Looming National Debt and the Need for Private Student Loan Reform

Molly Bearman
Jul 20, 2017 · 14 min read
Source: more student loan debt than credit card debt makes for a struggling economy

Negative Finances

Private debt has been on the mind of the media in recent weeks — due to the growing fervor of the Republican Senate Healthcare bill, which would cause many Americans to lose health insurance or suffer heart-attack inspiring increases in premiums. Many outlets (The New York Times, talking about Medicaid cuts — here, the Washington Post commenting on the lowered federal funding of health care here, and Business Insider high-lighting the Congressional Budget’s Office evaluation of this bill, here) have touched upon the Health Care bill’s potential for catastrophe. Both outcomes, lack of insurance, or insurance costing more than half of someone’s annual income, will result in an increase in private debt.

As a recent entrant into the world of personal health-insurance (first, with my first salaried position, and again, when I was laid off from that position, and had to file for insurance with the Marketplace) I understand the worry that lack of insurance, or financial barriers from accessing insurance, can cause. I am not, however, a newcomer to the world of private debt.

The Student Loan Industrial Complex

As almost any person between the ages of 18 and 35 will tell you, and this depressing Forbes article, private student loan debt is at an all time high. For the gloriously ignorant, the student loan industrial complex involves multiple players, from the federal government (less important to this argument, but still a vital player), to private loan brokers, to the students themselves. There are many types of loans students and their parents can apply for when planning to attend college or higher education, including federal, private, a plus loan (which is only for graduate education), and loans specifically and only for parents of those students. Available to students, in addition to loans, are Pell grants (free. money!), scholarships (or, as my family spelled it schol-er-ship, 3 words), family funding, and if you’re desperate, donating plasma and blood and, if you’re a woman, your eggs, and if you’re a human, your bone marrow.

Yes, young female students are selling their eggs in order to pay for college education. Yes, it can cause great hormonal imbalance, due to hyper-stimulating ovulation, long-term health problems, and the procedure is incredibly painful.

Pell grants are wonderful, although the government has been threatening to do away with them, and they do not cover the entirety of students’ expenses. Scholarships are a good option if you can secure them and your institution offers them. Family funding is a third option: I have friends whose families have emptied their retirement funds in order to send their first child to college.

For the rest of us: there’s private student loans.

Federal Loans

The major players in the student loan industrial complex are federal and private loans. Federal loans can be subsidized or unsubsidized, the former is usually a small amount, such as $2,000, and the latter works to cover large parts of tuition, room, and board. Federal loans are serviced when you are in school by your university: when you apply for your loans the money goes right to the institution and pays for your tuition. When you graduate the servicer is transferred to a third party. In my case, that third party servicer is Great Lakes Borrowers — but there are others. All of your federal loans are placed into your servicers’ care for a grace period, which usually lasts eight months. After the grace period, federal loans officially go into repayment.

You may defer your federal loans if you do the following:

-Enroll in higher education (such as graduate school, but you must reapply for deferment at the start of each year of your program)

-Join the military (The SALT program would love to have a word with you!)

-Join other federal programs such as AMERICORPS (the domestic peace corps for the United States) or Teach for America

It is possible to work toward eliminating your federal debt by:

-Working as a nurse, teacher, or counsellor in understaffed schools for an agreed upon number of years, after which an agreed upon percent of your federal loans will be erased.

There are many articles and maps that tout the average student debt as around $30,000. This number comes from the average amount of money students take out in the form of federal loans. I, personally, have $30,000 in federal loans, as do most of my peers. This number, however, does not reflect the actual amount of loan debt a student may carry. This is where private loans enter the picture.

Private Loans

Private loans can be used for anything — buying a car, a washing machine, paying rent — but if you are between the ages of 18 and 35 likely your first encounter with private loans comes in the form of paying for college. I was fortunate in that my parents had saved up enough money to pay for my first year and a half of college. My sophomore year spring semester, junior, and senior year, I had to take out private loans to cover the small amount uncovered by scholarships, grants, and federal loans.

Federal loans have an interest rate of roughly 3 to 4%. It is a rate settled on when you apply for your loans, and doesn’t increase for that loan even if the federal rate changes. Private loans are different (although the rate remains fixed): I do not have a private loan with an interest rate of anything lower than 7%. My highest interest rate hovers around 9.5%. Interest rates are important to this complex, because as any algebra student will tell you, interest compounds: it’s how the bank makes money. So my relatively small few thousand dollar private loans ballooned, gaining appallingly high interest while I was in school, because, while you can defer paying back the loans while you attend school, the interest does not stop accruing. By the time I graduated in the summer of 2014 — twenty-two years old, I had over $70,000 of debt in federal and private loans. By the time I graduate from my master’s program next fall, I will have amassed over $100,000 in student loan debt.

For a quick comparison: the average mortgage rate in the United States for 2017 (which is used to pay off purchasing a home, the prices of which are often equivalent to my student debt amount) is less than 4%.

An Indelible Debt

It is, at this point, very worth mentioning a trait of all (federal and private) student loan debt:

It is the only debt that you cannot liquidate.

What is a liquidable debt? When a person files for bankruptcy, because they have amassed a debt greater than their income and the total worth of their tangible (and intangible, in the case of bonds and stocks) assets, certain steps are taken. First, all sellable assets are sold: couches, cars, houses, as well as all stocks. Second: the government assesses what savings you have and takes their share. They then act to erase your debt, getting rid of whatever leftover money you still owe. This all but abolishes your credit, but you do not have the weight of the inescapable monthly cycle of trying to pay off a debt you cannot afford.

The only debt that is not “erased” by filing for bankruptcy: student loan debt.

What this means is that we have an entire demographic of the population saddled with unfathomably high debt, and there is no legal way for them to alleviate themselves of it — however, as noted in the terms and conditions of my loan agreements, if I die, my family is not required to assume the burden of my debt. While this statement may seem flippant, there have been an increasing number of reported suicides due to depression, caused by student loan defaults and feeling overburdened by debt. Just last year, a Brooklyn adjunct professor unsuccessfully attempted to fake her own death in order to alleviate her student debt.

Sallie Mae: The Insatiable Ouroboros

The Ouroboros is a mythical creature, often depicted in the form of a dragon or a snake, which consumes its own tail for nourishment. It symbolizes cyclicality, and can refer to the idea of “primordial unity” or that something persists from the beginning of time, and with such force and quality that it cannot be extinguished.

What pushes the student loan process into a complex? The part that creates an unbreakable cycle is Sallie Mae, the largest broker of private loans in the United States. It actively, lobbied multiple times to prevent any bills that would work toward student loan reform. As the Nation puts it: “they’re in the business of condemning students into a lifetime of debt, not paying for education.” What pays for Sallie Mae’s ability to lobby against those bills: undoubtedly the money they make from servicing delinquent loans, uncollected debts, and compound interest due to staggeringly high interest rates. Further, Sallie Mae is in the business of making money any way it can, and this includes the business of bureaucracy. Its thirst for money endlessly nourishes this snake of an institution that feels, at least to students, as if it has always existed, and that it can never disappear.

I introduced this article stressing the point that I work hard to be responsible and to take care of problems when they arise. Sallie Mae has succeeded in undermining my ability to prove, to my creditors, my co-signers’ creditors, and most importantly to myself, that it is possible to beat their system and maintain control of my financial reputation.

I applied and was accepted to the University College London in May 2014 for a master’s of science in bioarchaeology and forensic anthropology. I was informed when I applied for exit counseling on my federal and private loans, that my loans would go into repayment in October of 2014, but that I could apply for deferment as I was enrolled in an institution of higher education.

In June I corresponded with the servicers of my federal student loans, Great Lakes Borrowers, as well as my new University, and was ensured in writing that Great Lakes consulted with the National Student Loan Data System. The NSLD monitors student enrollments: when a student registers for courses and is granted at least half time status, the institution reports to the NSLD, and the database then contacts the servicers of the loans, placing them in deferment. Working with the NSLD ensures that, automatically, my federal loans went into deferment.

This was not the case with my private loans. Sallie Mae, (can) but simply refuses, to consult with the NSLD. This puts the onus entirely on the student to act as a third party communicator between the institution of higher education and the loan servicer. The student, effectively, becomes the database. In July, I spent a long, hot afternoon on the phone with Sallie Mae. After being placed on hold for 20 minutes, I was asked why I was inquiring about deferment at all: did I not know that my loans were still in their grace period? Yes, I was well aware that my loans were in their grace period, but I would be leaving the country and did not have a phone number that I could be reached at while in London, and couldn’t I settle my deferment now? “Yes,” the grainy voice on the other end of the line replied, “all you have to do is apply for a deferment form” (which no longer exists on their website) “and send it, with a letter of registration from my new institution, to Sallie Mae.”

I sweated over the letter of registration all summer: some time in August it came in the mail, and I dutifully filled out the deferment form. I was never told that I would receive a notification of my deferment, all I had to do was send in the paperwork: so I went into September believing my private loans were in deferment.

In November, I got a notice that “something about my loan” had changed. But the letter did not state what that change was. In December, I got a notice that I had missed a loan payment. Impossible, I thought, my loans were in deferment — I sent in the paperwork in August.

Attempt 1

I called Sallie Mae the first time, and was placed on hold for five minutes; only to find out I was calling the wrong servicer. “Will you please transfer me,” I asked, and I was placed on hold for another ten minutes. The first servicer I spoke to informed me that, indeed, my loans were not in deferment and that if I would just hold on one minute, they would pull up my account information. I asked if they had ever gotten my paperwork from August. I never found out the answer because I was making this call over Skype, and the call dropped.

Attempt 5

This phone call was with Francis*. When I asked for a letter confirming my deferment, which apparently was processed the day before, of which the company did not inform me, Francis said that I would get an updated status of my account when my bill statement came in on January 25th. This statement, Francis said, will reflect my deferment. I pressed the issue: “Will it also negate all previous statements of owed money?” “Yes,” Francis let out through clenched teeth. “Is there anyway I can get this letter earlier?” I asked. “No, it has to come with your bill statement, which you have selected to be the 25th of the month. And you can ignore the letter we sent you yesterday because it does not reflect your current status.” “But you have to understand that I cannot afford to ignore a letter that is threatening both my and my co-signers’ good credit.” Francis was getting more and more angry with me. “Are you trying to apply for a mortgage?” Francis asked. “What? No. I am not trying to apply for a mortgage. This is referring to my student loan debt.” Francis continued: “I ask because you said you have to report to your co-signer’s creditors, are you or your co-signer’s trying to apply for a mortgage?” I said as calmly as I could: “I don’t know if they are applying for a mortgage. Frankly, it doesn’t matter.” Francis reiterated his assurance: “You’ll get a letter with your statement notifying you of your deferment.” I presented Francis with a hypothetical theory: “Let’s just say,” I ask, “that for some reason the letter I get on January 25th doesn’t reflect my deferment, or if it is not enough proof for my credit agency. With whom should I speak?”

So what did I have, after five phone calls, and almost two days of correspondence with this company? A written notice dated 5, January, 2015, that I owe a large sum of money, a “promise” from various employees at Sallie Mae that I do not owe money, and various disputed claims that I do, in fact, owe Sallie Mae money. Oh, and a half-hearted apology from someone at Sallie Mae named Georgiana*, who runs the twitter account.

Helplessness, and the Need for Reform

Quartz recently published an article on millennials and their lack of money-savvy. The data, they said, shows that millennials are overconfident in their spending habits, in their financial stability, and they save nothing. Those millennials — they’re ruining themselves with their overconfidence. I would like to politely disagree with Quartz: millennials are not over-confident in their financial stability. They are overwhelmed and terrified. They do not save money because they do not have any to save. Large quantities of millennials’ salaries, which took a cut during the 2008 recession, go toward paying rent, which can be quite high if they have to live in a city to find a job, and the rest of their income goes toward paying back student loan debt. What is more, I would rather be perceived as feeling slightly over-confident in my financial stability than face the soul-shattering reality that is thousands and thousands of dollars worth of non-liquidable debt.

But, taxpayers will say, you knew that going in; you knew how much debt you would have when you signed for the loans. And to this I say: you’re absolutely right. I am not arguing against paying off student loans. I pay my credit card bill down every month, and I try my hardest to live within my means — I am absolutely for students paying down debt, and think that those who are waiting for loan forgiveness straight out of the gate are sorely deluded.

From a taxpayer’s perspective it makes a lot of sense to help students avoid defaulting on their debts, so they do not have to take on the burden of paying those debts. Therefore, shouldn’t we lobby for a reform that, while not abolishing student loans altogether, really, truly aims to help students who are struggling to pay their monthly payments?

What is egregious is that student loan reform systems like this do exist in other countries outside of the United States. In England, the Student Loans Company services loans, and the government sets an income threshold for repayment, or what is called an income contingent repayment plan. For plan 1, for loans taken out before September 2012, the threshold used to be £16,365 but was recently raised to £16,910, for plan 2, for loans taken out after September 2012, 9% will be taken out of any income made over £21,000 a year, anything below this level, and no repayment is required. This ensures students do not fall into abject poverty. If at any point you fall below the poverty line, your interest rate is frozen, and your loans are placed in deferment. Further, in the United Kingdom, any remaining balances on the loans are written off thirty years after they go into repayment; the university assumes the remaining debt. While there are income contingent repayment plans in the United States, very few people know about them.

For millennials, almost 35% of students in repayment will default on their debts, or have had their loans placed in serious delinquency. This default and state of delinquency is not the result of irresponsible borrowers, it is a case of drowning in payments they can’t afford due to the inability to obtain jobs that don’t exist, for which they are told they cannot qualify for if they do not have a college degree. Further, it is due to the tactics of loan companies, like Sallie Mae, that prey on the fear and trepidation of its customer base.

Conditioning them to not open up, reply to, or question, their notifications, Sallie Mae traps its customers in a cycle of helplessness, by burying its customers under mountains of paper work, which is complete with entirely unhelpful (and incomprehensible) “examples” of how principal interest works. They know that a large portion of its customers will not, are too afraid, or simply too confused to stand up to them. If I, someone who has both worked in and through bureaucracy, am baffled by their statements, and unable to obtain a straight answer from anyone at their company, I cannot imagine how impossibly tall the mountain of student loan debt is to other people who may simply have a 9–5 job and cannot find time to call and stay on the line with the loan company at 2:00 in the afternoon. This company makes it impossible to prevent your loans from going into delinquency in the first place (my case is an example), and once this happens, they throw up hurdles to prevent you from managing your debt.

If a case for student loan reform must be made, surely it is this: it is criminal to leave a portion of our population in the dark, scared and confused, about their financial situations. No one should ever be made too afraid or too confused to ask for help, and when they do ask for help and guidance, they should never be turned away or have the wool pulled over their eyes. But that is the business of companies like Sallie Mae: they confuse, overwhelm, and gut you for all your worth (or rather, for all that you owe).

*Names changed to protect the unhelpful

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