thependulumswings

Alice Cooper called it.  “School’s out, for summer.”  But, soon, Rodney Dangerfield and others will return.  “Hey, I am going back to school!”  And, when they do they need to bring their checkbook, and then some.

No one disputes the following.  One, the cost of a four year public college/university education in these 50 United States has spiraled out of control.  And, two, the debt that undergraduates and post graduates have incurred is huge at 1.6 trillion dollars and mounting by the moment.

Bernie Sanders and Elizabeth Warren and a few others have led or joined the battle cry to make college tuition free and/or forgive the outstanding student debt.  Each plan to do so essentially redistributes wealth from taxpayers to students and is fraught with inconsistencies.  More later.

But now, we ask, have you ever heard of Sallie Mae?  SLM Corporation (commonly known as Sallie Mae; originally the Student Loan Marketing Association) is a publicly traded U.S. company that provides consumer banking loans.   Its structure has changed dramatically since it was set up in 1973.   At first, it was a government entity that serviced federal education loans. It then became private in 2004 and started offering private student loans.

The company’s primary business is originating, servicing, and collecting private education loans.  Sallie Mae previously originated federally guaranteed student loans originated under the Federal Family Education Loan Program and worked as a servicer and collector of federal student loans on behalf of the Department of Education. 

So, the U.S. government started Sallie Mae.  It then decided the task too tall for itself and allowed it to privatize.  And it’s now government workers who are crying loudest about the soaring student debt.   And, they should.

We took a peak at Sallie Mae’s (now Navient Corporation, the largest servicer of federal student loans and collector on behalf of the U.S. Dept of Education) “generous” loan offers and terms there of last evening.  What’s our conclusion?  You might as well charge your education on your Visa or MasterCard.

Navient loans offered today start at a 7.5% interest rate.  They are tied to a marker of interest rates known as LIBOR, plus 5%.  They are variable, can even change monthly up or down, and are allowed to float as high as 25% if the market so chooses.  That’s 25% as a high side risk!  Seven point five percent isn’t cheap to begin with.  Ford will give you zero percent financing for that new F150.  Sallie Mae and Uncle Sam want more, much more.

But it gets worse.  Let’s take a 40k dollar loan as an example.  You have three options to repay.  All start with paying either $25 bucks a month while still in school, or the interest accumulated each month of $233, or foregoing paying anything at all until you have completed your education.  Tick tock goes the interest clock from day one of course.  The choices are bad, poor, and terrible.

The structured repayment schedule over the course of the next dozen or so years costs about $500 a month at the 7.5% rate, and much more if rates rise.  The total interest is 29k on top of the 40k.   But, here is the kicker of all kickers.  There is no interest saved for paying down the principal in any accelerated manner.  There is no incentive/gain for attempting to get out of the debt.  Sign up and Sallie starts counting her coins.

There is no bankruptcy filing that exempts anyone from repaying either.  Federal laws are written to absolve you of debt incurred when you can no longer keep your head above water, except if that debt is owed to your government.  It’s the golden rule.  He who has the gold makes the rules.  Sallie collects the gold for he who makes the rules.

Making college free (and it wouldn’t be free, just paid by others) and forgiving debt (and that would just be adding to the federal debt that we all are accountable for as well) isn’t the answer.  No answer is that simple.  And no answer should only be for the selected ones who are in debt today or in school tomorrow.   It needs to be equitable.   For example, shouldn’t trade schools be “free” too?  You can’t discriminate for just colleges can you Elizabeth?

Their approach is a big band aid and is designed to garner votes from the young and naive.  The bandage needs to be ripped off of the whole mess and the root cause needs a vaccination.   Otherwise, many will continue to fall down, scrape their knees, and eventually the wound will get infected.   A great start to this would be to examine the ridiculous terms of Sallie Mae and others in this federal loan business for students.  If you didn’t save for college at least there should be an incentive to get out of debt sooner.

Maybe Crazy Bernie isn’t so crazy after all in attempting to address this.  It’s just how, not handouts, that need to be looked at and changed.  Start with Sallie Mae and others just like her.   And, like the $22 trillion dollar debt, and ballooning government, the sooner the better.