The Consumer Financial Protection Bureau (CFPB) and the US Dept. of Education issued a report on Friday that recommends that Congress change the bankruptcy law to include bankruptcy relief from private student loans. The 2005 change in bankruptcy law made private student loans non-dischargeable in bankruptcy, which simply means that they survive bankruptcy in most cases. Private student loans make up $150 billion of more than $1 trillion in outstanding student loan debt.
Rather than bankruptcy reform for treatment of student loans, I believe that we simply need to think differently about student loans. This morning, I had an initial debt consultation for a couple that is on the verge of facing foreclosure because they have missed 4 house payments. Their budget shows a monthly student loan payment of $700, and when you subtract the house payment, car payments and living expenses from their income, there is a $400 shortfall. After reviewing their budget, I stated that it looked like they wouldn’t be in financial trouble if they didn’t have the $700 student loan payment. The husband, age 48, agreed.
You can tell from the man’s age that the student loan has been hanging around for quite some time. There were periods of deferment, which simply increased the total amount owed to a total of $72,000. Another way of looking at it is having a mortgage payment with no house to go with it!
Despite causing financial trouble in their household, it is the pattern that their daughter may be following: Today, their daughter was at college orientation in Dallas, and she’s using student loans to make it happen. I suggested that they re-think the advice that they’re giving their daughter regarding how she pays for college. Student loans are easy to get, which has created the unintended consequence of making college more expensive. Rather than having your daughter join the “student-loan-for-life” club, why not recommend that she live at home while she attends a local college or university? I recommend that students use “family housing” (which means stay at home) and get funding for college from work rather than loans.
I always point out that my wife worked as a waitress while she attended UTSA. Sure, she feels like she missed only on the “out-of-town” college experience, and it took her an extra year to get through college. However, graduated college with no student loan debt, she got a job with a Big-6 accounting firm, and she passed her CPA exam. (The husband suggested a tour of duty in the military so his daughter could help with school, but that idea never “made it out of committee” during those discussions on the home front.)
So, you can go through college without student loans. It may not be your kid’s first college choice, but staying local and avoiding student loans may be your kid’s best college choice. Just think of the financial problems that you will help your child avoid by helping them avoid student loans. Remember, your kid is probably going to get married, and most “marital discussions” are about money problems. Why set them up for a student loan payment, which may equal their housing expense after college?