I have a good friend who is a CPA. He and I were discussing personal finance a couple of days ago while he took a break from doing taxes. He has a regular job but during tax season he also works for himself as a tax preparer. His regular job is overseeing the college loan office at a local university. He brought to my attention something that is on the horizon financially for this country and that something is student loan defaults.
Virtually any student can take out a loan to pay for their college education. After they graduate they have 6 months to begin repayment of that loan. Many students do begin to make payments but according to the Federal Commission on Student Loans, more than 60% will default on those loans. To that end the government has been taking steps to force repayment. Those steps include reporting to credit agencies and reporting to certification agencies. Not only can defaulting on your student loan ruin your credit rating it can also keep you from getting a job. In the state of Illinois you cannot become a certified teacher if you are in default. If you fall into default after certification then your renewal can be prohibited until you set up a repayment plan.
What my friend and I were discussing mostly was that many of these loans probably shouldn’t have been made in the first place.
If you go into a bank to take out a loan to buy a house or a car the bank is going to assess your ability to repay the loan. They look at a number of factors but an important one is your income. If you make $20,000 a year working at a fast food place you are probably not going to qualify for a million dollar mortgage or a loan for a new Porsche.
Yet student loans have been handed out with no apparent thought as to the ability of the student to ever repay the money. Some majors in college simply do not pay a decent return for the investment of the money.
I have a friend who paid over $200,000 for each of two of her daughters to go to name colleges. One daughter majored in drama and the other in iconography (the study of pop culture icons like Madonna and Michael Jackson). Neither of these girls found a job in anything resembling their major. One is a bartender and one works for a non-profit group. Neither of them earns over $25,000 a year.
While my friend paid cash for her daughters to be educated this scenario is repeated frequently by those who took out loans to study subjects will little practical application in the real world. These students should never have been allowed to go so deeply into debt to the American people with so little chance of ever repaying the debt.
There is currently talk in the Student Loan Commission about suspending the drivers licenses of those who are in default. This will do nothing but make it harder for those in default to ever repay their loans. A better solution would be to set standards for obtaining the loans. In the meantime, don’t take out student loans for majors that are iffy in a good economy. Study something practical that can earn you a good salary and study icons on your own time.