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Wednesday, June 02, 2010 2:28 AM

Subprime Goes to College; Students Buried in Debt; Who is to Blame?

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Students fresh out of college, six-figures deep in debt, face decades of debt slavery. Both parents and students are wondering what went wrong. Please consider Placing the Blame as Students Are Buried in Debt.

Like many middle-class families, Cortney Munna and her mother began the college selection process with a grim determination. They would do whatever they could to get Cortney into the best possible college, and they maintained a blind faith that the investment would be worth it.

Today, however, Ms. Munna, a 26-year-old graduate of New York University, has nearly $100,000 in student loan debt from her four years in college, and affording the full monthly payments would be a struggle. For much of the time since her 2005 graduation, she's been enrolled in night school, which allows her to defer loan payments.

This is not a long-term solution, because the interest on the loans continues to pile up. So in an eerie echo of the mortgage crisis, tens of thousands of people like Ms. Munna are facing a reckoning. They and their families made borrowing decisions based more on emotion than reason, much as subprime borrowers assumed the value of their houses would always go up.

The Project on Student Debt, a research and advocacy organization in Oakland, Calif., used federal data to estimate that 206,000 people graduated from college (including many from for-profit universities) with more than $40,000 in student loan debt in that same period. That's a ninefold increase over the number of people in 1996, using 2008 dollars.

No one forces borrowers to take out these loans, and Ms. Munna and her mother, Cathryn, have spent the years since her graduation trying to understand where they went wrong.

She started college at age 17 and borrowed as much money as she could under the federal loan program. To make up the difference between her grants and work study money and the total cost of attending, her mother co-signed two private loans with Sallie Mae totaling about $20,000.

When they applied for a third loan, however, Sallie Mae rejected the application, citing Cathryn's credit history. She had returned to college herself to finish her bachelor's degree and was also borrowing money. N.Y.U. suggested a federal Plus loan for parents, but that would have required immediate payments, something the mother couldn't afford. So before Cortney's junior year, N.Y.U. recommended that she apply for a private student loan on her own with Citibank.

Over the course of the next two years, starting when she was still a teenager, she borrowed about $40,000 from Citibank without thinking much about how she would pay it back. How could her mother have let her run up that debt, and why didn't she try to make her daughter transfer to, say, the best school in the much cheaper state university system in New York?

The balance on Cortney Munna's loans is about $97,000, including all of her federal loans and her private debt from Sallie Mae and Citibank. What are her options for digging out?

Her mother can't help without selling her bed and breakfast, and then she'd have no home. She could take her daughter in, but there aren't good ways for her to earn a living in Alexandria Bay, in upstate New York.

Cortney could move someplace cheaper than her current home city of San Francisco, but she worries about her job prospects, even with her N.Y.U. diploma.

She recently received a raise and now makes $22 an hour working for a photographer. It's the highest salary she's earned since graduating with an interdisciplinary degree in religious and women's studies. After taxes, she takes home about $2,300 a month. Rent runs $750, and the full monthly payments on her student loans would be about $700 if they weren't being deferred, which would not leave a lot left over.

"I don't want to spend the rest of my life slaving away to pay for an education I got for four years and would happily give back," she said. "It feels wrong to me."
What Went Wrong?

Supposedly "Ms. Munna and her mother, Cathryn, have spent the years since her graduation trying to understand where they went wrong."

It should take seconds. Going $100,000 in debt to get an interdisciplinary degree in religious and women's studies seem rather foolish to say the least. Exactly what kind of job did Ms. Munna expect to get with that degree?

Now she is working for a photographer and it is plain to see her degree is totally useless.

Ms. Munna and her mom should look in a mirror to see who to blame.

Recognizing the Enabler

Although Ms. Munna should blame herself, there is a huge enabler of these kind of tragedies: Pell Grants and government loans.

Subprime Goes to College

Inquiring minds are reading the Eisman ira sohn conference slides and speech-5-26-10 presentation called Subprime Goes to College.

Excerpts from Subprime Goes to College
As long as the government continues to flood the for-profit education industry with loan dollars, and the risk for these loans is borne SOLELY BY students and the government… THEN the industry has every incentive to:

  • Grow at all costs
  • Compensate employees based on enrollment
  • Influence key regulatory bodies-Manipulate reported statistics and other regulatory measures

All to Maintain Access to Government Money.

“It's about the numbers. It will always be about the numbers.” -Bill Brebaugh, head of University of Phoenix Corporate Enrollment

Boiler room tactics:

  • Ashford University (BPI) former enrollment counselor - “Every 6 months we get a review that looks at how many students we enrolled and what percentage of them finished their first class. As long as they finish their first class we get full credit and after that they are not our problem…”

  • “We are under so much pressure we are forced to do anything necessary to get people to fill out an application…”

  • It’s a boiler room –selling education to people who don’t really want it.”

  • APOL former enrollment counselor - “The EC [enrollment counselor] review matrix is all smoke and mirrors so we could fly under the radar of the DOE…”

Accreditation…the inmates running the asylum

In many instances, for-profit institution’s representatives sit on the boards of their own Accrediting body, inevitably influencing the approval process and oversight of their own institutions!

Department of Education Losses

DOE will face nearly $275B in defaults over the next 10 years on a half-a-trillion dollars of lending to the For-Profit Industry

Projected Cumulative Stafford Loans (in $ Billions) and Cumulative Defaulted Dollars for For-Profit Education Students, 2007 - 2020$

Kill the Pell Grant Program

I have written about this many times before, most recently in For Profit Schools Turn Students Into Debt Zombies; It's Time To Kill The Entire Pell Grant Program.
Rather than throwing hard earned taxpayer dollars at programs that invite fraud and make debt zombies out of students, it's time to kill the program entirely. Instead, Obama wants to expand the fraud, even indexing the fraud to inflation.
Education is not the answer when the cost is $100,000 for totally useless degrees.

Inquiring minds might also be interested in Debt for Diploma Schemes and the Cookie Monster Principle

Government meddling enabled this mess, and the best cure (although it will do nothing for Ms. Munna) is to shut off all student aid programs, offer more online programs at low cost, fire needless administrators, and get rid of bloated pension plans for teachers.

Instead, Obama is compounding the failures of the disastrous Bush administration "No Child Left Behind" program.

The president wants to throw still more money at the problem. This will do nothing but increase the profits at questionable schools, jack up the pay of administrators, and make more student debt zombies.

The student vote turned out overwhelmingly for Obama and his policies are helping make them debt slaves for life.

Mike "Mish" Shedlock
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