Thursday, May 16, 2013

Student loans as consumer spending

One angle of the student loan scam that is just starting to get some attention is the over borrowing of student loans for the purpose of living expenses.

The Wall Street Journal (paywall) reported (as re-reported by the libertarian Reason.com) on the case of a law school graduate named Lilianna Rodriguez-Marshall, a 30-year old mother of three. Ms. Rodriguez-Marshall graduated from the Southwestern Law School in Los Angeles in December owing more than $300,000 in federal loans. Ms. Rodriguez-Marshall is apparently applying for government jobs in the hopes of entering the federal loan forgiveness program.

According to a right-wing think tank who crunched the numbers on her loan, assuming Ms. Rodriguez-Marshall lands a government job paying about $55,000/year (good luck, big assumption), she will have payments of $273/month instead of the $3,562/month she would otherwise be obligated to pay. Her payments under the program would total about $102,000 over 10 years while the balance of approximately $639,000 including interest would be forgiven.

Ms. Rodriguez-Marshall acknowledges that her debt is so large in part because she spread out law school over 4 1/2 years instead of 3. However, what is interesting is that she also says that she and her family used the student loan money for living expenses. She reported that her husband was laid off twice and she took out emergency student loans totaling $30,000 to "make home repairs, pay unexpected medical costs and keep up with the families $1,000-per-month health-insurance bills." 


In other words, at least in this case as reported, what would otherwise be typical consumer and personal spending (which is dischargeable in bankruptcy) is being converted into non-dischargeable student loan debt.

On the right, commentators are arguing that the student loan forgiveness program encourages reckless over borrowing. Ms. Rodrigeuz-Marshall being held up as the poster child on this point.

On the left, progressives acknowledge: "Students actually spend their loan money on surviving as consumers in a tight economy, while learning skills needed for the economy of the future." The argument then seems to be that this kind of spending is good for the economy. The progressive's proposed fix so-far seems to be to lower student loan interest rates. Elizabeth Warren is advocating that student loan interest rates (which are about to reset to 6.8% per annum) should instead be the same as the overnight lending rate that the too-big-too-fail banks receive which is .75% per annum. Is Elizabeth Warren just one of the liberal professors Brian Tamanaha is calling out?

Whose right? Both? Neither? Is it common to use student loans like charge cards for your living expenses? Why aren't progressives forcefully advocating to get the cost of education down? The interest rates are just a tiny portion of the problem here. Why aren't progressives forcefully advocating to get better information to student consumers about career prospects and loan payment responsibilities so that they can make more informed choices? Why isn't there the equivalent of a TILA for law school where the schools have to provide projected loan repayment information together with projected career prospect information side-by-side? Why isn't anyone pushing for bankruptcy reform? It would seem that both the right and the left should be advocating for meaningful education reforms that don't create a society where vast resources are being wasted by educating students in areas for which there is no demand and then leaving them in debt bondage for most of their adult life. What is the political impact moving forward of the choices made today?

Is Ms. Rodrigeuz-Marshall's scenario typical? Does anyone know of similar situations?

33 comments:

  1. easy now. I'm a progressive ("lefty") and I don't advocate or support this type, mode of borrowing and spending. I think Elizabeth Warren's point was not that we prop up the economy in this fashion, but that it didn't make sense for US Gov't to be charging banks near zero interest for "free money" while hammering students. When I was in LS, I was asking the same thing. Why are "bankers" who are crashing their companies with long positions on highly volatile and risk laden products being offered free rides? Shouldn't moral hazard mean that we let them crash if they levered up?

    ReplyDelete
  2. Aw, hell no. This pisses me off. Yet another example of the non-traditional trap.

    It's bad enough in your mid-20s. Going to law school as a non-trad, with family in tow, is a recipie for disaster. You take one bread-winner out of the market, throw in some worthless health insurance with huge medical payments and premiums, a laid-off spouse...damn.

    I'm sure many will excoriate Rodriguez-Marshall, and yeah, it was more than likely a terrible idea for her to go to law school. The problem is further compounded by the fact that Staunch-Conservatives will want to burn her at the stake rather than address the cost of higher education, while Limosine-Liberals who don't know the actual value of a dollar will commend her efforts and encourage her to dig the hole deeper (just use your trust-fund proceeds to pay it off!).

    And the ScamDean/LawProfs? "Why Ms. Rodriguez-Marshall, you future is bright defending liberty and pursuing justice! Your multicultural background will bring needed diversity to the bar! Sign here."

    Kids, don't to law school. Non-trads, don't go to law school. They will (1) charge you up the ass on the way in and then (2) kick you in the ass on the way out. It's not the ScamDean/LawProfs who end up wrecking their lives and passing the buck to the taxpayer, you know.

    ReplyDelete
    Replies
    1. Right- Some conservatives seem to enjoy hearing stories about overindebted people because it justifies their life choices. And the "liberals" running law schools will shed crocodile tears over this story, then throw their hands up and blame "the market" for high tuition, seemingly oblivious to their hypocrisy.

      Delete
  3. Well, I’m fairly conservative and don’t have any strong feelings about Ms. Rodriguez-Marshall one way or the other. Frankly, I’d rather see my tax-dollars go to a roofing contractor than some Prius-driving prick at Southwestern. Anyway, how I feel is beside the point. Unemployed and 300K in the hole is not a good place to be. That woman is screwed - and not by conservatives either.

    ReplyDelete
    Replies
    1. I think that identifying the failing left-right philosophies underlying the overall scam is healthy, but I hope that our generation, regardless of worldview, bands together to kill the foundational elements: predatory loans posing as access for diverse groups, impractical educational models backed by fluffy profs with tenure, and free market bullshit abounding in an area of society that looks nothing like a free market. Also, the hyper-focus on individual responsibility gets old in the scam context, as most of those people are happy to eat up their medicare and social security.

      Delete
    2. Credited. I hope the pendulum will start to swing back towards something sustainable, not yet more hot-potato ponzi schemes or empty rhetoric that says nothing more than "Hooray for our side!"

      The reality is that many so-called "free marketeers" (lookin' at you, banksters) want special protections and guarantees for them, but free markets for everyone else.

      Delete
    3. "Free marketeers" aren't responsible for the law school scam or the student loan scam.

      Federal government guarantees for loans and progressive scam-deans/scam-profs/scam-ABA-elite are responsible for tuition increases. The latter are also responsible for the overproduction of lawyers, which they believe will serve "social justice".

      Pretending conservatives (or libertarians) share the blame with the Left for the mess in student loans, law school and Higher Ed is not realistic. If they are to blame, its for not pushing for reform harder or coming up with practical policy solutions -- sins of omission. When conservatives do try to come up with solutions academia is not very thankful -- see the reception for Rick Perry's idea (now policy?) for a $10,000 undergrad degree.

      --Jim

      Delete
    4. Jim, I hear you. I'm just saying some "free marketeers" are really wolves in sheep's clothing who are all about living by the sword but want the "little people" to die by the sword when the tables turn. There are plenty of people of all political stripes willing to ride the neutron bomb like Slim Pickens so long as it lines their pockets, and higher ed is just one facet of this.

      Delete
  4. Great, so now law school is a thinly veiled version of social welfare. This country is fucked up beyond all recognition. Here is a better solution for Ms. Rodriguez-Marshall. Buy a home using one of Obama's First Time homebuyer programs and then flip it for $300K. Pay off your student loans and then you are debt free. Oh, sorry, that was last decade, you know, before "hope and change" arrived.

    ReplyDelete
    Replies
    1. Residential real estate "flipping", done right, is back. In certain regions, it's highly profitable. You gotta come with solid grasp on numbers, construction data, and research. Commercial real estate flipping is something elsse.

      Delete
  5. Why are you paying $1k/mo in health insurance costs only to turn around and pay for "unexpected medical costs" with student loan money?

    This is American lunacy at its finest. First, we really need government-backed health care. The three kids here are completely innocent parties and their access to health care shouldn't depend on mommy and daddy being broke and reckless or not. It's not a boogeyman, but a preferred alternative to the current system. Second, if mommy and daddy are paying $1,000/mo in health insurance costs, it should be covering, like, "unexpected medical expenses." Third, there is no reason - ever - to spend student loan money on medical expenses and home repairs. You've just taken situations where you can usually get the money/service done and made them nondischargable albatrosses. Most doctors will work with you if you need care. They will usually let you pay back balances on long, low-interest payment schedules. Home repairs can usually be gained by getting a home equity loan and giving another lien on your house.

    Also, shame on Southwestern.

    ReplyDelete
    Replies
    1. "First, we really need government-backed health care. "

      entitlements programs are going to bankrupt this country

      Delete
    2. No one is more entitled than politically connected big business. The rules are written in their favor. The regulators do not police them. Courts protect them. They are given generous subsidies, govt contracts, and tax breaks. This includes the education industry.

      In fact, the government will plunge the nation into debt to fund our trillion dollar wars, which are really about Big Oil and Big Defense Contractor profits.

      Don't blame poor people for our economic woes. They're not the ones in control of the money.

      Delete
    3. "entitlements programs are going to bankrupt this country"

      The lack of entitlement programs will bankrupt the country first. You pay for your poor whether you want to or not.

      Delete
  6. Just to clarify, Reason is a libertarian web site, not conservative. Their authors support gay marriage, drug legalization, getting the US out of most current foreign entanglements, getting rid of the Patriot Act, and other positions which are not "conservative" in the current sense of the word.

    No one in a position to influence such things is pushing for student loan/bankruptcy reform because they (including Elizabeth Warren and her husband) and their friends (law profs/administrators) profit from the current scam.

    ReplyDelete
  7. It's Called UNDERWRITING. Remove or change the federal loan program, poof, this all goes away.

    ReplyDelete
    Replies
    1. True. Many will cry foul regarding access, and that is another issue with a separate solution. But basic underwriting will avoid the train wrecks like the above.

      Delete
  8. Not to drop this into your lap, but I just discovered this author and book recently:

    http://www.amazon.com/Debt-First-5-000-Years/dp/1933633867

    ReplyDelete
  9. a prediction--warren will be the next prez

    ReplyDelete
    Replies
    1. Nah, Hillary will be the next prez. Then Jeb Bush for a couple of terms, then Chelsea Clinton, then one of the Obama girls, then maybe George P. Bush (Jeb's son, the cute one). Here's to fifty years of the White house belonging to the same 3 families!

      Delete
  10. Jack Marshall.is my GODMay 16, 2013 at 7:43 PM

    This woman needs to start a consulting firm or axxept appointment to the board of directors of a nonprofit that will pay her $350k per year. she can than pay these loansin less than 12 months

    ReplyDelete
    Replies
    1. from what my friend who works in NFP tax tells me, NFP directors dont get paid.

      Delete
    2. The ones on the board of NESL sure did.

      Delete
  11. If I were hiring an attorney, I would have no incentive to pay Mrs. R-M more than $35,000 because of PSLF/IBR/PAYE. If I were to pay her more than that, the money will go to the government on a loan that would be forgiven anyway.

    ReplyDelete
  12. curious if she used any of those loans for vacations, TV's extra stuff.

    I remember some of my friends using loans for happy hour, cars and vacations to Europe.

    end the fed loan program. its a disaster for tax payers.

    ReplyDelete
    Replies
    1. Yep. And watch tuition plummet in the process - only when a fraction of students are actually able to pay sticker price, instead of every single student, will the schools react.

      "Non-profits", indeed.

      Delete
    2. I'd end the program too but politically its probably impossible.

      IMHO, the next best thing is capping annual student loans to any 1 person at $25,000, which is still generous to academia.

      -Jim

      Delete
  13. Here's the practical problem with Elizabeth Warren's idea -- you can give students very low interest rates, but they still have the $150k principal balance.

    Monster-sized debts would still exist and be saddled on new students.

    Here's the theoretical problem. If we give student loans really low interest rates, then why not homeowners... people need houses right? Why not.... car buyers? Cars are crucial to Americans. Why not... credit cards? People use them to buy stuff they need sometimes, right? It is a recipe for catastrophe if we go down this slippery slope -- any further.

    ReplyDelete
  14. I had to look into a structured settlement loan in order to afford to go back to school. I agree with the comment above, though---- low interest rates across the board would create an even messier situation.

    ReplyDelete
  15. Here's the speculative issue. Provided that we give person credits truly level interest rates, then why not mortgage holders... individuals require houses right? Why not.... auto purchasers? Autos are significant to Americans. Why not... Mastercards? Individuals utilize them to purchase stuff they require here and there, correct? It is a formula for fiasco in the event that we go down this tricky slant --any further.

    ReplyDelete