Sunday, September 12, 2010

Educational Loans, Student Slavery to a Bank

It school time, and a lot of our sons and daughters have headed on to college. This is where parents and the young who wish to improve their station in life seek out college loans to finance their great quest. Whether it is a trade school or college, the government will co-sign on these loans. What most people don’t realize is that a college and a trade school are businesses. Without customers who can pay for the services to be rendered, they cannot survive. Student loans are the life blood of higher education and more so for the fly-by-night trade schools.

There is one little snag to the whole warm and fuzzy idea of higher education. Nowhere does it say that you will be offered or even find a job after graduation. The other thing not mentioned is that your field of study might be flooded with graduates or technicians already looking for a job, X-ray technician and dental assistant come to mind. You might not like the idea of moving to Montana, Wyoming or Tennessee, they are not the greatest places if you’re single looking for a wife. Plus usually the single mom with kids, looking for a new career gets cornholed into a trade school that spits out plenty of hope but no real jobs.

So here is what happens, the student applies for these student loans and gets everyone of them. Your kid can run up 20K a year on student loans. So it is not uncommon for a college graduate to have 80K (or more) in student loans and the payments start 6 months after you graduate. Sounds just great doesn’t it, but what happens if you can’t find a job? Once you sign that promissary note, you can never file bankruptcy and wipe that student loan off of your slate. It follows you for life.

Here is a little story of what happened to me many, many years ago at Syracuse University. I graduated in June of 1971. My student loan came due six months after I graduated. The bank sent me a letter with a promissory note to sign for all of the money I had borrowed. The amount was for $4,000 which by today’s standards would be about $40K (inflation—go figure!). As a young padawan, I read the note and several things stood out. (This is from memory, so the wording is not legalese and it has been a long time—39 years) My debt to them was to be paid first even if I filed for bankruptcy. I thought that a little unfair if I owed money to other people, I thought everyone should get a slice of what was left. Then there was a passage that said if the US government no longer existed, I would owe the money to the new government. I thought that a bit strange also. Anyway, there were three lines of verbiage that I did not like, and took a ruler and a pen to and crossed them out. I signed it and mailed it to the bank. They called me and asked me to come down to the bank and I did. When I got there, they informed me that I couldn’t cross out items on their legal agreement, they wouldn’t allow it. The bank manager was saying “You can’t do this!” I explained to him that I already received the money, spent it, and if he didn’t like the agreement, I wasn’t going to sign another just to please him. They defaulted my loan even though I had never missed a payment.

To make a long story short, I paid the interest on the loan every month for 10 years. About that time I was making more money and they called again to see if I would increase my payment. I had been talking to this collection agent for several years and I asked him what the payoff was? He said something strange, “Offer 50 cents on the dollar and see if they take it. So I offered them $1,500 to pay off the $4,000 note and they countered with $1,800. I wrote them a check.

I don’t know if things are still the same, but when Congress offers money to students and these loans are excluded from the bankruptcy laws, they have enslaved our college students to the banks. My advice to students who receive a promissory note to sign, tell the bank to go fish. You already have the money. All they can do is ruin your nonexistent credit rating.

I'm not suggesting that college students walk away from their obligations. But the right to file bankruptcy would make these lenders think twice about the amount of money they would lend to a teenager who has never held a job.

Bankruptcy is a way we can preserve our right to prove to Congress that we don’t have to pay for their bumbling stupidity. College should be the door that opens to new opportunity, not one that leaves students prey to their trusting naive innocence.\

Copyright 2010 All rights reserved

18 comments:

dearieme said...

" if the US government no longer existed, I would owe the money to the new government": but surely you admire that foresight?

JMS said...

The other thing to note is that college education cost have doubled if not tripled during the last decade. When I started college back in the fall of 2000 my tuition was about 3k a year. I went to a state school, stayed with the parents (commuted), and worked part time to pay what I could to keep my costs down. By the time I graduated in the spring of 2005 tuition for the year was over 6k a year. I could not believe how much it went up. I wound up graduated with about 20k in loans which I am paying off. The amount is manageable for me. I know other people of my generation who are graduating with 100k plus loans with bullshit degrees. They have no chance in paying the loans back even if they found a job in that obscure field they want.

Colleges are taking advatage of students now. I think they need to have a financial discussion with a student during admission to discuss the real life implications of a student loan and how to spend less in college. Is an extra 15k a year for room and board worth it just to have the "college" experience?

Don't even get me started on the text book racket. Every year a new edition, written by the professor who is teaching the class, who must teach from the latest edition no ifs ands or buts.

rob in ns said...

The only reason costs have doubled is because the government at least here hands out loans without any regards. I have two sons in university right now and the money they are borrowing to go to school is mind boggling. People will say "yeah but one needs an education to get a good job". Problem is as long as the students are willing to take on debt the universities will have no incentive to cut costs. What is point of getting a job that requires a lifetime of debt servitude to pay off. We have become nothing more than modern day serfs when we accept this.


rob

Ohio Loan Officer said...

"College is not for everyone. Who do you think is hiring all of those new college grads? -- It's some guy who took the risks and worked 80 hours a week building a business. He might be a college grad; but I doubt it. He didn't have the time." ----My Dad

Another anecdote about college---
My wife has a Masters Degree. When she decided to go back to work the best she could find in this economy was a job as a receptionist in a hospital's clinic. She was making half of what the Med. Assistants in the office were making yet she was doing the same if not more work. The doctor gives all orders to her and expects her to delegate tasks to her boss and the other MAs.
So I told her about an on-line MA program that you could get certified in as little as 8 weeks for just $695. She did the program, took the State exam, and informed the hospital that now she was a certified MA. If it was a situation where she was a new hire they probably would have laughed at her diploma from XYZ College. But she is currently an employee and has a legitimate State Certificate. So they have to bump her to the MA pay scale.

You don't learn that in college!

Anonymous said...

If you want to be rich and successful, don't go to college. I think Robert Kiyosaki said that. The educational system, like so many other components in this society, is crumbling. The statistics are horrid and the costs are totally prohibitive. Web training, seminars, workshops, books/CDs/DVDs, etc. are the new college (unless of course you strive to become a doctor, lawyer, or other professional that needs certification). I would never pay the money that colleges expect for tuition... I could pay a lot less for a real education. Apprenticeships and internships will be coming back on a large scale. The micro chip is going to do in formal institutional education (along with this depression). Here's to the death of ineffective archaic institutions!

Anonymous said...

"If you want to be rich and successful, don't go to college"

Sorry, I have to disagree. Since so little under-educated people will actually get rich (by design) they will have to look for "normal" work. So, not having a degree will put most people, especially the young, at a disadvantage in finding any work.

Europe has a better system, students don't leave college with so much debt.

Jeffrey said...

Notice how our laws treat the rich differently. Compare the middle or lower-class student with the rich entrepreneur. The latter can borrow $100k to buy, say, a stake in a MLB team. When the profits never materialize, he can discharge every penny of debt and get a fresh start. His fresh start will be made even easier by the fact that Mom and Dad can give or lend him another helping hand, i.e., seed money.

Most people consider starting a business as more risky than getting a college education. But when the former fails you get to start over debt free. When the latter fails, even through no fault of your own (the economy tanks, the job you trained for is made obsolete by technology or is off-shored), you're stuck for life.

BTW, Jim, I wouldn't recommend your plan of action to anybody today. Back in 1981, your loan was dischargable in BK, which is why they accepted a partial payment. Today it is never dischargable. Moreover, the collection agents for these loans have powers that no ordinary collection agent has, i.e., they can garnish your SS checks after you are retired, collect your tax refund directly from the government before you even see it, garnish alimony payments --- it is nothing short of debtor's prison for the most vulnerable Americans: young people with no money hoping to better themselves through higher eduction. And notice how there is almost no mainstream information telling these people that higher education is a HUGE RISK. In fact, quite the opposite.

Anonymous said...

I think that the best and brightest with sought after skills will relocate to other countries to cut the cord on the crazy debt loads. Community Colleges have been systematically starved in favor of private colleges. Too bad we have made so many mistakes in our culture.

Jim in San Marcos said...

Hi Jeffery

I know with the one and two year trade schools, you sign the promissory note up front before you attend school, they know the exact cost of the whole program in advance. Plus your note is discounted by the school and sold into the private market immediately.

But with college loans, (and this could have changed) you sign the note after you have borrowed all of the money you need, or the 6th month delay period has expired. It's the signing of that note that damns you for eternity. At this point the bank has a financial instrument that is fungible.

Maybe there is a banker out there that can clarify this issue.

AIM said...

Jim,
Interesting discussion.

It's the same old story. This time it is education. But it is also with wanting and buying: businesses (or starting one), homes, cars, furniture, appliances. You're either the banker or the borrower. The way this society and economy is constructed... it is best to be the banker/creditor.

Anonymous said...

"Neither a lender or borrower be." That is a proverb that is not being paid attention to.

In this society the winning formula is "to be the bank".

Look at the arrangement: they loan out money that they don't even have (thanks to fractional reserve lending) and they can borrow from the Fed for 0% and then buy treasuries that give them a 2-3% return. Total theft in my mind.

It is the biggest scam in this country--- next to the US government that is.

Raises a point about inflation--- you don't really have to worry about high inflation--- the government has already proven that they are in bed with the banks by choosing to save them instead of the taxpayer. They'll never let inflation get out of hand because the banks don't want it--- they don't want their loans paid back with cheap dollars (they are already getting stiffed on a large percentage of their home loans (the houses are coming back to them and they are only worth 50% of the value they held when they were originally underwritten.

Big business and banks run our Congress. Don't worry about high or hyper-inflation--- it will be gradual increasing, as always.

frakrak said...

It seems every forth or fifth person I meet down under are expat Americans. I call them the advance guard! My suggestion to all your university graduates is to emigrate down under. Perhaps in five or ten years it will be every second person I meet :-)

Wait a little while until our realestate bubble tanks, here's a link http://www.debtdeflation.com/blogs/
and be part of a nation building process, that could help kick start both countries into something bigger and better than before.

Your banking institutions (lets say the big four need not apply).
Here's to giving our younger generation renewed hope in a free market system that isn't rotten to its core.

The link provided gives a break down on the a-z of economic theory, commentary on the GFC, and for all you potential "New" aussies a little background into our economic strengths and weakness...
come on down :-)
cheers

Anonymous said...

Because of our great leaders here in America, all of our taxi drivers and grocery store clerks have master's degrees or PhD's from prestigious universities.

I guess that is from our "trickle down education" policy.

Ya gotta laugh people... if you don't you'll start crying.

Jim in San Marcos said...

Hi Frakrak

Australia could be the new student lifeboat.

Your country is about the same size as the US. They will have a rough time with the seasons being reversed, but it should work out OK.

Escape to a new life-- with youth-- now there is a life that eludes me-- Australia could be that second chance for many a student.

dearieme said...

At least (government) student loans in Britain expire when you reach 45. But due to the wonders of the EU our government has to give loans to any EU students who attend British universities and then has no way of enforcing repayments if they go back home. It's as if your government gave loans to Canadians and Mexicans.

Anonymous said...

THIS IS WHAT YOU INFLATIONISTS ON THIS BLOG ARE MISSING AND DON'T UNDERSTAND. IT'S NOT THE MONEY SUPPLY IT IS THE CREDIT THAT DWARFS IT WHICH HAS THE BIGGEST EFFECTS ON US. INCREASES IN PRICES IS VERY SECONDARY.

http://globaleconomicanalysis.blogspot.com/2010/09/myths-about-whats-economically.html

AIM said...

Good article Anon 12:11. I agree with it. We are and will have some price increases (you can call it inflation) but the credit contraction is huge and will prevent The Fed from stopping the deflationary spiral through increasing the money supply. We'll be in a deflationary period for quite some time (and that is even without the banks finally marking all their assets to market--when that happens they'll be another heavy deflationary drop!)

Getting back on topic... it seems almost surreal that tuition costs are going up while job and career opportunities are going down. Education is a rather poor investment at this point in time for our youth (especially when there are ironclad debts connected to it). Doesn't give this new generation coming into the work force much hope, does it?

Do you think the key players who created this credit collapse (Greenspan, etc.) and the players who are "rescuing" us and bringing a "recovery" to us have any idea of the destruction that has been caused in the lives of the American people and its youth? Ugh! Don't know how they can sleep or look at themselves in the mirror.

Jim in San Marcos said...

Hi AIM

I disagree with 12:11. Mishes blog had no facts and it was entirely statements that had to be accepted at face value.

I do not link "expanding credit to inflation." Nor do I link "Contracting credit to deflation."

Deflation and inflation have nothing to do with credit.Of course if you have loans, you do have to deal with the issue. You can state that in good times more credit is extended and vice versa in bad times.

Deflation has to do with the overproduction of goods that no one wants.

Inflation has to do with goods in demand, you can charge more for them.

To say that "expanding credit created an enormous housing bubble," is wrong. It was people wanting to get rich that caused the housing bubble. There was always the greater fool willing to buy and rake in the profit.

Deflation occurs when you have too much of something and nobody wants it--kind of like housing and autos.

Inflation occurs where there is a scarcity of product, like gasoline, steaks, potato chips, charcoal and beer. If you want it, you have to pay the price.

I'm not buying steak anymore and the price hasn't gone down, but we like chicken, so it is no big deal.

There is one special case with inflation, when government prints money to pay bills. At that point, there is less product for consumption because people are not working. Sooner or later, you are going to want real money for your hard work and unemployment checks are not hard work (you have produced nothing, but the government says you are entitled to part of the crop). The producer will demand more for what he makes than the guy cashing his unemployment check.

That's inflation government style and credit doesn't even enter the picture.