Screw campaign finance, take a look at higher education

So I am sure most of you have seen those ads on TV hocking student loans.

Has anyone bothered to ask why we’re seeing those so often nowadays?

It’s been over a year since a cutback in federal funding for student loans.

Anyone see a correlation?

After doing a bit of research, and by research I mean typing “Student Loan” into Google, I came to some disturbing realizations.

First off, I am lucky. I am a college graduate and benefactor of the old student loan program. I also happened to graduate at a time when interest rates were at 40 year lows. I was able to consolidate my student loans and lock-in a rate below 4%. That’s darn near free money.

Especially when weighed against going the route some of my classmates, who charged books and other expenses on their credit card(s). At rates ranging from 9.99-24.99%, and being that most of their cards were “baby’s first credit card” the rates were at the higher end of that spectrum.

So the Federal Student Loan Program did me quite a favor. It allowed me to educate myself, paid for me while I was in school and created enough earning potential that paying my student loans off was a reasonable expectation. (The fact that I am now unemployed notwithstanding.)

The same cannot be said for those who allowed Visa, AmEx, or Mastercard to foot the bill.

Is starting-off in the world with 4- to 5-digit debt the best way for a young person to enter the workforce?

No.

But then again, I didn’t want to borrow the money to buy my condo. But such is the cost of being an American and living the dream.

There has been quite a bit of scrutiny of the credit card industry and the tactics they use, especially the targeting of younger college-age consumers.

One worry was that these poor college kids, who didn’t understand the financial ramifications of high interest credit, were being saddled with debt before they even finished college. Student loans were ok, as they were a bargain that was offered by the government for the betterment of American society.

Student loans seemed to be alright, until July of 2006.

That’s when the gravy train went away.

The sentiment behind the move seemed reasonable enough. Why should the government take the financial risk when plenty of private financial institutions were willing to?

We’ve all seen how good private institutions are loaning out money, just look to the mortgage industry. (Which I used to be a part of.)

By taking the government out of the mix, the move was promoting business. And the free market would keep rates at a reasonable level, as there would be multiple lenders to choose from.

Which is all well and good, until you start looking at the APR’s from these various lenders:
Astrive.com: Rate: 9.67%. Total finance charge & principal: $23,280.80
Thinkfinancial.com: 9.22%. Total finance charge & principal: $21,663.00
*All rates/finance charges are on a $10,000 deferred repayment loan with a 240-month term. Rates/fees are from each lender’s web site obtained on 10/4/7

All of the sudden, the reality of allowing the free market to determine how much it really costs to go to school doesn’t look too rosy.

If it’s a bad idea to give an 18-year-old a $500 credit card at 15%, how does it make sense to give that same youngster $10,000-30,000 at over 9%? And these are variable rates, meaning they can change.

Earlier, I mentioned earning potential, which is the idea that as a college graduate you can command more pay over the span of your career. According to the 2000 US Census, graduating from college nearly doubles one’s lifetime earning potential. Earning potential is all well and good, until you look at the real cost of college. Per the rate quotes above, borrowing just $10,000 will cost the average student ~$12,000 in interest. Higher interest means higher payments, which may mean that entry-level job coming out of college won’t pay the bills.

For the record, I went to a public university, graduated in 5 years and accumulated over $22,000 in debt. Yet, my relatively meager student loan payment allowed me to take a lower-paying job to get my foot in the door and establish myself. I am not so sure that will be an option for future college graduates.

Just imagine what school will cost future college students, as tuition, not to mention interest rates, continue to increase. According to the website postsecondary.org, tuition increases have out-paced inflation by 4.6%.

Which brings me to my point.

Is privatization of the student loan industry really in the best interest of the students? A simple look at the increased costs, will say no.

So is pricing education out of the reach of common Americans in the best interest of American society? The obvious answer is no.

As Federal funding of education continues to decline and the credit industry continues to contract, it returns college, once a luxury of the elite, to its exclusive status. As the rest of the world continues to educate itself to make its populace more competitive, America is taking steps backwards. One big example of this is the decrease in access to college education via finance.

By making college something that has to be paid out-of-pocket, the American dream is relegated to a relative few in America, effectively ending the American dream for many lower- to middle-class American families.

Is education really still the great equalizer?