Student Loan Hustle: What they don’t want you to know.
Student loans! We all know what these damned things are so I’ll spare us both the misery of the intro. But to throw out a tease we’ll just say they’re even worse than you’re thinking. College tuition is that kind of proud, unabashed, in your face kind of thievery. You know the kind that can saddle you with $200,000 in debt for an education then expects you to thank them for it. The student loan industry opted for a more cloak and dagger approach to their con. You just sign on the dotted line and assume this is how it has to be. College is expensive after all.
($) –1.57 trillion Problems and a Functioning Education System Ain’t One.
Since the financial crisis we have been living in a world with historically low interest rates. The current rate of the benchmark 10 year treasury note is approximately 1.3%. This means there is a lot of liquidity out there and money is generally easy to come by- to put it in very simple terms. It is not uncommon to see people getting loans or refinances at or below 3% right now. Yet when students apply for private aid to go to college the rates are often 9 to 12 % for private loans with terrible terms and worse customer support.
Federal loans (sometimes upwards of 5% ) are even overinflated as they are a profit center to the tune of $70 billion a year to the government. Maybe even more disturbing than the government profiting off student loans is the emergence of a scandal ridden, private debt servicing industry that has emerged to take the loans from the government and service them. The vultures circling ahead looking for a piece of the grift.
“Consumer Financial Protection Bureau Sues Nation’s Largest Student Loan Company Navient for Failing Borrowers at Every Stage of Repayment
Navient, Formerly Part of Sallie Mae, Illegally Cheated Borrowers Out of Repayment Rights Through Shortcuts and Deception”
Not exactly the headline you want to be seeing as a borrower
A few percentage points here or there may not seem like a lot but when you take in to account the compounding effect this will cost the borrowers tens of thousands of extra dollars in repayments. It also means that our total student loan number is on pace to double just about every 6-8 years so $3 trillion in debt is right around the corner. Add on to that loan recipients aren’t even allowed to refinance at the market rate until 6-12 months post-graduation or while attending school even if they show forms of income and its just unfair. You don’t let people refinance because its nice collecting anywhere from a 200 to 400% premium above the market rate.
So what gives? How did all this get stacked against us?
Leverage is always key.
If you’re waiting for a totally reasonable explanation- dream on. This whole thing has gotten so out of hand because companies realized you have to go to college if you want to get a ‘good job’ so they exploited our lack of leverage. That’s why higher education costs have went parabolic over the last decades. Everyone wanted a piece of the pie, loan companies included.
Sofi’s website states:
“Unsecured loans, like student loans, are not tied to an asset that can serve as collateral. Secured loans, in comparison, are backed by something of value. If you don’t pay your mortgage or auto loan, the lender can seize your house or car.
But a lender can’t seize a college degree! In other words, student loan interest rates are typically higher than secured loans’ rates because the lender’s risk is higher.”
Unproven product, it’s no guarantee you graduate and they recoup their investment. Risky, right? Wrong. A logical person would think that. However, they’re banking on no one reading the fine print. At a point in time this was a totally logical argument they could make because the student loans were riskier. More people did default or declare bankruptcy.
That all changed in 2005 with the passing of BAPCPA or the Bankruptcy Abuse Prevention and Consumer Protection Act. Funny when they give something a name that sounds like its doing you a favor but in reality it’s the opposite. A bill literally no one- except lobbyists- asked for and was vetoed in the 90’s by President Clinton. A more apt name for the bill would be the Stripping Bankruptcy Protections from Millions of People Act. This further trapped people into loans they couldn’t pay back all while assuring interest was continuing to accrue.
A bipartisan effort spearheaded by the republicans but also pushed through on the democratic side of the aisle by Joe Biden, the senator from the state that represents many of these financial institutions, wiped out the right and liberty we afforded to others-through a court guided process- to get out from underneath of catastrophic debt. The kind of debt that can almost take a person’s life away. It is now nearly impossible to get out of repaying your student loans now. Consider them locked and chained to your ankles until they’re paid back. They took away your right to nullify through bankruptcy and even some cases death. Yes that’s right, your student loans can outlive you! So kind of them to pass on this gift to your next of kin.
Caught with Both Hands in the Cookie Jar
Remember earlier on Sofi’s website where they coyly explain that because a student loan is unsecured and therefore more risky as a cost of doing business their interest rates are naturally higher. To quote our friends across the pond: that’s total bollocks. In an M. Night Shamaylan level plot-twist, turns out they are secured… to you! You are the thing of value- try to refrain from blushing- they’re backing the loan with! Human collateral, pretty gross concept, but a great way to make sure you get your repayment – even from beyond the grave!
So to put it a little more succinctly: the companies are gouging students and families on interest rates above market value & denying them the ability to refinance on the open market- on the grounds the loan is risky – while simultaneously de-risking the loan through legislation that takes away almost any risk of default. You can get out of medical debt, credit card debt, a mortgage, car payment, etc. through bankruptcy but forget student loans!
Seems to me after you change laws and de-risk the asset by inexplicitly tying the loans to a human being for essentially eternity you then should lower rates, offer better terms or offer something back to the consumer for the lower risk profile of the loan. What you shouldn’t do is treat it as exactly the same as before you pushed the law change through. However, to no one’s surprise, they opted to have their cake and eat it to. I mean in all fairness, it’s a pretty good racket if you can get away with it.
So what?
Here is a rare bipartisan issue that screws us all the same regardless of age, gender, orientation, political party or ethnicity. We all take this one on the chin. Makes you wonder why we tolerate it? Congress passed a bill no one asked for that hurts us all. So brave. Now what we do about it? I don’t know. That’s up to you. I’m just the guy that’s here to pose that age old question: isn’t that f*cked up?
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