Another Failed Government Program

Yesterday The Wall Street Journal ran a story about the now government-run student loan program. In 2010 Congress passed a law that essentially forced commercial banks out of the student loan business and made student loans a federal program. At the time, critics of the change pointed out that the banks had a better handle on how to screen people to see if they were likely to repay the loans. Congress chose to ignore those warnings. Now the U.S. taxpayers are quite likely to find themselves stuck with a bill for $125 billion in unpaid student loans. This is not good for our economy. It is another example of a government program that has failed miserably.

The article in The Wall Street Journal focused on two students from for-profit colleges.

The article points out:

Borrowers in long-term default represent about 16% of the roughly 43 million Americans with student debt, now totaling $1.3 trillion across the U.S., and their numbers have continued to climb despite the expanding labor market.

One story involves a student from Abdill College:

Mr. Osborne said Abdill provided a low-quality education and exaggerated the likelihood that they would find career success. And he said the government should have never extended them so much debt for jobs that are in low demand. The typical phlebotomist makes just under $32,000 a year, according to the Labor Department.

About 1 in 5 student borrowers who left Abdill in 2012 defaulted on their loans within three years, the latest federal figures show. Its default rate of nearly 21% is far higher than the national average of 12% among all colleges.

Would a commercial bank have given these loans? What is the responsibility of the borrower in doing research on the college and its graduates? I don’t have a problem with for-profit colleges, but there is a need for students to study the employment rates of these colleges before borrowing large amounts of money to attend them.

The story reported on another student:

He is in default on his private loans and in forbearance on his federal loans. Debt collectors call him almost daily but he ignores their calls.

Mr. Lopko, who lives in a Chicago suburb, now earns $32,000 a year as a customer-service agent for an Illinois manufacturer.

“The only way out of this situation honestly is to win the lotto or to find a job that pays me $300,000 a year,” Mr. Lopko said.

He says he tries to be frugal but admits he occasionally splurges. He recently upgraded to a one-bedroom apartment from a studio and took out a loan for a new Subaru WRX that carries a $445 monthly payment.

“Are you supposed to stay in inside all the time, never go out, and pay these loans?” he said.

Maybe I’m old-fashioned, but I think I would have bought a cheaper car for a few years. I am also somewhat amazed that he was able to get a car loan. Part of the problem here is that we have not taught all of our young people financial responsibility and that there are always people willing to lend them money that they may not be able to pay back.