Shortly before Hillary Clinton announced her “free-college” plan today, a July 3 article in the New York Times described the aggressive collection tactics of New Jersey’s student loan agency. Featured is a woman who continues to pay $180 a month (and has 92 payments left) in order to pay off the student loan of her son, who was murdered. (Yes, a very New Jersey story.)
To give you an idea:
New Jersey’s loans, which currently total $1.9 billion, are unlike those of any other government lending program for students in the country. They come with extraordinarily stringent rules that can easily lead to financial ruin. Repayments cannot be adjusted based on income, and borrowers who are unemployed or facing other financial hardships are given few breaks.
The loans also carry higher interest rates than similar federal programs. Most significant, New Jersey’s loans come with a cudgel that even the most predatory for-profit players cannot wield: the power of the state. New Jersey can garnish wages, rescind state income tax refunds, revoke professional licenses, even take away lottery winnings — all without having to get court approval.
In 2010,when the Obama administration shifted to providing all federal loans directly, not by guaranteeing the loans of private lenders, some states that had their own lending agencies dropped or downsized them. But New Jersey expanded its agency, the Higher Education Student Assistance Authority. Half of the agency’s budget depends on revenues from its loans, the Times says.
“I never thought that sending my daughter to college would ruin our lives,” said one woman who was sued when her daughter faulted on $140,000 in loans.
My view: Yes, the student loan business is a “racket,” but especially because of increasing evidence—in fact, proof—that the loans allow colleges to raise their prices, creating a never-ending cycle.
Doing something for today’s graduates, who may have been somewhat hoodwinked into borrowing too much, has its place—such as restoring the right to declare bankruptcy under some circumstances. But proposals for the future distress me, such as Clinton’s “debt-free” and now “free” college, loan cancellations, and forgiveness for getting the right jobs (with government and not-for-profit organizations). The first two are impractical and the last two create a moral hazard for those just entering college now.
What is most distressing is that people from Hillary Clinton to the Lumina Foundation’s Jamie Merisotis fail to see the loan racket (state and federal) as a systemic process that needs to be stopped or at least reinvented. Its features are 1) the fiction that everybody must go to college; 2) lavish loans that students don’t have to pay for till they graduate (or drop out) and that they often don’t even understand; and 3) loan forgiveness programs that fool students into thinking that they will be rescued when they act irresponsibly.