Gotta love this from Bloomberg. Debt collectors are now going after college graduates who owe student loans… On behalf of the federal government. The story highlights the sorry saga of Oswaldo Campos, who is disabled from liver disease (presumably, although with all of the disability fraud, who can tell) and was harassed by debt collectors contracting with the US Department of Education with calls threatening “We’re not playing here. You’re dealing with the federal government. You have no other options.”
“Campos agreed to have the money deducted each month from his bank account, even though federal student-loan rules would let him pay less and become eligible for a plan — approved by Congress and touted by President Barack Obama — requiring him to lay out about $50 a month. To satisfy Pioneer, Campos borrowed from friends, cut meat from his diet and stopped buying gas to drive his 82-year-old mother to doctor’s visits for her Parkinson’s Disease.”
With $67 billion of student loans already in default, the Feds are now relying on debt-collection boiler rooms to kneecap the new debt slaves. In 2011, the boiler rooms worked on commissions that totaled about $1 billion according to Bloomberg. Many of the contractors earn commissions of as much as 20 percent of recoveries. Former boiler room workers said they earned bonuses of thousands of dollars a month, restaurant gift cards and even trips to foreign resorts.
I’ve said it before and I’ll say it again… The student loan debacle is the next financial bubble to blow sky high. Roughly four years after the mortgage bubble popped, the Feds have blown up the student debt bubble, which just passed $1 trillion (more than the entire country’s credit card debt), in their latest desperate attempt to foster the illusion that consumers are releveraging. It’s nonsense of course, as Fitch reports that “as many as 27% of all student loan borrowers are 30 days past due.”
Keep in mind that the 27% of student loans past due is occurring with interest rates at record lows. As Zero Hedge points out, it’s not the low interest rates that determine affordability, it’s general economic conditions… With the unemployment rate of 18-24 year olds at 46%, there is simply no way most of these loans will be paid back.
So, who guarantees that $270 billion in student loans that are no longer current? Why, we do of course. The Fitch report tries to gloss over the shocking 27% figure by pointing out that most loans are backed by taxpayers in the form of the Family Federal Education Program. From Fitch:
“Fitch believes most student loan asset-backed securities (ABS) transactions remain well protected due to the government guarantee on Family Federal Education Program (FFELP) loans. The Federal Reserve Bank of New York recently reported that as many as 27% of all student loan borrowers are more than 30 days past due. Recent estimates mark outstanding student loans at $900 billion- $1 trillion. Fitch believes that the recent increase in past-due and defaulted student loans presents a risk to investors in private student loan ABS, but not those in ABS trusts backed by FFELP loans.”
Parents with college aged kids should do everything possible to avoid the student loan racket. College loans can no longer be discharged in bankruptcy for one thing, meaning that when Junior is slinging burgers at the Burger Doodle with his next-to-worthless degree from some astronomically expensive four year adolescent sleepover camp, he can count on goon squads harassing him a la Oswaldo Campos with the full backing of the federal government.
There’s two simple solutions to the college loan insanity: First, get the government out of the student loan racket entirely. It will make college more affordable as college cost increases are no longer backstopped by taxpayer guarantees to pay off bad loans. Second, demand that the banks (not the taxpayers) shoulder the loan risk by allowing college borrowers to discharge their obligations in bankruptcy.
In the meantime, at the retail level, there are plenty of alternatives to participating in this insanity. First, try Mr. Cheap’s Guide to Paying for College: Go to School without Going Broke. It comes highly recommended and offers straightforward advice on getting a quality education without going into hock.
Second, consider a college or university abroad. They are often much more affordable and educationally rigorous than many of our U.S. diploma mills that have forsaken educational excellence for easy taxpayer-guaranteed cash.
Third, if Junior’s motivated, encourage him to take a year or two off before college. Take what would have paid in tuition and encourage him to go out and start a business with it. I know this may sound controversial, but I have many highly successful friends who never went to college. Entrepreneurial skills will never be learned in college in any case (the entire model is predicated on churning out office cubicle drones), and they are arguably the most valuable skills today’s college-aged kids will need in our changing global economy.
Student loans are a racket… They are no different than the government-sponsored “affordable housing for all” Ponzi scheme that gave mortgages to anyone who could fog a mirror and led to the housing catastrophe. As the old saying goes “Fool me once, shame on you… Fool me twice, shame on me.” For your children’s sake, don’t play their game again.