The Smartest Girl I Know

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When I first met Deja and Zhane, they were living with their mother in a Section 8 housing unit in Yonkers, New York. Their mother was what most people would describe as a “typical welfare mom” — she got a job once in a while, although the risk of losing her benefits if the job didn’t work out made it difficult to get off welfare. But she was proud of those girls! They didn’t go out on school nights, studied hard, stayed away from boys and drugs, and won numerous school awards. When Zhane was offered the opportunity to attend a scholastic camp during the summer, her mother hustled to contact everyone she knew who might be willing to sponsor the girl with a donation of $20, $10, even $5 if they could spare it. I was one of the hustled. More than once. And I was happy to help.

I lost track of the girls when they stopped attending our church, but I ran into Deja recently at the grocery store in my middle-class neighborhood north of Yonkers, where she is working as a clerk and saving money for college. She also works at a Burger King in the evenings, but she enjoys her grocery job better. “I like the customers, and I feel like ‘somebody’ here,” she said. I asked about her sister, and we caught up.

An estimated 40 million Americans are saddled with outstanding student loans totaling over a trillion dollars.

Zhane is also working two jobs, trying to earn enough money to pay off the debts she accrued after one year of college. “She didn’t want to owe all that money,” Deja told me, “so she’s working to pay it off before she goes back to college.”

Smart girl.

According to statistics compiled by the Federal Reserve Bank and the Chronicle of Higher Education, an estimated 40 million Americans are saddled with outstanding student loans totaling over a trillion dollars. Many of them are well into middle age now, with little hope of ever paying off their debt. In fact, student loans are the only debt that cannot be discharged through bankruptcy, and if the loans aren’t paid off by age 65, when Social Security kicks in, payments to Sallie Mae will be deducted off the top. So add student loans to the inevitability of death and taxes — and don’t plan to leave that fancy engagement ring to your heirs, because Sallie Mae will be first in line when your will is probated.

The average student debt is $30,000, but many students owe well over $100,000 when they graduate, and it isn’t unusual today for grad students from Ivy League schools to amass debts totaling over a quarter million dollars. Unless you’re fortunate enough to land a six- or seven-figure job, those loans will never go away. Never.

Deja and Zhane might not be in college yet, but they know the difference between “aid” and “debt.” Other college students aren’t so wise. One of my own students, repeating a required English course for thethird time, was rather flippant when I cautioned her that she was amassing a huge debt without making any progress toward graduation. “I don’t have to pay for it,” she said proudly. Thinking she meant that her parents or grandparents were footing her tuition bills, I reminded her that she should be more respectful of their money. “Oh no,” she crowed, “they don’t have to pay either. The school gave me financial aid!” This poor, foolish girl thought “aid” meant “help.” She had no idea that it really meant, “Let me hold the door for you as you step into a lifetime of debtors’ prison.”

Unless you’re fortunate enough to land a six- or seven-figure job, those loans will never go away. Never.

At the university where I teach, I encourage my students to purchase their textbook, an anthology of classic literature, on Amazon. Cheap, used editions are seldom available at the college bookstore because the book is updated every three years, making the older editions conveniently obsolete. Half the time the new edition is the only option, and they can’t sell it back at the end of the semester because a new edition is usually about to come out. But I don’t care which edition they use. It’s classic literature, after all! Most of my students find the book online for $5 or so (one found it for a penny!), instead of paying $120 for the new edition at the bookstore. However, last semester I received an email from the dean: “Please encourage students to purchase their books at the college bookstore. Remind them that this is to their advantage, as they cannot use their financial aid if they purchase books online.” So let me get this straight: my students are better off borrowing $120 from Sallie Mae and paying 4–8% interest for the next 20 years than they would be if they simply skipped Starbucks for one day and bought the book online with cash? What kind of new math is that?

“Learn now, pay later” is one of the main reasons tuition has skyrocketed in the past two decades. When students can enroll without putting a penny down, they don’t give enough thought to how much it’s going to cost them later, and colleges can raise tuition almost indiscriminately. When our daughter began college at a private southern California university 15 years ago, she was awarded a scholarship that covered 50% of her tuition. We were delighted, and budgeted accordingly as we allowed her to select this expensive school. By the time she graduated four years later, however, the scholarship was only covering 25 % of her tuition, because tuition had doubled in those four years. How can anyone plan for college, when tuition is changing that drastically?

Banks would not be awarding these astronomical, uncollateralized loans to unproven debtors if the government weren’t guaranteeing the loans.

I fear for this generation whose future is being sold for a mess of pottage. Fully 60% of students accept some kind of loan for college, without ever considering the consequences. Most of them are mere teenagers when the university’s suave, educated, comforting grownups tell them to sign their lives away on the dotted line because “that’s the way everybody does it.” After all, it’s financial aid. The government is helping you get ahead. Aren’t you lucky.

I’m not suggesting that these loans should be forgiven. I don’t really have a solution for the 40 million Americans who are already hopelessly strapped with debts they knowingly contracted. I certainly don’t think free college is the answer. But something has to be done. Banks would not be awarding these astronomical, uncollateralized loans to unproven debtors if the government weren’t guaranteeing the loans by making them undischargeable through bankruptcy, and college tuitions wouldn’t be rising beyond the ability to pay if these loans weren’t creating artificial demand.

As I left the grocery store that day I congratulated Deja again on her wisdom in avoiding debt. By saving her own money for college, she is more likely to spend it carefully on a degree that truly interests her, and she’ll study more effectively because she won’t want to waste the money she has worked so hard to earn. She’ll live at home with her mother and sister instead of paying $1,000 a month for dorm life, and she plans to attend community college before transferring to a university, which will also help keep her costs down. She expects to have enough saved to pay for her first year of tuition by September. And she sleeps well, knowing that her savings account, not her loan balance, is growing.

Smart girl.




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Government Motors Goes Subprime

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President Obama continues pointing to his crony bankruptcy bailout of GM as a success. Never mind that it stiffed the secured creditors to favor the UAW, a huge backer of Obama and the major cause of the domestic auto crisis to begin with. Never mind that that GM was allowed to carry forward losses from the bankrupt entity to offset future earnings, stiffing the taxpayer and giving it an unfair advantage over Ford and the foreign auto makers, none of whom got the bailout. Never mind that when GM went public again, the UAW was able to sell its shares first, which enabled it to be made whole while the taxpayers saw their shares diminish in value.

Now it turns out that much of the recent sales growth GM has bragged about is due to GM jacking up its sales with subprime loans.

In the auto industry (like other industries that sell products and offer financing to the customers), the credit worthiness of customers is judged by their FICO scores, which range on a scale from 300 to 850. Subprime customers are those with a score below 660. In the fourth quarter of 2010, subprime loans accounted for 4.8% of GM’s sales. In the first quarter of this year, they hit 8.32%, which is over one-third higher than the industry average (6%).

Why is GM taking on more risky debt in a chancy economy? Edward Niedermeyer (editor of The Truth About Cars) puts his finger on it: “[GM] may be trying to goose short-term sales with subprime lending to boost its stock price, which is tied to the government getting out of its GM investment.”

Indeed. The federal government still owns nearly 30% of the stock (500 million shares). The stock price is only about $20 per share, close to the post-IPO low. For us to get our $26 billion in direct support back, the price would have to hit $53 per share.

So GM — controlled by the Obama administration — is pushing junk loans. This is rich, coming from the same guy who sold the Dodd-Frank financial regulation bill by claiming that greedy capitalists had duped innocent buyers into risky subprime loans.

What’s greedy for capitalists must be ethical for neosocialists.




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