The Student Loan Problem

You may have seen the recent story about the 41-year-old doctor who graduated from medical school in 2003 with student-loan indebtedness of $250,000 that has since swelled to more than $555,000. She is now scheduled to pay $990 per month until she is 70 years old. Ouch!

This is an extreme example of a widespread problem. Only 40 percent of the $730 billion of outstanding student loans are actively being repaid. This isn’t healthy for financial institutions and it isn’t healthy for many young Americans. Just as was the case with the ongoing mortgage fiasco, there is plenty of blame to go around for this sorry state of affairs.

It’s easy to say that those who borrow to pursue their post-secondary education bear the primary responsibility. The first rule of survival in a market economy is caveat emptor (“let the buyer beware”). Nobody forced anyone to go into debt.

Still, it is significant that almost all student loans are taken out by Americans too young to know what it takes to pay their bills and make a living on their own. Undoubtedly, some unscrupulous students will borrow money with every intention of avoiding repayment; however, I believe that most borrowers sincerely intend to fully repay their debt. The problem is—due to their lack of maturity and, yes, intellectual development—they literally have no idea how hard it can be to repay $50,000 or $100,000 of debt.

My wife and I recently entertained two of her former college students—intelligent, talented young ladies laden with considerable debt. The one owes over $100,000 and has a bachelor’s degree in theatre. She has an entry-level position with a business, and no realistic prospect of repaying her debt before she turns 40. Much wiser now at age 23, she realizes the gravity of her predicament. She most emphatically wouldn’t have sustained such debt if she had known then what she knows now, but now she’s stuck.

Like many young adults in her position, the price for her indebtedness is more than monetary. There are very few young men out there who are willing to marry somebody with a six-figure debt chained to her ankle. (Apologies to all the romantics out there, but that’s the way it is.) Here you have someone whose strongest desire is to be a wife and a mother, but her student-loan debt makes her a leper to most men in the marriage market. Sad.

I have heard people suggest that colleges and universities provide debt counseling to students so they don’t get in too deep. My employer, Grove City College, requires students to attend debt management seminars as a requirement for participating in its privately-funded loan program. That is a wonderful program, but the reality is that colleges are businesses and, like all businesses, are hungry for revenue. Expecting them to counsel students to drop out or transfer to an inexpensive junior college is like expecting a fox to warn chickens not to go into foxholes because they might be eaten. It just isn’t the nature of the beast.

That leaves the lenders. As was the case with defaulted mortgages, lenders protest that they explained the dollars and cents of the student loans thoroughly. And again, it is safe to assume that some of them really did, just as some of them really did not alert starry-eyed, naïve youngsters to the pitfalls inherent in taking on large debts. Let’s face it, if loan officers profit from issuing loans, they have every incentive to write as many as they can.

Normally, I would say there is nothing objectionable about that, but in this case, I believe that public policy once again is guilty of having altered normal market incentives. I refer to laws that make it almost impossible for student loans to be erased through bankruptcy.

Now don’t get me wrong—I believe strongly that debts should be repaid. A society that makes it too easy for individuals to walk away from their financial obligations does not sufficiently uphold the foundation of economic progress—property rights—and consequently jeopardizes economic progress. But in the student-loan market, government has created moral hazard: Knowing that government will take extraordinary measures (even garnishing unemployment checks) to see that student loans are repaid, issuers of student loans feel bulletproof, and proceed to crank out as many loans as they can. If they knew that they might lose their loans through normal bankruptcy proceedings, they would do what prudent lenders always should do: Assess risk very carefully and issue fewer loans to starry-eyed kids who want to pay $30,000 per year for a degree with minimal market value.

I don’t pretend to know how to get out of the current mess. It would have been much preferable had we never gotten into it. I do believe, though, that it isn’t right for financially incompetent young Americans to be penalized for decades because no adult who knew better stopped them from making a foolish financial mistake. Let’s have some mercy here.

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  • Cooky642

    Having a daughter who’s about to receive her Masters Degree, and a grandson in the initial stages of community college, I’m quite interested in the ramifications of this issue. So, I have to ask: what do you think of Mr. Obama’s idea of “forgiving” student loan indebtedness after something like a 20-year period?

  • Claire

    I graduated from college almost 19 years ago, with a considerable amount of debt (although nothing compared to what students accumulate today). As the article points out, when I started school I had no understanding of the ramifications of the loans I was taking out. I hope to have my son live at home for college, attending a community college for two years and then transferring to the local state university in order to keep his debt reasonable.

  • kjww

    Not only young adults are faced with this problem.

    Many adults of all ages, lured back into college with the goal of obtaining a degree, struggle to complete the coursework. They are the working poor, who take 2 or 3 classes a semester because they are able to receive financial aid.

    How many years, taking 12 credits a year, does it take to graduate? (In my state, an elementary education major requires 145 credits–that would take 12 years of evening classes.)

    In the meantime, their families suffer because they are away from home 2-3 nights a week for classes, plus the additional time they need to study.

    The Catch-22 of this scenario is that they can never quit school. Once they have started taking out student loans to pay for these 2 classes a semester, they have debt they cannot repay on their usual wages. If they stop taking classses for 6 months, they are required to pay back the loans, which they are not able to do. I know many people who have started down this road, but few who have reached the end. Many I know have defaulted on their loans.

    Unfortunately, if you are working for low wages and spend years building debt while earning a degree, you are not guaranteed a good-paying job when you are done. In fact, the extra income you earn may simply be spent paying those loans back. (In my state, starting wages for a teacher is $26,000.)

    I agree with you; I don’t think these individuals understand what they are undertaking. They can only see the wages at the end, and not the sacrifices it will take or the actual debt they are taking one. It’s a frustrating situation. Thank you for this article.

  • In Florida they have bright futures scholarships that are paid for through the lottery. That’s why I play the lottery, 10 dollars a week, to support it. 😉

    It’s paid for 3 of my kids already (with one going a private school on almost all school and bright future scholarships and grants, with only a 10 thousand in school loan to re-pay)and I hope it pays for the rest. I would think this program could be imitated in most states.

    But as far as school loans are concerned, My husband and I are not so lucky. They get you with the interest, and get you good. A 40 thousand loan can grow quickly into a 100,000 dollar loan before you know it. Their are cute little cuddly things till you feed them. Fortunately we found a program for our loans called the ‘Direct loan program’ where we consolidated all the loans, and pay according to our income and after 25 yrs the balance is forgiven. It’s better then nothing. This way they can’t go after our kids. And you have to be up on the paperwork they throw at you. It is in their best interest to see you tripped up and have to start the whole clock over again.

    To bad the stimulus money did simply go to releasing people from bad loans and then get put into a slush fund for education.The money is out there, there is no reason any American should be in debt to go to college.


  • [[To bad the stimulus money did simply go to releasing people from bad loans and then get put into a slush fund for education.The money is out there, there is no reason any American should be in debt to go to college.


    I meant to say it’s too bad the stimulus money DIDN’T simply etc…sorry.

  • One of the best gifts my Mother ever gave me was a paid-for college education. She saved through her employer for years before I went away, and when the time came, she had enough to pay the bill for me in full. Only after the fact, hearing about people’s student loan stories, did I realize what she had given me.

    Also after the fact I recognized that I might have been better, given the way my brain works, not going to college at all and instead taking up a trade. I certainly could have delayed college a few years to get some work experience first. I would recommend to all parents having children of that age, not to pressure them to go to college. It may not be the right choice. Sometimes a child just knows what’s best for him.

  • neiders

    I too had student loans 35 years ago, it was what made it possible for me to attend college at all. And it was also what made it possible for me (in spite of a semmingly useless degree in art) to pay them back because I did get a good job. Relatively speaking it was a huge amt. $ compared to my early salary but eventually it was done and I do not regret it.
    My children also have some school loans because the cost is astronomical and there is no way to have this kind of cash available, especially with more than one child and having spent thousands for lower level catholic education. But we are watching the amounts, and making sure they choose a field where they will get a job. Because for a Bachelor’s degree there is no other option and in this world they need a degree or more.
    Community college is ok but we see many students here do that and then never get to the next step the BA/BS, they end up staying in school longer to re-do requirements etc- needed to transfer and it ends up costing as much or more.
    Why does it costs so much is the real question here, and how do we get the loan interest rate cut?

  • mstapleton

    I think all states should follow suit of Georgia and how they use some of the lottery money towards education in this manner: Georgia’s HOPE Scholarship Program: As one of the most successful education initiatives in Georgia history, the lottery-funded HOPE (Helping Outstanding Pupils Educationally) Scholarship Program provides Georgia students with tuition, mandatory fees, and a book allowance for attendance at any of Georgia’s public colleges, universities or technical colleges. Georgia high school graduates with a 3.0 grade point average in core-curriculum classes may be eligible to receive a HOPE scholarship. A $3,500 scholarship per academic year is awarded to eligible students attending Georgia private colleges/universities full-time.

  • kent4jmj

    Austrian School Economists, predicted for a long time now, that inflating currency creates a bubble that will eventually pop. Savings and Loan, Fannie Freddie, Housing etc. are prime examples. Only a Free Market, truly free not managed, will dictate the true value of anything. It will also create healthy competition which drives prices down.

    1 Colleges had no incentive to lower costs. Credit was too easy for students.
    2 Colleges in a free market would have to compete with all forms of education and that kind of competition is very healthy.
    3 A radical paradigm shift from Keynesian to Austrian economics needs to happen now or else we will continue the same mistake over and over again. Isn’t that the definition of insanity? Doing it wrong over and over thinking it will work?

    Where is all this credit and debt leading us? Someone holds the note you know and they will want to be paid. You don’t expect the FED to treat you and me like they do Goldman Sachs/AIG?

    “…the old trapper replied, “Simple. I started putting the feed out in a
    small clearing and the hogs began freely eating the feed. It didn’t take
    long and they were there every day. Then I put up the fence posts, but with
    no fencing. At first the hogs were a little skittish, but it wasn’t long and
    they ignored the posts. Then I began putting the fence up, but I left the
    gate off. Again, the hogs were skittish at first, but soon realized they
    could come and go freely, and before long, they were devouring the free food
    with a vengeance. Then, one day when the hogs were aggressively consuming
    the vittles, I slammed the gate closed.”

    One last point. Is it true mercy for Government to steal money from one man to practice charity towards another?

  • kent4jmj

    Notice the prophetic statement made in this article from 07.
    “Stronger proposals, such as to bypass the private lenders altogether and have all students get their loans directly from the federal government, would be disastrous. At root the problem is massive government subsidies and regulations, and more of the same will only make the situation worse.”

  • allboys

    The average student loan is about $20,000. A sizable sum, to be sure, but not overwhelming by any means. It’s about the price of a new car. And one reason that only 40% of loans are currently being repaid is that many of the debtors are still students. Many of the real student loan tragedies involve low-income students who borrowed to attend proprietary schools and either never finished, or have been unable to secure a decent job with the degree or certificate they received.

    But here is what I do not understand: What led an apparently otherwise intelligent young woman to borrow $100,000 for a degree in THEATER, when her primary life’s goal was to be a wife and mother? For what sort of job did she imagine that such a degree would qualify her? Did she ever undertake the due diligence of researching the employment value of various degrees before she decided on a college and course of study? Where were her parents when she was making these important decisions?

    Perhaps the real “problem” is that too many colleges are enrolling too many students who don’t really belong there, and awarding them degrees in non-rigorous, essentially useless disciplines such as “communications” and “gender studies.”

  • rwalter

    “I do believe, though, that it isn’t right for financially incompetent young Americans to be penalized for decades because no adult who knew better stopped them from making a foolish financial mistake. Let’s have some mercy here.”

    So where does personal responsibility come into play? If ‘financially incompetent young Americans’ aren’t penalized, then taxpayers are on the hook. Mercy equals someone else (taxpayers), without consent, being asked to pick-up the bill. Student loans have been way too available, contributing to the rising cost of education. As pointed out by allboys, there are too many students who do not belong in college, majoring in subjects that have little lasting intellectual value, let alone market value. The average college curriculum today, in terms of rigor, is equivalent to the average high school curriculum 30-35 years ago.

    The accountability issue is huge. We have it with sub-prime mortgages, failed companies (hello GM) and failed banks. People who are diligent, self-sacrificing, and live within their means are expected to pay for the errors in judgment and failures of others. We have to return to an ethic of personal responsibility.

  • nathan.faucher

    Speaking as someone who is currently paying student loans and has only been out of college for close to three years, I know firsthand the situation that many people get into in regard to student loans.
    One of the biggest things that kids, and most parents, fail to understand, is that the money you’re given is to pay for your education, not to buy your new car or xbox 360, or big screen TV for your dorm. There is a pervasive problem of spending what one does not have, and this is something that’s not taught anymore. The prevalent attitude in society today is one of get what you want no matter how do you it. This leads to the spending of money that isn’t there, with the result that 10 years down the road, there is some serious debt built up.
    In response to allboys, I can understand where that theatre student is coming from, since I was basically in the same boat. It took me 3 1/2 years to decide on a major, which I am currently doing nothing with, for lack of jobs and because most require at least a masters degree. Society forces us to look at college as the only option to do anything with our life. Had I known that I could do what I am without a college education, I might have considered doing so. I would have saved tens of thousands of dollars, not to mention 5 years of my life, by not going to college. Everyone tells us young people that we must attend college, but they fail to tell us how to pay for it, or what real benefits there are from attending college. Unfortunately, a lot of colleges really do not help with job placement within the selected majors as well, particularly if one does not pursue at least a masters degree. As the article said, colleges are businesses. They’ll do what they can to make money. I remember a professor telling me to go abroad for a semester, and when I told her I could not afford to (because I had to work) she simply told me I could get a loan through the school.
    What’s really needed is for parents to engage their children, and let them know that college isn’t always a necessity. Yes, education is a good thing, but not at the expense of mortgaging your future. Kids need to be instructed to do research into loans and into the possibility of job placement once their college careers are over. They also need to be taught how to be fiscally responsible. Most college students acquire credit cards, usually through their schools or through special college programs credit card companies create, with no idea of how to pay off all that they put on the card. I was fortunate enough to be told many times by my parents to never spend more than I could afford on my credit card, which is something I never did.
    The societal mentality that education is everything needs to be changed at the most basic level; the family. Instant gratification, the taking out of loans and credit cards to do what and get what you want during college years needs to be done away with. Only by teaching kids can they learn how to responsibly take out loans and plan for their financial future, without paying it all back for the rest of their lives.

  • terrygeorge

    such an important issue to address and so many good comments!

    student loans and govt money for educational institutions are exaccerbating the problem. the more we give in that repect the more the colleges and universities raise there costs and cry they need more. it is an unending cycle.

    parents and schools pressure children greatly to attend college, and into accepting loands to do so. this would also contribute to the children making bad decisions. many adults do not have good financial skills to pass on to their children.

    the church should teach better financial responsibility also, to adults also. we have the wisdom books in scripture but they are largely bypassed by the cyles of readings. this could be useful in other areas as well.

    i question whether those people who comprise and motivate the federal govt might perhaps want many of us to be in debt for extended periods. people in debt can be pressured to do things they otherwise wouldn’t: working extra hours away from family often without full pay, continuing to work under adverse conditions, delaying childbearing and limiting family size so both parents can work. and here is the big one: placing children in the care and influence of others in order to pay back debt. so control of the next generation begins. where is the conspiracy theory about that?

    anyhow i have to get back to work so i can pay off my student loans and buy a new house 😉

    hope we find a solution. there does need to be more risk to those pushing the loans. at the same time perhaps student loan insurance should be required that would cover defaults.

  • Kathryn

    My parents also paid for my college education. I am not sure this was a good thing, though, as I sometimes think a lot of it was wasted. Gotta love 20/20 hindsight. I will say this, though: it always amazed me that my dormmates who had loans had money to go away on Spring Break. Where did I go? Home. What did I do Christmas Break and Summer Break? Work for not much more than minimum wage.

    My parents went to college just after WWII and Dad said he had to “compete” with the boys (now men) who came home from the war. It was tough but Dad did well for himself and would often tell us tales about how he (and then he and Mom) didn’t have this or didn’t have that. I was spoiled by comparison, and from what I’ve seen, the kids these days are in even worse shape.

    I can’t help but wonder if college isn’t made more expensive by the lack of proper training in the younger grades. An aquaintance of mine was telling me her college daughter’s roommate had taken honors English, but somehow never really had a paper corrected. It seems all the red ink she was getting was quite the blow. I remember my own college math class. It was a rehash of highschool Algebra II, and didn’t cover as much frankly. I paid plenty for those credits and learned nothing new. Come to think of it, I didn’t learn anything new in my college French classes either, not until junior year or so, and it was my major.

    I would agree that government is a large part of the problem, but also think the system as a whole is a problem. We are so totally convinced as a society you’ve just got to have that Diploma: it is a “seller’s market” not a “buyer’s market” so I guess we should not be surprised we have an expensive product that isn’t necessarily a good one.

  • elkabrikir

    First, the cost of a college degree has risen exponentially, while the posession of an undergraduate degree BA/BS has become mandatory. (seriously, manufactoring doesn’t exist in this country and few make a living as plumbers, painters, or brick layers anymore.)

    Regarding cost: I graduated from VaTech in 1985. My first year costs, including room, board, and tuition was $2400. By the time I graduated, four years later, the cost had tripled! Why? Well, one reason is that the state of VA reduced its subsidies of higher education and shifted the true cost to the student. (although the state/nation as a whole DO benefit from an educated citizenry.

    Now I live in SC and have two daughters at a public in-state university. Despite the fact that they receive $7500 each through the state education lottery for academically successful students), since the total cost per year, per student is about $18K, I still owe about 10K for room, board, fees, books for each girl, each year. That’s a lot of green stuff!!!

    Some tuition has been paid in cash by all parties and some has been paid by credit card balance transfers with very low, 3.99% interest rates. I determined they were a better deal in the long run over the scam of some of these high interest student loans (which are not issued by benevolent lenders, FYI)

    My son, the 3rd child of 12 kids, will be heading off to college soon. Despite his academic success, we’ve encouraged him to attend an in-state school in its honor college. Also, he can hopefully get even more scholarship money than the lottery funds provide. If it comes down to it, an Ivy League degree is not worth 100 grand in debt……..although Med school may be worth it.

    This issue is definately worth discussing at the national level. However, realities must be faced at the personal/family level too. Perhaps a HS grad must attend the community college for two years. Maybe work/study is an option. Perhaps going into the military and getting a GI benefit afterwards is a route some kids need to go. Graduating in 4 years should be a goal too. (However, some states, like Va offer a 5 year teacher’s certification program where one graduates with a Masters.)

    When $$$ is “free” tough choices aren’t faced. Students aren’t the only ones who rely on free $$$…..universities do too. They must be weaned from their diet of starving students, fed on the empty promise of student loans/ and state lottery money. (All SC universities raised their prices after the lottery money started flowing, while the state legislature reduced funding! And, shock!! the true costs for students–ROSE!)

    The university system is predatory big business in America. Unfortunately, people, mainly young vulnerable people, are the prey.

  • SMG 62

    I agree that the cost of a college education has gotten ridiculously high. The fact that lenders over-lent to students just fits in with the credit decisions lenders were making on credit cards and mortgages over the past 10 – 20 years. The banks were lending under crazy circumstances, and the borrowers were borrowing under crazy circumstances. Federally guaranteed loans are a great deal for the lender, I suppose, but I wonder if the private education loans carry the bankruptcy-proof protection that the federal loans carry. I’m thinking not, so both the lenders and the borrowers have a lot to lose.

    I see a couple of dilemmas after reading the above comments. One is, it looks like the only realistic way to afford a college education is by going the public school route. How sad, since there are so many (at least 23, by the Neuman Center’s count!) wonderful Catholic schools that many of us would love to have our children attend. How can one support those institutions, and experience an authentically Catholic education, when tuition has gotten so high?

    Another dilemma mentioned above is one that has been brought up in CE before. What about our daughters? Can they afford to take on student loans and still prepare to become mothers? How are some of your daughters managing? Are they able to handle a career and parenting, earning enough to cover both student loans and child care? One option may be for our daughters to put as much of their early post-college incomes as possible on their student loans. Living at home for a couple of years, a young nurse could put $20,000 per year onto her loans and get them paid off before too long. I’d be interested to hear if anyone else has creative ideas for paying off student loans early.

  • elkabrikir

    A friend of mine, who has 13 kids, says that she doesn’t believe the cost of a Catholic education is worth it. (and she is a faithful Catholic.)

    One of her sons is racking up huge debt at a liberal arts Cathoic college in CA. She’s very worried about his ability to pay it off.

    Also, while her daughter had a full ride to a Catholic college, her son-in-law who attended the same liberal arts college, did not. He has a menial job, because at this time he can’t find anything better and he doesn’t want to add more debt to the huge red ink he’s brought into the marriage by getting a Masters degree. They’re hamstrung with regard to starting a family and moving on past the college debt.

    Maybe this young couple (age 23) should have waited to marry until he had discharged his debt— several decades from now. Maybe he was self indulgent, as a child from a large family, to desire to attend an authentic Catholic college. Who knows.

    Are large families just thrown into the musty book bin? Only state schools for you, you 8th child…..

    Well, the family is a School of Love, therefore, perhaps the authentic Catholic education occurred at home anyway. Go to daily mass at the state school…

    No easy answers here.