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Sunday, October 14, 2012

Greed: Colleges, parents, and the PLUS loan

Remember the recession? We’re still arguing over whether this was due to greedy financial services firms or people getting in over their heads, and the role that Fannie Mae and Freddie Mac played in enabling this mess we’re still recovering from.

But the general story of loaning money to people who can’t afford it continues.  In this story line, banks are replaced by colleges, and the federal government is the lender and enabler.


One program filled the gap: Aurora’s mother, Gemma Nemenzo, was eligible for a different federal loan meant to help parents finance their children’s college costs. Despite her mother’s modest income at the time—about $25,000 a year as a freelance writer, she estimates—the government quickly approved her for the loan. There was a simple credit check, but no check of income or whether Ms. Nemenzo, a single mom, could afford to repay the loans.

Ms. Nemenzo took out $17,000 in federal parent loans for the first two years her daughter attended NYU. But the burden soon became too much. With financial strains mounting, Ms. Almendral—who had promised to repay the loans herself—withdrew after her sophomore year. She later finished her degree at the far less expensive Hunter College, part of the public City University of New York, and went on to earn a Fulbright scholarship.

Today, a dozen years on, Ms. Nemenzo’s debt not only remains, it’s also nearly doubled, with fees and interest, to $33,000.

So, basically we have the same story of loaning money to people who can’t realistically pay it back, or who can’t pay it back without severe hardship.

There’s even a cover-up aspect, just like with the banks:

The U.S. Department of Education doesn’t know how many parents have defaulted on the loans. It doesn’t analyze or publish default rates for the PLUS program with the same detail that it does for other federal education loans.

A sea change

We’ve yet to adjust to the sea change in consumer finance. It used to be that financial intermediaries such as banks only extended credit / loaned money to those who could clearly afford to pay it back.  The old joke used to be that banks would only loan you money if you could prove you didn’t need it.

In grad school, I didn’t have a general credit card, just a couple of gas company cards. By the time Deb and I got a general credit card (Visa or Mastercard, I forget which) we were making above the median household income (primarily due to Deb’s earnings as a teacher at that point, although I was earning money as a graduate student).

Now we have a deluge of financial intermediaries anxious to keep us in perpetual debt – in part because the government will bail out those financial firms, or they can shift the burden on to others.

The overall effect is similar to that of the old company stores, which kept the workforce around by providing services in rural areas, but which ended with substantial financial leverage over the employees.  This situation occurs in the popular song “16 Tons”, which is an immensely sad song from the 1950s.

St. Peter don’t you call me

Because I can’t go

I owe my soul to the company store.

(The song was made famous by Tennessee Ernie Ford, but his versions of the song on YouTube seem too cheerful, and Johnny Cash’s version seems more in the mood of what I want to convey here.)

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