There are so many things I don't understand in this world. Why can't we do something about North Korea? Why are all the bees dying?
None of these things, however, are nearly as confusing as student loans.
There was a time when kids whose parents couldn't afford to pay for college just worked their way through. But the price has gone up so fast – more than twice as fast as inflation over the last two decades – that it's not an option any more, unless the student in question is planning to be a sophomore through 2020, or is exploring the possibility of part-time employment in armed robbery.
Students borrowed $19 billion in private loans last year, from a bewildering array of options. (Does anybody find it strange that Congress is patting itself on the back for passing a law that protects college students from being offered credit cards, while they're encouraged to commit themselves to tens of thousands of dollars in education debt?)
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Some of the regular private lenders charge as much as 15 percent, although thanks to their dedication to the cause of learning, they are still protected from having their claims wiped away by a bankruptcy court.
Others sound as if they're nearly free, except when they aren't. This week, Jonathan Glater of The Times reported the story of Travis and Stephanie Gay, a couple in Kentucky who had borrowed about $100,000 to become special education teachers, under the impression that they could pay their loans off in five years via a special state forgiveness program for people who worked in low-salary service professions. Right after they got married last summer, the Gays got a letter from the state agency that ran the program saying that due to tough economic times, it was canceling most of their assistance and good luck with that debt.
And then, there's the epicenter of the college loan strangeness, the federally guaranteed loans. This is a system that goes something like this:
We the taxpayers pay the banks to make loans to students.
We the taxpayers then guarantee the loans so the banks won't lose money if the students don't pay.
We the taxpayers then buy back the loans from banks so they can make more loans to students, for which we will pay them more rewards.
Are you with me so far? Wait, I see a hand waving back there. What's that, sir? You want to know why the government doesn't just lend the money out itself? Excellent question!
The White House estimates it could save about $94 billion over 10 years if it cut out all the middlemen. It has such a system in place, since the Department of Education already makes a lot of direct student loans.
How many people out there think this turns out to be extremely controversial? Can I see a show of hands?
“Senator Nelson is for the system as it is now,” said a spokesman for Ben Nelson, D-Neb. A great part of Nelson's resistance has to do with the fact that Nelnet, a big student loan provider, has its headquarters in his state. Last year, after an investigation by the New York attorney general, Nelnet was one of several student lenders that agreed to a settlement in which it paid a fine and promised to abandon alleged deceptive marketing practices and inducements such as offering free iPods to students who sign up.
President Obama's proposal would allow private companies to continue servicing the loans, protecting thousands of office jobs. However, they would no longer get the loan origination tasks. Stunningly, this turns out to be the part of the business that is most popular. (The chief executive of Sallie Mae, the giant in this line of work, made $4.6 million last year. The vice chairman made more than $13.2 million plus the use of a private jet.)
State agencies like the Kentucky Higher Education Student Loan Corporation, star of the Gay family debacle, also make federally guaranteed loans and they don't want to get out of the business. They like giving state residents money. They also enjoy using their profits to finance worthy enterprises – like loan forgiveness programs that run out of cash. Or, in the case of the Pennsylvania Higher Education Assistance Education Agency, spending $185,000 to send the board and staff to the Greenbrier resort in West Virginia for golf and spa treatments.
It's time for reform. The system is a mess. Possibly not as much of a mess as North Korea, but right up there with the dead bees.