Students Loans: Debt Peonage


Summary

I advise my kids to stay far away from student loans. I'd rather they take a semester or two off and work, if necessary, student loans are tantamount to debt peonage and I'd just a soon my children weren't enslaved for a good portion of their life. I can't help thinking that we've yet to see the real cost of this. I think it might make the housing bubble look like a warm-up act.

Take a look at the following graph from the College Board's Trends site.

Inflation-Adjusted Published Tuition
(click to enlarge)

What you'll notice is that the cost of attending a public 4-year college or unversity in 2011 was almost 4 times the cost in 1981--after adjusting for inflation. At the same time, state contributions to higher education also increased (albeit not by nearly as much).

The problem with the price increase is that it's difficult to undertand the increase in terms of the value of the product returned (a degree). We're essentially returning the same education for 4x the price.

As I struggle to understand this, I've hit upon a theory that it comes down to student loans. Student loans have made it much easier for students to borrow money. And when your chief customer has a lot more money, it's easier to charge them more for a given product. Outstanding student loans exceeded $1 trillion for the first time in 2011.

Many people think of student loans as "good debt" because they can lead to a higher paying job. But they are incredibly pernicious. They are easy to get, but difficult to discharge. And delayed payment terms while the student is in school make them especially attractive.

Taxpayers and other lenders have little risk of losing money on the loans, unlike mortgages made during the real estate bubble. Congress has given the lenders, the government included, broad collection powers, far greater than those of mortgage or credit card lenders. The debt can't be shed in bankruptcy.

The credit risk falls on young people who will start adult life deeper in debt, a burden that could place a drag on the economy in the future.

"Students who borrow too much end up delaying life-cycle events such as buying a car, buying a home, getting married (and) having children," says Mark Kantrowitz, publisher of FinAid.org.

From Student loans headed for $1 trillion this year -- USATODAY.com
Referenced Mon Jan 02 2012 16:15:54 GMT-0700 (MST)

This amounts to nothing less that debt peonage. Peonage is a system where debtors are forced to work for creditors in a kind of involuntary servitude.Thanks to Congress working closely to protect banks in the latest revision of bankruptcy laws, student loans are exempt from bankruptcy. Collections agencies can garnish wages, tax refunds, and even social security. Because there's no way to discharge the debt, student loans end up looking just like debt peonage.

As a consequence, students take out loans to pay for ever increasing college costs, struggle to repay them, and end up working for the creditor for a significant portion of their life. Granted many people do pay them back, but for many, the dream job doesn't work out and repayment is difficult.

Think back to the graph at the beginning of this post. We've created a system whereby a lot of money gets injected into system with less demand that the funds available. Consequently, prices went up. Universities control who is a student, the primary qualification for getting the money. Banks and universities benefit and students suffer. The purpose of the program--more educated people--never materializes.

I advise my kids to stay far away from student loans. I'd rather they take a semester or two off and work, if necessary, student loans are tantamount to debt peonage and I'd just a soon my children weren't enslaved for a good portion of their life. I can't help thinking that we've yet to see the real cost of this. I think it might make the housing bubble look like a warm-up act.