A Student Debt Counterpoint: Doing Everything “Right” & Still Feeling Like a Failure

By Ester Bloom July 12, 2016

Why do we let companies profit off of student loans?

You’ve read Saul of Hearts’s detail-filled follow-up to his Doing Money interview, I hope?

You may not agree with his approach or his conclusions but he’s making interesting, provocative points about the kind of life-altering decisions we let people make — specifically the kind of excessive financial burdens we let them take on — at a time when we, as a society, consider them to be still too immature to drink, get tattoos, join the army, or vote. And “let them” is, frankly, understating it, since college educations are more or less mandatory these days if you want to get a job.

The worst part is that we, as a society, allow corporations to profit off of those hard but necessary decisions. Consider this first-person essay by Nikko Mitrano Schaff in the Guardian’s “Life in the Red” series.

I did everything right. So why am I in debt? | Nikko Mitrano Schaff

Schaff is almost as different from Saul as it’s possible to be. She was hyper practical about higher education from the start, and she’s done everything “right” since in terms of paying back her loans. But she’s still frustrated.

I enrolled at the Rochester Institute of Technology with a major in computer science and a double minor in entrepreneurship and Mandarin Chinese. I figured that whether software or China takes over the world, I’d find a way to make money. In my sophomore year I started a business with my buddies and we even got seed funding from the college to develop it over the summer. It didn’t work out, but the experience landed me an amazing internship with Apple. …

This is not a “woe is me” story. Instead, it is quite the opposite: this is a testament to how people in my generation can make the right decisions with their education, employment, and finances and still be taken advantage of in ways which will have ripple effects throughout their entire lives.

Her target in this piece is the entities allowed to profit off of her need to get an education to the tune of 6.55%.

The US Department of Education — which has financed 100% of my student debt — does not need to make a profit on my degree. In many ways, the profit to society has been made many times over: I have a stable job, I do not require government assistance to make ends meet, I have a retirement plan which lessens the future burden on social security and I pay plenty in taxes.

But my student loan provider — even as a non-profit corporation — does need to make money on my student loans to exist. …

I am a web developer. In less than a day I could create a website that lets you sign up for automatic, recurring bank withdrawals. Hook it up with the Stafford loan database and the government will have everything it needs to get its money back from me. If anyone at the Department of Education is reading this, contact me! I’ll make this site for you — I’ll even do it for free — just promise you can give me a more reasonable interest rate than 6.55%.

6.55% really is crazy, and yet that was the going rate only a few years ago. The average right now is lower than that, at about 4.29%, according to Credible.com.

What are average student loan interest rates?

But still: my mortgage charges around 3% and those fine folks at the bank are making plenty.

Bernie Sanders was tooting this very horn throughout his campaign. The Federalist would like to explain to those of us who agree with him, as though we’re a room full of golden retrievers, why I can get an interest rate for my mortgage that’s so much less than the one Schaff could get for a student loan, so if you’re interested in the patronizing, lecture version of the answer, here it is. Indeed, the author argues, student loan rates should be even higher than they are.

No, Bernie Sanders, Student Loan Rates Should Be Higher

So higher risk means higher interest rates. Voila. Economics 101. I don’t pretend that interest rates in this area entirely reflect a free market and the laws of economics. They’re also heavily manipulated by government. But the effect of government interference has been to keep student loan interest rates too low and to make those loans too easy to get.

The article goes on to suggest that the student loan business should be run by the market, not the government, even if that means many fewer people will be able to attend college.

What if you want to take out loans to finance a degree in sociology or women’s studies or some other field that utterly fails to qualify you for productive work? Try running that up on your credit cards at 24.5 percent because no one else is going to touch it. Nor should they.

Charming.

Anyway, if you’d like the less condescending version of the economic thinking behind the disparity, the Washington Post has you covered. Their explainer points out that the chasm between my interest rate and Schaff’s isn’t as deep as it seems.

Interest rates for student loans are calculated in ways that are not comparable to mortgages. The student loan interest rate varies on the type of loan (undergraduate, graduate/professional, parent), additional fees, the year the loan was disbursed, and whether the loan was consolidated (and at what interest rate). Student loans disbursed between 2006 and 2015 had interest rates from 3.4 percent to 8.5 percent. …

Depending on the type of loans and years you choose, the comparison between mortgage and student loan interest rates is not as dramatic as Sanders portrays it.

Another very real difference, of course, is the presence of collateral.

these two loans are apples-to-oranges comparisons. Here’s one major difference: Your home is collateralized and student loan debt is not. This lack of collateral makes the student loan more risky than a loan for a home.

I get it. The absence of collateral makes student loans “risky.” Yet that risk doesn’t seem to be scaring anyone away: student loans have become an “enormous business opportunity,” as reported in Bloomberg.

Companies that have benefited from the loan program range from debt servicer Affiliated Computer Services Inc., now part of Xerox Corp., to Education Management Corp., which operates for-profit colleges and whose largest shareholder is Goldman Sachs Group Inc. Education Management settled with the government in November for almost $100 million over alleged illegal student-recruitment practices without admitting wrongdoing.

FMS Investment Corp., a unit of Ceannate Corp. that tried to collect from Sofia, was paid $227 million by the Education Department from October 2011 through September of this year, the most of any debt-collection company under contract in that period, according to the agency. Florida Coastal is part of the InfiLaw System, a consortium of three schools. A principal investor in InfiLaw is Sterling Partners, a private-equity firm that also owns a stake in Laureate Education Inc., which is planning an initial public offering next year.

Congress created the loan program 50 years ago with the goal of encouraging students to attend college. Today, the Education Department is one of the largest financial institutions in the country. If it were a bank, it would rank fifth in the U.S. in assets.

This is why Senator Elizabeth Warren has called the government “an exploitative lender” and candidate Donald Trump has asked why the government is making money on student loans. When even Warren and Trump can agree on something, it’s worth doing the double-take and figuring out whether they just might be right, and whether there’s anything that can or should be done.

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