, after taking out enormous debt to help their children attend college. Not enough attention has been given to parents who take out second mortgages on their homes to pay for college, because there isn't good data on this. But we're starting to see the impact on this group, because their default rate is going up. Ugh.
Almost 10 percent of the borrowers over 60 were at least 90 days delinquent on their payments during the first quarter of 2012, compared with 6 percent in 2005. And more and more of those with unpaid federal student debt are losing a portion of their Social Security benefits to the government — nearly 119,000 through September, compared with 60,000 for all of 2007 and 23,996 in 2001, according to the Treasury Department’s Financial Management Service.
Apt. 11d 
There’s also the problem of cosigning, which means that a single loan can bring down both mom and dad and the kid.
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The examples are bizarre, though — the guy who is 27 and still working on his undergraduate degree? Someone who borrowed 300,000 dollars? It’s hard to feel any sympathy for people who do things as monumentally stupid as that.
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I’m not sure how bizarre those people are, Louisa. Our babysitter will spend 8 years getting her BA, because of transfers and major changes. I think that people who make these monumentally stupid decisions need some help so they don’t end up $300,000 in debt and sinking their parents’ finances, too. Either someone needs to shut down the schools that enable kids to get into these troubles or someone needs to prevent people from taking out that much debt. They need counseling to prevent them from making these mistakes. (Broken record, I know.)
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“Either someone needs to shut down the schools that enable kids to get into these troubles or someone needs to prevent people from taking out that much debt.”
Or student loans should be bankruptable, like other consumer debt, and it should not be federally guaranteed (or at least only a very small amount should be).
I was listening to Dave Ramsey a few days ago and there was a student caller who was pondering buying a $10,000 boat to live in as an undergraduate in order to save money on living expenses. He was planning on using student loan money for the purchase. In this particular guy’s case, it wasn’t quite as terrible an idea as it sounds (he was a boat guy who had bought, repaired and flipped a number of boats already), but it’s an illustration of how fuzzy the line is between normal consumer debt and student loans. For an even more far-out example, my husband has a colleague who had a student who used her student loans to buy an expensive horse. And of course Octomom was living on student loans for a while–that’s a surprisingly common life plan.
http://www.nbclosangeles.com/news/archive/NATLOcto-Mom-Interviews–.html
I suspect that quite a number of people have gone back to school during the recession simply in order to be able to borrow money to live on.
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“I suspect that quite a number of people have gone back to school during the recession simply in order to be able to borrow money to live on. ”
I’ve been surmising this, too, from the advertisements I fast forward past on the tivo. It’s the contrast between “going to school” (yes, in air quotes, because what does going to school require), and getting money to live on, versus trying to get a job when you can’t find them (and, we don’t even have to attribute any laziness to the balance — the person might be willing and able to work the job they can’t get). And, failure at a job results in getting fired (and losing your pay), but failure at school ends up putting you in debt (that can’t be discharged).
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I didn’t like the article, though, ’cause it didn’t tell us how their anecdotes got into the debt problems. Although I have sympathy for people in distress, I also don’t think that people end up 300K in debt by accident. There are a series of decisions made, and we have to talk about those decisions, to avoid the outcomes, not talk about debt as though it was like getting hit by lightning (which might also result from some bad decisions, but not as many as getting into 300K of debt).
I can see how people can make those series of mistakes — I myself find the different kinds of loans and their terms to be incredibly complicated (I only learned in the last month or so that Parent Plus loans are offered without regard to ability to pay back the loans, to the full cost of education, and are not dis-chargeable in bankruptcy). I can imagine how a regular parent may miss any of those key factors to the point of being in trouble (especially when you add the social/psychological issues that were clearly at play between the mother/daughter profiled in the article).
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The guy who is 27 apparently was working on a second bachelor’s degree–had earned one “in California” and the second at Columbia (spendy!).
When I was adjuncting at community colleges, I had students who were working their way through, caring of children/relatives/parents, dealing with health or substance abuse issues, lack of parental support, and lots of other reasons why getting a Bachelor’s degree would take that long. It’s easy to judge all of these choices, and it seems that conversations about debt always end up in this kind of rhetorical cul-de-sac.
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The problem feels new because it kind of is: in 1977, room board tuition at Harvard was a third of the median income of 45-54 year olds ($6000/19000). 2010 it was over 70 percent ($50000/70000). I went to Berkeley in mid 70s for $750 tuition and around $1800 room and board, and thought the Harvard kids were living pretty large.
The 70s level of spending you could do, and better still inflation dissolved the debt away. Now, the debt will survive as a great millstone round your neck. Peoples’ notions that this is ‘good debt’ formed during that time, and attitudes are only now adjusting.
Neither as individuals nor as a society can we pay $200 thousand for bachelor’s degrees. We have to find ways to provide education for less. Fewer climbing walls, fewer diversity outreach deans, more online classes, I think. My own view is that we could spend a lot less on football, and things would be just fine.
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“We have to find ways to provide education for less. Fewer climbing walls, fewer diversity outreach deans, more online classes, I think.”
Good online classes are not going to be cheaper – in fact, at my college faculty are already petitioning to have their online classes capped at levels lower than the face to face classes in order to meet the “online best practices” guidelines (here, 45 vs. 35 for some humanities courses). There is so much interaction with students required via email to do a halfway decent job – and so much reading of student writing – involved in these classes. In some fields it may be easy to just set it up and let it run, with multiple choice tests, etc. – but that’s bad practice most places.
I’m all for getting rid of any extra deans or higher-level administrators, but staff that are aware of diversity issues are critical for bringing in different student populations and helping them succeed (at least out here in the predominantly white, rural Midwest).
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“Peoples’ notions that this is ‘good debt’ formed during that time, and attitudes are only now adjusting.”
I haven’t heard the term “good debt” used seriously for several years now, but it was in common use about 5 years ago. (Suze Orman, you have a lot to answer for.)
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Suze Orman tells people that you should never borrow more than your projected starting salary for your first year out of college. So if you will make 60,000 then you can borrow 60,000 total. (In other words, even if the guy who borrowed the 300,000 was elected President of the United STates when he graduated, he’d still need to get a second job.)
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If you don’t have the money saved, it is simply impossible these days to get a law degree without taking on 60K+ in debt. State schools cost as much as the elite privates. And, the pay off for going to a top 5-10 is much much higher, potentially than at a lower rank (and, the precise fall of the cliff varies from year to year — in the stats during this recession, the fall off occurred at 5, when the country was in the bubble, the fall off slipped down to 20, and the precise ranking change from year to year).
So, the 150K of debt you might have to take on to get a law degree might only pass the test, if you go to a top 5 this year (but a top 10 next year). And, you have to worry about the unpredictability of finding jobs at that salary level, in any economy.
This math might mean that fewer people should go to law school and/or they should figure out a way to save 150K before going. But, such math exacerbates the economic differences in our system significantly.
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Not all public law schools are that expensive. UNL is still $15k the last I heard was quick to offer a scholarship if you could boost the entering LSAT average.
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“Suze Orman tells people that you should never borrow more than your projected starting salary for your first year out of college. So if you will make 60,000 then you can borrow 60,000 total.”
I think I’d be more comfortable with 50% of projected annual income as the upper bound for student borrowing.
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UNL? Should I be able to tell what that is? University of Northern Lousiana? (I’m not trying to be funny, or well, if I were, I’d be failing. I really don’t know).
There’s the caveat emptor, though, that the top 5, 10, 15, or 20 matters for law school, and can matter forever, as in one sees advertisements for people +20 years out of law school that still request that they went to a list of 10 or so schools.
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Nebraska-Lincoln. It works fine in Nebraska and probably most surrounding states.
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“I think I’d be more comfortable with 50% of projected annual income as the upper bound for student borrowing. ”
That sounds like a better rule of thumb to me, though I also think the other caveat is that there are professional degrees worth paying for, even with debt. But, you really need to be able to earn them (not be a marginal candidate) and have a pretty good idea that you can use them (i.e. if you’re training to be a nurse, you know that you can handle being a nurse, by having worked in a hospital been an aide, . . . ).
This issue is circling my brain, because I think its a bit like the advice that most people need to save 20% or 30% or some crazy number for retirement (and, the people making those recommendations are usually not including school costs and houses and the rest). One could argue that being frugal means just doing without those things. But, that kind of frugality will create permanent and continuing differences in the population, and, I think, in the end, bring the downfall of our society. It might a last a little while (like the venetian empire after the establishment of the gold class). But, ultimately it will fail.
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bj,
I know I’d cry if we had to pay a debt equivalent to 1 year of annual household income. We paid off a much smaller fraction some years ago ($10k credit card, the remains of a $6k student loan and $10k first car) it was brutal. We’re going to be taking on a mortgage that’s about 2X income in the spring, and it’s a very scary prospect, but at least it’s a pretty sure thing–if we pay the money, we’ll get to keep the house.
“This issue is circling my brain, because I think its a bit like the advice that most people need to save 20% or 30% or some crazy number for retirement”
Dave Ramsey suggests 15% saving for retirement, BUT (and this is an important caveat), that is supposed to be after paying off all non-mortgage debt, saving a 3-6 month emergency fund and saving a downpayment for a house.
http://www.daveramsey.com/new/baby-steps/
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I kind of don’t buy ‘x per cent’ rules: seems to me the defensible way to do this is to identify age at which you intend to retire, and how much per year you think you want at that time, then figure out what number you need to do that. That gives you what you need to save between now and then.
Then, once you have gotten over your panic attack, you decide whether you push back the date of intended retirement, or dial down your hopes of yearly spend, and figure out what amount you need to save for that.
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dave s.’s plan is logical, and the calculators are do that, right? Ask you how much you think you need in retirement, how much you have saved, and tell you how much you need to save every year.
But, the method doesn’t really seem to work for people. I think part of the issue is that the savings does have to be pro-rated for income. You have to increase your savings as your income goes up, and they want to get people in the habit of saving, by sequestering a part of your salary.
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My parents are starting to think that all retirement plans are ridiculous. They saved a lot of money “tax deferred,” and next year will be turning 70 and have to start taking it out. They are both still working (by choice).
Suddenly, my father realized that the money that he saved tax deferred in the 1970s when he was struggling and in a low tax bracket now has to be paid at his current “old and successful” tax rate. He was telling me last week, “I should have just paid the taxes then!”
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“Suddenly, my father realized that the money that he saved tax deferred in the 1970s when he was struggling and in a low tax bracket now has to be paid at his current “old and successful” tax rate. He was telling me last week, “I should have just paid the taxes then!””
Ragtime’s dad, meet the Roth IRA:
http://en.wikipedia.org/wiki/Roth_IRA
I confess a suspicion that there’s eventually going to be a huge temptation for the federal government to tax Roth IRA money a second time, but putting some money into a Roth IRA isn’t a bad idea.
I also like the spousal IRA, which is a nice option for couples with a SAHP.
http://www.moneycone.com/what-is-a-spousal-ira/
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Interesting discussion but I haven’t seen anyone mention what’s happening in high schools — or more importantly what’s not happening which is good career counseling coupled with financial literacy. We teach kids algebra but not the basics of how to manage money and make good decisions.
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Outside of a few school, I have bad news about the algebra.
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Yeah. The Roth IRA started when my parents were in their late 50’s, and they did not qualify. In any event, $5,000 per year for the last 10 years wasn’t going to be the cornerstone of anyone’s retirement.
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