The Insanity of Student Loans

Much has been written about students getting huge loans and then graduating with heavy loan payments and scarce job prospects, and one wonders how people can make such bad choices, and who would lend them this kind of money in the first place. And then I heard of the story of Amira Nader. Amira graduated from Columbia University in 2010 with a master’s degree in acting and nearly $190,000 in debt.

Let me point out the most glaring points:

First – Amira got a master’s degree in a career that’s known for the brutal treatment of people that pursue it, and for those who do “make it”, their income prospects generally aren’t that good.

Second – she’s been loaned an amount equivalent to the price of a decent neighborhood house.

Third – even though student debt can’t be discharged in bankruptcy in the US, the likelihood of the lender getting their money back with interest is somewhere between “slim” and “none.”

Which leads me to the the obvious question – why on earth would anyone loan this women this much money when they had virtually no hope of getting it back? The insanity doesn’t stop there – thanks to a Federal program which “encourages” students with loans to work at non-profit companies like Amira’s work at WNYC:

If Amira works at a nonprofit like WNYC for eight or nine more years, most of her student debt will be forgiven under an Education Department program.

According to an opinion piece by Jeffrey Dorfman at Forbes:

Under the latest version of President Obama’s giveaway to former college students[1] , people with student loans that meet certain income eligibility standards will only need to pay 10 percent of their discretionary income for a maximum of 20 years. Discretionary income is the amount you earn above the poverty line for your family size. If a borrower works for a government or in a job defined as public service, they only have to pay for 10 years. After that, the remaining balance is forgiven.

Using numbers in Jeffrey’s article as an example, If Amira makes $40K a year, she’d only have to pay $144 / month towards her loan. Because the loan payment doesn’t even cover the interest costs, part of the interest would be placed back on the loan, resulting in the loan amount increasing over the years instead of decreasing.

If she works in the nonprofit for the full ten years to get her loan forgiven, she would’ve paid ~$22K towards her $190K loan, which by then would’ve costed north of $200K for the federal government to “forgive.” If you amortize $200K across 10 years, that’s ~$20K / year Amira’ll have been “gifted” for getting her masters in acting.

If you follow the money – from students being given huge sums of cash to spend on their “education” and then those loans are forgiven over a relatively short period of time, who benefits? The colleges! And with this epic windfall of money flowing into the coffers of these institutes of “higher learning”, is it any wonder that the price of education is sky-rocketing? And with the government presumably knowing that this is the effect of their program, one has to ask – what’s the agenda?

[1] I would note that this is an existing Federal program, and that Obama’s directive “only” expands the pool of eligible people by five million individuals.