George Ure & Gaye Levy, Contributors
On George’s UrbanSurvival site recently, there has been a very good discussion on how to avoid some of the traps of the Higher Education Game. Game because it is one: School programs costs seem to miraculously match the federal loan and grant programs available. And that’s set George off on a rant of some proportion:
This week we may be staying a bit closer to our economic roots with a discussion of the whole “Boomerang Kids” situation (impoverished loan-burdened kids having to move back in with mom and pop because the “drank the Kool-Aid on “get a lot of education and there’s sure to be a job.” Thousands are finding that’s either not true, or if there is a job, it involves standing by a grill flipping burgers.
My consigliore, a normally meek and mild-mannered tax attorney, has been eyeing this space for a good while and offers a few thoughts…
“Student Loans = the real estate “No Job, No Income” loans
In order for the Free Market to work in the credit markets the lender needs to actually be risking their money … if they are NOT then they don’t give a rat’s ass about the Credit Quality of the Loans they are giving out (and perversely may actually be making LOTS of money on loans that with even a casual glance they know will NEVER be paid back!! econ 101 … reward $$$ for doing something, you get more of it – so the incentive is for the loan issuer to make BAD LOANS!!).
What happened with Student Loans is actually very simple, the “lender” had all of it’s risk removed from the game.
With real estate, as everyone understands now, it was the divorcing of the upfront payments to the lender making the loan from the business risk associated with the loan (since the loans after issuance and the originator collecting their upfront fees were immediately packaged up and sold to clueless third parties). With Student Loans something similar happened.
With Student Loans the way the risk to the lender was removed from the game, so that they could make loans without regards to loan credit quality (ala a clone of the real estate loan origination game), was done by two simple mechanisms:
1) The Bankruptcy Code was changed so that one could virtually NEVER DISCHARGE a loan if it was made for an “educational” purpose!! i.e.: you OWED FOR LIFE (think slavery here ….). In almost all other aspects of American life CREDIT RISK exists for the lenders … so the lenders at least try to PAY ATTENTION to their prospects for eventual repayment (a company or person could go bankrupt and the lender would never get their money back) . NO NEED TO DO THIS FOR “STUDENT LOANS” since BY LAW the borrower can NEVER GO BROKE with their student loan (they could still be collecting on it from a person’s estate when the person dies at the ripe old age of 80!! after making payments all their lives!!)
2) The government in it’s infinite wisdom decided that for many, actually most, loans to “GUARANTEE THE LENDER” that they would get paid for their Interest and Principal no matter what the student did … OR for what purpose the “Educational Loan” was made (8 year degree in clay pottery making? Same guarantee as a loan for a person in Medical School or one getting an advanced degree in Microbiology or Chemical Engineering).
With those types of Government Imposed Distortions to the Free Market, both of which distorted the market such that neither the Lender NOR the supposed “Educational Establishment” had to care about either credit worthiness of the borrower OR the issue as to whether the “Education” being received would actually assist the borrower in making enough money to pay back the loan, everybody decided just to make money NOW and forget about the long term benefit to the student.
These two dynamics of course has led to lenders lending freely (no risk to them … like with the real estate loans they make money regardless as to whether the loan makes economic business sense in a free market system) AND to the “Educational” institutions not needing to care about whether the education they were giving out provided “value” to those receiving it (and as a corollary they also no longer needed to care about the “cost” of their product … since if they raised the price they would just force their consumers – students – to borrow more money to cover that higher cost).
The entire system of post secondary education in the US has become totally divorced from the Free Market place.
The “Student Loan” issue is a HUGE one, and one that isn’t going away easily.
*Higher Education LOVES the current system since they make LOTS of money off of it (because it makes their customers “price insensitive” and thus inclined to “overbuy”).
*The Banks /Loan Originators etc. LOVE the current system since they make LOTS of money off of it (because they do NOT have to factor “credit quality” into ANY loan decision – they are guaranteed payment no matter what).
The “simple” solution would be to make student loans non guaranteed and bankruptable again … which would make lenders look closely as to the value provided by the loan for any one individual student and their field of study/grades etc.. Will that happen? Of course not! Too many ox’s would get gored … starting with virtually all private colleges and all for profit schools (both of which would have to cost cut and downsize dramatically) and also including a huge chunk of the financial services industry.
It is going to be interesting to see how this plays out over the years … but personally I believe the changing of the Bankruptcy Code back to it’s original structure would be the most efficient way to handle the problem. ~ Older and Wiser
(PS: wanted to add. this was all perfectly foreseeable. when they changed the bankruptcy code we kicked this issue around the office at the time and ALL of us came to the conclusion – way back then -that students /borrowers were being screwed while banks and the higher educational establishment were being given a government license to steal. that the stealing would start out slowly at first … but eventually would become an all consuming monster. it was all perfectly foreseeable … and was brought about via extensive lobbying and the purchasing of “legislation” by the vested interests who stood to make many many billions of dollars off of the scheme. the only disagreement we had in the office was how long it would take until the students would realize just how screwed they were. at the short end one person said 5 years, I on the other hand said 15 to as long as 20 before it would come to a head. looks like my timing is just about dead on)”
For those who have forgotten, Ures truly was a college president-level fellow who left the “school industry” a number of years ago, because I saw what was happening. In short it was this: Kids were coming in for a good education, signing up and going (at the time) $18,000 in debt for a 1.5-2 year program.
However, when I saw that expected jobs (and rising employment) were not there, I left the industry within a couple of years. Now, talking to people in the industry, there’s much discussion of how schools have plans to “go to private funding within 2-years” as one put it.
That sure sounds nice, but here’s the reality which you can write down and take to the bank: Most schools have not designed their programs around best “bang for the buck.” Most – many in the private/for profit sector – have “sold” education which is priced at the level of available funding.
They’ll deny it every breathing second, but most all are maxing out student loan and grant programs for everyone who comes in the door.
When school owners start talking about plans to revert to “selling education for cash” I get a little disgusted. I have been in that position and even with perfect sales skills, you can’t get blood out of a turnip. The people who are coming into most schools don’t have two dimes to rub together. Therefore, absent an economic miracle, I’m lumping private/for-profit schools with “plans” to sell education for cash, or a set of loans, in the same category I’d put a crack-head promising to quit. It’s a bad gamble.
The root cause of (what ails us in student loans) is the whole myth of which the higher education lobby has promoted – namely that an education is no good unless it’s from an “accredited” school.
Well, here’s the ugly truth: Education is education regardless of where you get it: Non-accredited school, the University of Hard Knocks, or from the holier-than thou, wrapped in robes people who “admit you” to student loan debt for life, rather than “sell” you an education which may – or may not – be paid off – EVER, including by bankruptcy except for exceptional cases which seem to mysteriously appear whenever the complicit media are looking. Might look to our nation’s capital and ask “Gee, which large powerful newspaper has an interest in a chain of schools which are for profit?
The government has not yet come to the obvious answer, and it is simple as the nose on your face, but no one wants to talk about it because it would remove cancerous student loan debt and put learning back in its proper place: In the hands of students. But first a bit of history.
When I decided to go back to school at mid-life, I shopped schools until I found one which would give me credit for life experience. Go ahead – look it up – the College Level Examination Program.
Basically, this lets a bright (self-learner, like Ures truly) to bone up on things like the difference between Egyptian pottery versus pottery Crete, and go challenge a bunch of time-wasting electives. I also blew off 2-years of math and a couple of years of English and such, though they obviously didn’t test out on use of spellcheckers or grammar checkers.
When I CLEP’ed my way through school, since I was really engaged in the core learning that I was after in Business Administration, I naturally got a spectacular GPA because why? I didn’t have to load up on bull-shit filler courses.
While I appreciate that there are lots of people in higher ed who have a wonderful time on things like history of the Middle Ages, that ain’t terribly relevant in most workplace settings.
Side Note: My older sister has an MLS and seems I recall her as being really expert in that kind of history as a minor from the UW in Seattle. But she did very well because she was interested. But this gets me to the point that when you’re sizing things us, achievement follows interest. Plain as that.
You want to know why the drop-out rates are high? Mandatory stuff that doesn’t track well to interesting a subject. How did I get a first class commercial radio ticket at age 16? Burning interest in electronics, of course! D’oh, why the academicians can’t get this is obvious.
Programs which document personal competencies are dissed and sneered from the hallowed halls of higher ed.
In fairness, is there some value to being well-rounded instead of a monomaniacal gearhead, for example? Of course! And is there some value from rubbing shoulders with the rich kids from the other side of the track at the Ivy League schools? No Bonesman (go look it up) in his right mind would argue the point.
But what’s the real answer? Stop using higher ed as a major tool of employment and start teaching people what they don’t know and give it up on the “wrapped in academic robes” crap. We can no longer afford government underwriting of the higher ed crowd and until they stop bullshitting the public about things like “accreditation” their funding needs to be cut. And a class-action lawsuit against the government for getting the jobs forecasts terribly wrong ought to be considered, since under pressure from the school industry, kids are still enrolling in programs which have lowering probabilities of employment.
Yes, college-educated people make more money than high school dropouts, but we’re confusing a whole bunch of variables here. The higher ed crowd would have you believe that this is from attending those filler classes that keep butts in chairs and federal money coming in.
Nothing could be further from the truth. The FACT is that some people have hustle and some people don’t. And if we want to have that argument I can point to some highly successful college dropouts (Apple? Microsoft?) as a prime examples of how “You can’t keep someone with smarts and hustle down.” My first example might be Bill Gates.
Is my eldest daughter facing BK because of student loans? Yep. Is the other daughter still buried in student loan debt? Yep. Does my son who avoided the trap and peer pressure have money in the bank and is living debt-free at age 31? Yep.
So sorry, higher ed funding is a joke, a swindle, and a lie, depending on whether you want to tell it like it is…or repeat the same band mantras that have led us down the garden path on this stuff. Sure, it’s an employment/job creation scam, but it’s one we can ill-afford now.
Strip a man of his “papers” and those with gumption, hustle and determination will still make it to the top.
The Big Lie is college makes the man. No, good parenting along with good values and principles (regardless of source) makes the man, especially coupled with a willingness to see opportunity and apply hard work. Go back to my example dude. The rest is pretty much frosting and it’s dishonest of school owners to claim credit while forcing most (including 2 of my 3 kids) to eat their cake.
You seeing how this Law of Financial Motion stuff works?
The next day, the email was brimming with feedback which I distilled down as best I could this way:
Not everyone was happy with my position, or that of my consigliore – like this fellow:
“COUNTERPOINT: Your tax-consigliore did not accurately summarize the bankruptcy code, and is perpetuating/supporting the Establishment’s student loan myth – that student loans simply _cannot_ be discharged, so don’t even go there (i.e. never, no way in hell, 100% certain it cannot be done). That is a false statement.
The bankruptcy code _does_ allow for the discharge of student loans at Section 523(a)(8). Yes, there have been many changes to make it more difficult for people, including those by VP Joe Biden (thx, Mr. Wall Street!), which do not apply to businesses. It’s not easy to discharge student loans (or may be impractical if parents co-signed), and requires an extra step that the dime-a-dozen bankruptcy attorneys do not want to take. Reality is that most “bankruptcy” attorneys buy software, plug in numbers and e-file the bankruptcy forms, while collecting upwards of $1,000 per filing; there’s one court appearance (meeting of creditors with trustee), and it’s easy money without really having to know much (software does it all).
The extra step is called an adversary proceeding, and it’s started by filing an “adversary complaint” against the loan provider (e.g., Dept. of Ed) and asking the court to make a determination that the repayment of the loans would pose an “undue hardship” on the debtor. It HAS been done successfully, and people have been granted discharges of student loans. The bankruptcy code does not really define “undue hardship” and so far the courts have taken it upon themselves to set up different tests – the main one used by most courts is the Brunner test. With times now being very different, economically and job-wise, more people would qualify now than in the past. And, the cyclical economy argument used by Dept. of Ed won’t work so well (i.e. that things will improve, and therefore you will get a job making enough to pay back loans). However, the Dept. of Ed and US Govt (and all the profiteers such as Sollie Meyer et al.), for obvious reasons, do not want people to look at that section, or be fully informed, and know their options… they like having a noose around the majority of people aged 20-50.
Realistically, though, the colleges are equally to blame in the scam, with promises of lucrative jobs they cannot deliver, and the gloss-over when it comes to signing papers for the loans. Who reads them, let alone comprehends them, at 18-22 years of age? This is the “new” indentured servitude, like the strategy corporate-America adopted in the 1930′s-1940′s with mortgages, to keep workers tied to their jobs. Don’t complain about working conditions, or you’re fired and your family is out on the street… [Caveat: yes, I’m an attorney, but this is not legal advice…] Couple of people to look for/read are Rafael Pardo and U of Ch economist Scheimer (who also works for the Fed), about discharging loans and probability of finding a job. Some attachments to add to your reading list!
So, with a knowledgeable attorney contributing I immediately sent it on to my consigliore to respond:
Ah … of course there are exceptions, but they are tough and narrow and do NOT apply to most and if you talk to Bankruptcy Attorneys are an almost impossible hurdle for almost all who have Student Loans.
Here is one good synopsis (and a useful site to read completely):
“Courts use different tests to evaluate whether a particular borrower has shown an undue hardship. A common test is the Brunner test which requires a showing that
1) the debtor cannot maintain, based on current income and expenses, a “minimal” standard of living for the debtor and the debtor’s dependents if forced to repay the student loans;
2) additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and
3) the debtor has made good faith efforts to repay the loans. (Brunner v. New York State Higher Educ. Servs. Corp., 831 F. 2d 395 (2d Cir. 1987). Not all courts use this test. Some courts will be more flexible, some less.”
Note particularly the requirements: “minimal” standard of living; AND likely to persist for a significant portion of the repayment period. Those are DRACONIAN requirements for a loan that may have a 20 to 30 year duration.
“Student loans are usually non-dischargeable in bankruptcy. This means that after your bankruptcy erases all your other debts, you still have to pay student loan debt. If you fall nine months behind, your lender can call the whole loan due at once. Filing bankruptcy can be an option in only one circumstance.”
Again note the issues of “minimal standard of living”; AND the forward looking nature of your finances looking forward for the next 15 to 30 years.
There are good links at the first website in particular about how the changes to the Bankruptcy Code were done to PREVENT the normal operation of the Bankruptcy Code from applying.
A very very tight exception to the Rule doesn’t change the General Rule that Student Loans for MOST kids are non-dischargeable. (there are exceptions to everything in life … but that doesn’t change the thrust of the general rule).
My consigliore and I then had a conversation with what courts are interpreting as a “minimal standard of living” and that seems to include no ability to pay for a telephone, cell phone, or even (amazingly) an internet connection.
I’d like to thank both gentlemen for contributing to this – and refer you to the two websites we have quoted for additional information. This is not the kind of thing to be taken on without counsel.
If you were a juror in a bankruptcy case, how would you vote? Or, are trials by jury in bankruptcy even done? If they’re not, you may still get a chance to “vote” on this kind of legislation: Look up how your congressional representatives voted on making student loans prime fodder for the greed machine with life-long indentures and cast your vote according to your convictions in November.
If, that is, you can find the politician who’s willing to stand up to the onslaught of campaign money that will be dumped into the battle to keep more reasonable views of how long indentures last.
The right solution – at least the honest one – would be to make student loans interest free. If education really is such a fine thing to have – and really makes people wealthy over time, then government should be satisfied with the higher incomes resulting from such rewarding educations because the government would more than make back their student loan interest costs via higher income taxes and it would punish government for continuously eroding the purchasing power of its money. In other words, paying back an interest-free loan over 20-years wouldn’t be a problem for most.
The fact is, higher education is dressed up in Holy Robes but then – being made holy, it is systematically defrocked by adding charges…simple as that.
And as usual, the problem is interest and where there is interest there are derivatives, structured finance packages and banksters in the wings.
Like we hadn’t noticed…
The long term answer is to avoid student loan debt – and as long as the government is giving away FREE (bled from taxpayer) money to low income people, but not live-at-home kids, consider working until you are 23 or 24 and living at home for three years ahead of time in order not to have to get your parents to cosign on a loan. If you’re dirt poor, government will cut you some slack. This is one of those areas where the best deals go to those who understand the system and work it to their own advantage.
Hang on and enjoy the ride,
The Two G’s – George & Gaye
Introducing Strategic-Living: a practical and useful online magazine providing inspiration and guidance as we make our way through the maze of changes that are coming our way. In collaboration with my friend and colleague, George Ure, Strategic-Living will offer a synthesis ofUrban Survival and Backdoor Survival with much more detailed tips, tools and strategies for creating a vibrant and sustainable lifestyle wherever your path may take you. Think of Urban Survival and Backdoor Survival as your roadmap and Strategic-Living as your detailed guidebook. Here you will find articles and photos, diagrams and how-to’s, and a healthy dose get-out-there and do it with kick-in-the-ass inspiration.