Sunday, April 29, 2012

Student Loan Bill

Congress is getting the idea....maybe.  The Wall Street Journal’s article “Trying to Shed Student Debt” inspired this blog.  The article states that Senator Dick Durban is proposing a bill that would allow forgiveness of "private" student loans in bankruptcy so that private lenders will become more cautious about making student loans. Federal student loans would not be forgiven.
I have two problems with this legislation: 1) it is an uneven playing field. Why should private lenders have different standards than government lenders? 2: this is treating the symptoms, not the cause. The causes, as I see them, are many and complicated but the top three are the high cost of education, lack of financial literacy, and lack of personal responsibility.
1. The high cost of education. Reduced government support and increased college cost, along with a recession has left college more expensive and students with less in savings. We also need to ask if a college education is a benefit only to the student or to society as well.  If we determine that society benefits from a well-educated workforce and community, then we, as part of this community, need to make a commitment of help keep the cost of higher education affordable to everyone. This means increasing government financial support to education.

2. Financial literacy or lack thereof.  We need a financially literate society, where individuals know how to make wise financial decisions.  This starts with parents teaching and involving their children in decisions about money.  We all need to be reminded that money is it a limited resource with opportunity cost, that you have to make tough choices about needs and wants, and that every investment has risks and rewards.  A college education is an investment with risk and rewards, and the calculated pay-back, return on investment (ROI), should be considered when choosing a major and/or career.  Will my ROI be greater if I attend a two-year technical or community college, attend a private college or university, or attend a public college or university?  One has to be realistic about future income potential when taking out student loans.  Even with the best major and the best education, no job or future income is guaranteed.  You have to work hard to get the job, salary, and career that you want.

3. Personal responsibility.  If you borrow money, you need to be responsible and pay back your loan.  This needs to be communicated to students at the time they take out a loan.  Just like the CARD act, where your credit card statement tells you how long it will take to pay off your credit card, students need to be aware of their future payments, the time it will take to repay the loan, and the total cost of interest on the student loan.  When they sign their student loan documentation, they are signing away part of their future income for a minimum of 10 years!  They need to be fully aware of the cost of repayment, and the opportunity cost for the next 10 years of repayments; the opportunity of buying a house, car, or going on vacation.

As I stated in the beginning, there are a lot of causes to high student loan debt and hopefully these three ideas can be implemented to treat the cause, not the symptoms.  If you like this idea and want to work for solutions to the problem, not reacting to the symptoms, please forward it on to your congressional representative and/or the White House. The e-mail for the House of Representative can be found at http://www.house.gov/representatives/your Senator’s at http://www.senate.gov/general/contact_information/senators_cfm.cfm