Cortney Munna Responds

Cortney Munna, the debt-burdened NYU graduate featured in a recent New York Times profile and in my last blog post responds today to the more than 600 comments posted to the original Times article. She writes very eloquently and accepts responsibility for her plight, although she says she wants to fight to “re-write the rules of the student loan game as it relates to loan underwriting, counseling and the bankruptcy laws.”

She also points to the need for better information:

As far as why I let the debt amass as I did: Frankly, I was uninformed. For this, I blame myself and my family for not looking beyond the school for information, and I blame the school for not offering clearer information about the differences in lending sources.

In retrospect, it’s absolutely clear to me that I should have thought more about the cost of the education versus career prospects. I didn’t think of it as a purchase. It was always just the next step to take: Get into good school. Get decent scholarship. Work hard.

And have it all pay off in the end.

A Costly College Education

The college commencement addresses have all been delivered, and new graduates are faced with the realities of a slower economy and no diminution in the accumulation of student debt. Ron Leiber of The New York Times recently profiled Cortney Munna, a 2005 NYU graduate who is carrying almost $100,000 in student loan debt. Today National Public Radio ran a story about Heather Lefebvre, a 2010 summa cum laude graduate of Brandeis University who is burdened with $85,000 in student loan debt.



This graphic, which accompanied the web version of the NPR story, shows that student debt is a growth industry. So grads are getting hit with more debt than ever and the worst economy any graduating class has faced in several years. To make matters worse, student loan debt cannot be discharged by bankruptcy.

Leiber’s article for the Times asks the question, who is to blame? After interviewing Munna’s mother, herself a student loan borrower, the lending agencies, and the NYU financial aid office, he finds no one willing to take responsibility for Munna’s predicament. As usual, blame falls back on the borrower, but is that entirely fair? Education is supposed to be an investment that will bring future benefits, both economic and non-economic, but does the return on investment justify the expense? The question is not whether college is a good investment or not. In general, college is a very good investment. The real question is whether the marginally better education obtained at expensive schools like NYU and Brandeis is worth the added debt for students who can must borrow. State schools are the workhorses of our educational system, and they are much less costly. Are pricy private schools worth it? Of course, few of the schools will answer this question realistically, so it is foolish to look for the pricier colleges and universities to provide wise counsel to students like Munna and Lefebvre. Meanwhile, we are constantly encouraging young people to reach for the stars and not settle for less than the best.

One point that comes from these examples, is choice of major. Many of my liberal arts students come from wealthy families, and I know that they will be fine no matter what happens. But students like Munna and Lefebvre are not wealthy. Munna had an interdisciplinary major of religious and women’s studies, and Lefebvre was a double major in English and creative writing. I know many parents urge their children to diversify their majors, making certain that at least one major has the potential to lead to a job. If you are going to double major, choosing two quite different majors (English and biology, or religious studies and psychology) might improve chances of post-graduate employment. I was an English major, and I still believe that a basic liberal arts education is good preparation for both civic life and a wide variety of employment paths. But I went to state schools, emerged from college without debt, and benefited from good economic times. These things are not true for today’s graduates.

Desperate for Money in Oakland

While checking my email and enjoying a Venti-sized Pike Place Roast at a Starbucks near the Oakland International Airport, I spied the sign above on a building across the street. Title loans are typically short-term loans at very high interest rates. For example, a 30-day loan at 25% interest is the equivalent of 300% APR. Some title loans have APRs of over 600%.

In return for fast cash with few questions asked, the borrower must have a car that is owned outright and must sign over the title of the car as security on the loan. If the principle and interest are not paid off on time, the borrower can usually roll over the loan to a new due date, but if he or she is delinquent on the loan, the borrower can lose the car.

Seeing a sign like this one led me to ask, “What kind of trouble must you be in to borrow against your car for cash in 15 minutes?” The patrons of this institution inhabit the dark corners of our economy, and lenders like this one are happy to take advantage of their desperation. Right across from Starbucks.

The morality of ditching your obligations

In a piece entitled “Walk Away From Your Mortgage” by New York Times writer Roger Lowenstein makes an interesting point about the recent boom in foreclosures. The economy has gone into recession, and many people have lost their jobs and are simply unable to pay their mortgages. Furthermore, it is estimated that over 10 million Americans currently owe more on their mortgages than their houses are worth (this represents a quarter of all mortgages), and there is a trend towards people who could pay their mortgages simply walking away. This group, whose actual size is unclear, has been vilified in the press and by politicians of all stripes. Those who simply choose to walk away from their mortgages, not because they have to but because it makes economic sense, have been labelled irresponsible and immoral.

But Lowenstein points out an interesting contradiction. Businesses walk away from similar obligations all the time. The investment firm Morgan Stanley recently decided to stop making payments on five San Francisco office buildings simply because the investment did not make sense. As Lowenstein points out, “Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with.” Another argument for holding onto your home is that foreclosures bring down the prices of homes in the area. But oil speculators drive up the price of gas for all of us, and those who sell stock, decrease the value of other people’s savings and retirement accounts. All of our economic decisions are interconnected, but not all are infused with moral obligation.

So homeowners are expected to be moral, while businesses are free to be self-interested economic entities. Not homo economicus but corpo economicus. Furthermore, Lowenstein points out that those who walk away from their mortgages are not avoiding the consequences of their decisions. The consequence of not paying is written into the mortgage—surrendering the house—and homeowners who foreclose are suffering this consequence.

Finally, Lowenstein argues that homeowners should feel free to foreclose on a house that is worth less than the mortgage. Housing prices are not likely to recover for a long time, and throughout the financial world, it appears that moral motivations, social bonds, and social consciousness have decreasing influence on our decisions.

There is a sad reality to this article. One cause of our current economic crisis is the breakdown of local banking and personal relationships between mortgage issuers and homeowners, as well as between borrowers and credit card companies. Each has acted like the self-interested homo economicus of neoclassical economics, and often the self-interested action of one was at the expense of another—a kind of social zero-sum. But Lowenstein argues that, in this economic prisoner’s dilemma, there is no reason for the homeowner to cooperate when everyone else is defecting. Sadly, he has a point.

Pre-paid Debit Card Fees Soak Low-income Users

I recently got a new cell phone, and after I sent in several pages of documentation, my rebate was mailed in the form of a pre-paid debit card. These financial products and their close cousins pre-paid gift cards are becoming ubiquitous. Gift cards can be purchased at the grocery store and many other places. Pre-paid debit cards are particularly popular with low-income consumers who are unable to open a conventional bank account or get a credit card. But as this New York Times article suggests there are many hidden fees and deductions that make this a very expensive form of banking. Recent credit card reforms passed since Barack Obama became President did not touch the pre-paid debit card market.

It is particularly concerning that some employers—including WalMart—have begun paying employees with prepaid debit cards. This policy must be a boon to the credit card companies, but it is no bargain for the employees.

Bankruptcies Top A Million

The 2005 bankruptcy reform bill had a strong impact when it was first implemented, knocking down the rate of personal bankruptcies in the US to approximately a third of what it had been, but the basic problems of consumerism and easy credit where not touched by the bill. As a result, it was just a matter of time before rates would climb back up, and they have--quite steadily since the introduction of the bill.

Now with the added impact of unemployment and the economic decline, rates have taken off again. As the October 2nd Wall Street Journal article below indicates, we had over a million personal bankruptcies in the first nine months of 2009. A rate that is very close to that just prior to the 2005 bill and one that will likely bring us to 1.4 million bankruptcies by the end of this year.

In addition, the bankruptcy statistics always underestimate the pain by approximately 25 percent. On average, approximately a third of all personal bankruptcies are married couples filing together.

--------------------------

Personal Bankruptcy Filings Soar
By SARA MURRAY

Consumer bankruptcies topped one million for the first nine months of this year, the highest point since the system was overhauled in 2005.

The number of personal bankruptcy filings for the nine months rose to 1,046,449 as of Sept. 30, the American Bankruptcy Institute, an organization made up of attorneys, accountants and other bankruptcy professionals, said Friday, using data from the National Bankruptcy Research Center. There were 773,810 personal bankruptcy filings for the same time period in 2008.

September's filings reached 124,790, 41% higher than the same month last year.

The 2005 revamp was intended to make it harder for Americans to shed their debts by filing for bankruptcy. In that year, before the law took effect, there were 1.35 million bankruptcy filings in the first nine months.

But a tough economic climate has sent filings soaring again and ABI expects personal bankruptcies to exceed 1.4 million by the end of the year. "Bankruptcy filings continue to climb as consumers look to shelter themselves from the effects of rising unemployment rates and housing debt," the institute's Executive Director Samuel J. Gerdano said.

Write to Sara Murray at sara.murray@wsj.com

WSJ: Student Debt Grows Dramatically

From the Wall Street Journal, Sept 3, 2009:

Students Borrow More Than Ever for College

Heavy Debt Loads Mean Many Young People Can't Live Life They Expected

By ANNE MARIE CHAKER

Students are borrowing dramatically more to pay for college, accelerating a trend that has wide-ranging implications for a generation of young people.

New numbers from the U.S. Education Department show that federal student-loan disbursements—the total amount borrowed by students and received by schools—in the 2008-09 academic year grew about 25% over the previous year, to $75.1 billion. The amount of money students borrow has long been on the rise. But last year far surpassed past increases, which ranged from as low as 1.7% in the 1998-99 school year to almost 17% in 1994-95, according to figures used in President Barack Obama's proposed 2010 budget.

The sharp growth is "definitely above expectations," says Robert Shireman, deputy undersecretary of the Education Department. "But we're also in an economic situation that nobody predicted." The eye-opening increase in borrowing is largely due to the dire economic environment, which is causing more people to seek federal loans, he says.

The new numbers highlight how debt has become commonplace in paying for higher education. Today, two-thirds of college students borrow to pay for college, and their average debt load is $23,186 by the time they graduate, according to an analysis of the government's National Postsecondary Student Aid Study, conducted by financial-aid expert Mark Kantrowitz. Only a dozen years earlier, according to the study, 58% of students borrowed to pay for college, and the average amount borrowed was $13,172.

The ripple effects for today's heavily indebted young people are becoming palpable. A growing body of research suggests that tough loan payments are affecting major life decisions by recent graduates, forcing them to put off traditional milestones—from buying a first home to even marriage and having children.

Also, the rising levels of borrowing may ironically be contributing to the accelerating cost of college, say some college-finance experts. Loans can give colleges an artificial sense of a family's ability to pay tuition. To some extent, that false sense of security gets built into the assumptions schools make when setting prices, say experts. The idea is that as prices rise, families borrow more and more, spurring prices to rise further, which in turn requires more borrowing. Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers, says this phenomenon is playing a role in why tuition grows at about twice the rate of inflation. "Instead of imposing tougher choices" on college costs, he says, it's "easier to raise prices...because this additional loan amount is made available."

These and other impacts are likely to continue to spiral for future generations of tuition payers, college finance experts say. It is unclear whether we have seen the worst of it. Mr. Kantrowitz predicts the rate of increase will slow to 12% for the 2009-10 school year due mainly to what he expects to be a rebounding economy. On the other hand, Mark Zandi, chief economist for Moody's Economy.com, says he thinks unemployment rates will be at least as high as they are now, and housing prices will fall further, making it difficult for families to borrow against home equity.

"Growth in student lending can remain very strong, at least through the next school year," Mr. Zandi predicts.

The total borrowing limit for dependent undergraduates who take out federal Stafford loans—the most popular federal aid program—grew to $31,000 this past school year from $23,000. Raised limits in federal loans may have siphoned some borrowing away from riskier—and costlier—private loans, which are now harder to get due to the retrenchment of that business. The move away from these risky loans may be one bright spot in an otherwise frenzied student credit environment, Mr. Kantrowitz says.

Still, students cringe when they think of what they will owe by the time they graduate. Kordi Solo, a senior majoring in journalism at Central Michigan University, expects to owe about $60,000 in student loans by the time she graduates in the spring. She had hoped to owe much less, but her father, a construction worker, has been out of work since last fall. She worries about the ramifications that debt will have on her future—whether it is being able to afford health insurance or qualifying for future loans.

Zack Leshetz, a 30-year-old lawyer in Fort Lauderdale, Fla., has $175,000 in student loans from his seven years in college and law school. Lately he has had his eye on the real-estate market. "Everyone says that it's a great time to buy a house," he says. But that is not an option right now, he says, thanks to $800 a month in payments—and another chunk of student loans in forbearance, which means payments are halted while interest accrues. "I find myself living paycheck to paycheck," he says.

He has also been engaged since March, but has held off on marriage. "There's no way I can pay for a dream wedding, or even just a regular wedding," Mr. Leshetz says. "I feel like I'm putting my entire life on hold."

"There are no guarantees about how easily you'll be able to pay off your student loans," says Lauren Asher, president of the Institute for College Access and Success.

These students' experiences are mirrored in research by Mathew Greenwald & Associates Inc. for investment-management firm AllianceBernstein LP. In a 2006 survey of 1,508 graduates under age 35, 39% of college graduates say it will take them more than 10 years to pay off their household's education-related debt. The survey says that this has caused a delay in certain key "rites of passage" associated with adulthood. Forty-four percent of respondents said they delayed buying a house because of their student loans, while 28% delayed having children.

"Loans have gone from being the exception to being the norm for most students," says Mr. Nassirian. He laments that, rather than fixing the problem of sticker price, policy makers typically tweak student-aid programs to make it easier for students and families to continue to borrow more.

Attacking the problem of cost is thorny because it is politically difficult to get all the interested parties -- which include federal and state governments, foundations and private institutions—to agree. "There are so many stakeholders, different explanations at different schools as to what's happening with cost, that it becomes politically dicey," says Christine Lindstrom, higher-education program director for U.S. Public Interest Research Group, which advocates for consumers. Also, colleges can be big employers in congressional districts, making it challenging for politicians who represent them to also take them on. "You're not going to win friends if you're alienating them," she says.

Some Republicans made attempts at controlling tuition increases when they held the majority in Congress. Rep. Howard P. "Buck" McKeon of California championed legislation in 2003 that would have penalized colleges for raising tuition too much by taking away federal subsidies. Though the bill died, he plans to continue pursuing the issue in the upcoming Congress, a spokeswoman says.

Some recent graduates say they wish they had known more about the consequences of debt before taking it on. Lillian Russell graduated from law school at the University of Pittsburgh last year with $181,000 in debt from her seven years in school. She has spent much of the past year looking for work. In recent weeks, she found a job clerking at a small law office. While she settles into her job, she has deferred payments on most of her federal loans, though interest continues to accrue.

"I wish I had considered the long-term impacts of what I was getting into," Ms. Russell says. When she entered school, "the idea was I'd take out the loans, get a job, and pay it back," she says.

It seemed straightforward. But as the economy has soured, "I feel like it's shifted a lot of my life goals," says Ms. Russell, from buying a house to starting a family. "I'm really concerned about handling this obligation while taking on new ones."

Write to Anne Marie Chaker at anne-marie.chaker@wsj.com