Unlike almost all other forms of debt, for student loans there is no statute of limitations on collections, and protections such as the Truth in Lending Act, Fair Debt Collection Practices Act, the right to refinance and adherence to state usury laws do not apply. Furthermore, student loans have the harshest collection methods allowed by law, including wage garnishment without a court order, suspension of state profession licenses like medical and teaching licenses, garnishment of social security and disability income, and withholding of IRS tax refunds.
The price of a college education in America can be staggering. Public four-year colleges charge an average of around $8,000 per year for tuition and fees for in-state students and around $12,000 per year for out-of-state students. Private schools charge an average of nearly $28,000, while public two-year schools charge a little less than $3,000. These costs are all reported in the College Board’s Trends in College Pricing 2010. In addition to these costs, a student must pay for food, rent, books, supplies, transportation, incidentals, and other such necessities. Room and board can easily add $10,000 to the yearly bill, but cheaper options can likely be found for those who search for them.
Most college students today pay for a good portion of their education using student loans. This year, student loan debt reached a bloated $829 billion dollars, surpassing American credit card debt for the first time in history. A typical college student going to an in-state school with half of his education paid by scholarship, aid, or savings can still graduate with $36,000 of school loan debt. A student going to a private school could rack up four times as much debt for a bachelor’s degree. Many students will further add to that debt by earning a master’s degree or more at some point within ten years of earning their bachelor’s degree – long before they’ve paid off the initial degree.
In 1965, President Lyndon Johnson signed the Higher Education Act which created affordable federally-guaranteed loans and scholarships, providing access to college for millions of students for the first time. In 1978, the Bankruptcy Reform Act prevented a person filing bankruptcy to be discharged from student loan debt less than 5 years old. In 1998, the law was changed to permanently prevent student loan debt from being discharged. The only other kinds of debt that a person cannot be legally discharged from in bankruptcy include debt from criminal acts and debt from fraud. In 2005, this was extended to include private student loan lenders, not only government lenders.
Unlike almost all other forms of debt, for student loans there is no statute of limitations on collections, and protections such as the Truth in Lending Act, Fair Debt Collection Practices Act, the right to refinance and adherence to state usury laws do not apply. Furthermore, student loans have the harshest collection methods allowed by law, including wage garnishment without a court order, suspension of state profession licenses like medical and teaching licenses, garnishment of social security and disability income, and withholding of IRS tax refunds. School loans are defaulted at much higher rates than even from the subprime mortgage crisis. One-fourth of government student loans default; and that number goes up to 40% for students who attended four-year colleges. Why? There are many reasons, but the harsh reality is that the burden of debt upon graduation is often unmanageable for students seeking their first jobs and finding the market not living up to their hopes and dreams. While the government provided a bailout for the subprime mortgage mess, there will be no bailout for student loan default, because the government profits from it.
Let’s say a student obtains a loan from Sallie Mae, the largest loan originator, of $20,000 with a 12-year term and 8.8% interest. In paying the loan on time, the student will actually pay $43,376. The monthly loan payment is $293, and after graduation the student has trouble finding a job and paying the loan, and in less than 1 year the loan is in default status. The federal government then pays Sallie Mae the balance of the loan and interest, and then sends the debt to General Revenue Corporation (GRC), the largest collections agency in the country. GRC adds 25% to the debt as a collection fee, as well as a 28% commission which is also added to the student’s debt. GRC is allowed to take the money from the student’s pay check and tax refunds as soon as available until fully paid, and even if that means deducting from the student’s elderly parent’s social security checks. So when a student defaults on a loan, the government and loan agencies actually make more money and the schools incur no loss, allowing tuition to rise at more than twice the rate of inflation, and quadruple the rate of wage growth in the U.S.
President Obama pushed an overhaul of the student loan program recently, but it doesn’t really help students. No consumer protections were added, and the GRC was replaced with a non-profit organization such as EdFund – but the ultimate outcome is the same: a $35,000 loan that a student defaults on is turned into a $100,000 repayment. (All the above school loan information was obtained from CollegeScholarships.org and information graphic designer Jess Bachman’s WallStats.com.)
The moral of the story (that I wish someone had told me when I graduated from high school) is to avoid loans to pay for education, and to certainly never default on a loan if possible. This is not easy by any means, but neither is it unachievable by anyone who is determined to do it. Several important steps must be undertaken to fund college education today:
- Many students cannot count on family to provide savings toward college education. But, if families are willing or able, setting up savings accounts toward college education is a wise investment that should be started as soon as the child as born. A child could be encouraged to put a significant portion of allowance, gifts, and summer work wages towards his/her college fund. Parents should be careful not to spend retirement savings on their children’s educations, but rather should fund education separately, unless they are sure they can count on and are willing to have their children provide for them in old age – which is an increasingly difficult prospect in our era of astronomically rising health care costs and increased life expectancy, among other factors.
- Students must not underestimate the importance of completing as many quality aid and scholarship applications as possible, and earning the good grades and well-rounded extracurricular resume-fillers to go with them. Students complain about the time involved in applying for scholarships, but they should understand the few hours they spend on an application could turn out to the best paying job they ever have – they may well earn thousands of dollars for that few hours’ labor. This process does not need to wait until senior year. Some scholarships are given even to elementary-age students, and some are available for working adults. Searching for what you hope to apply for can begin at any time, at any age.
- Students should expect to use wages from summer and part-time work for college education. Some students employ a pay-as-you-go mentality. Although this often means the degree takes more than the not-so-typical “standard” four-years to obtain, having that paper debt-free is well worth the added time.
- Students should not go to college just because it is expected. If the student has little interest in education, or doesn’t have any idea what he or she wants to study, it may be much wiser to wait until the motivation is there. Yes, people who get college degrees while having already started families and jobs will tell you that it isn’t easy, but they’re not wasting tens of thousands of dollars on something they won’t use, either. A college education is not the golden ticket to the American Dream. You can’t achieve the dream if you don’t have a dream first. If that dream ends up having a college education as one of its steps to achievement, fine. But a piece of paper for a bachelor’s degree in English or Psychology without a plan of what to do with it doesn’t necessarily pay off. Yes, there is real value in education for its own sake – but you need to answer for yourself if that value exceeds the cost of the paper. Generally speaking, people who earn degrees earn higher wages than those who don’t. But, if that wage is consumed in debt, then the advantages quickly diminish.
- Forget the prestige behind a school’s name. For most people, a Harvard degree does not pay off more than a degree at the local state school. Choose your school based on where you can get the education that suits you best for the least money. Many students can save tens of thousands of dollars by staying at home for all or part of their college educations, and/or by getting the first two years of their educations at a community college and then transferring to a four-year school. That idea may not be as glamorous, but it might provide the same or even a better education for a lot less money. Community colleges may be able to provide better experiences for the first two years than some larger schools where you would be herded into class sizes of over one hundred for those general education requirements. If you pursue this smart money-saving option, just be sure to keep in regular communication with your intended four-year-school to ensure the classes you take at community college will transfer and you won’t have wasted money on a course that you can’t use toward your degree (unless you want that class for another reason). Frugality in getting an education doesn’t have to mean lower quality.
- If we lived in a truly Islamic society, there would be nothing to discuss here. There would be no usury, no exorbitant fees, no get-rich-on-the-backs-of-the-middle-class schemes, no mindless capitalist rat race to drive you on in wasting time and money for pointless acquisitions and reputations. Keep your Islamic principles first in everything you do, and you will be guided rightly in your choices about college education and how to pay for it. Make your life’s dream something that reflects your Muslim values first and foremost, and make the manner in which you pursue that dream be a humble reflection of your devotion to the Ahlul Bayt (peace be upon them). Build in yourself the society you want to see, and actively await the Imam of Our Age (may Allah hasten his reappearance).
- And finally, keep a positive outlook, keep up your prayers, and maintain a strong work ethic. Good things often come to those who expect them, pray for them, and work for them.