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September 15, 2010 4:38 PM “Financial Literacy” and Student Debt

By Daniel Luzer

Americans have to much student loan debt. What should the country do to fix that problem?

Joining the chorus of those understandably worried about education debt is American Student Assistance, a non-profit loan guarantor. ASA has just published a new report about student loans, “Approaching the Tippling Point,” that is both informative and very wrong. According to ASA:

Student loan repayment problems no longer affect a small minority of student borrowers. Reports show that as many as one in five student loan borrowers over the last 15 years has defaulted….Student loan repayment problems result in ruined credit records, higher interest rates on other consumer credit, and difficulty in obtaining a car loan or mortgage. If left unchecked, student loan delinquency and default can mean garnished wages, withheld tax refunds and even offset of social security benefits.
Although federal student loans offer all sorts of repayment protections for borrowers (deferment, forbearance, income-based repayment, etc.), what the program lacks is proactive communication of these options to borrowers. In fact, an unintentional consequence of the recent student loan reform enacted by Congress was the removal of federal funding for innovative research in proactive borrower communications. The white paper puts forth the case for why policymakers should reinstate and expand the federal investment in higher education debt management programs.

The ASA report makes use of a common problem in the way Americans talk about student loans. Many college graduates, the thinking goes, have too much debt. They’re drowning it in; therefore they need more “financial planning” skills to become more financially responsible and plan for the future.

No, they don’t. They don’t need more “proactive borrower communications” or “debt management programs.” They just need less debt.

All of those repayment protections that exist—deferment, forbearance, and income-based repayment—are not sophisticated investment strategies; they’re tactics indebted people use when they don’t have enough money.

No doubt a little advice about debt management can help individual people avoid getting into really bad credit problems but this sort of solution won’t address the real problem here. People don’t default on their student loans because they just aren’t having productive conversations with their loan holders; they default because they can’t afford to service their loans.

The report recommends “expanding the federal investment in higher education debt management programs.” This is like attempting to address the budget deficit by creating a budget deficit hotline. If we want to use federal money to address education debt, it would be far more effective for policymakers to “expand the federal investment in higher education” itself, not “higher education debt management.”

Read the full ASA report here.

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer

Comments

  • anonymous on September 15, 2010 6:28 PM:

    Thanks for bluntly stating the truth here - students just need less debt. The government needs to invest in education itself, not debt management of students' loans.

    Having been there myself - garnishment, loss of tax refunds year after year - I appreciate your piece more than some might.

    And, no, I didn't get into credit card debt or take on a house loan or anything else foolish - I was injured in an accident that prevented me from working for more than a year. After that, it was hard to get decent-paying job. I used all the deferments and forbearances available to me; eventually there were no more, the payments were due, and I couldn't make them. That was it.

    We really need to change the way higher education is financed in this country. Thanks again.

  • anonymous on September 16, 2010 7:15 PM:

    I want to echo the previous commenter......I got into trouble with student loans not because I wasn't willing to pay but because I borrowed too much and struggled to pay, spending more than half my monthly income on the loan. That was before losing my job, an unemployment that lasted one year. 10 years later, I'm on track. I work hard and want to pay what I owe. But when I finish paying, I will be more than 70 years old (I'm in my 40s now) and I will have paid back nearly triple what I borrowed.