My take on avoidable student loan mistakes is on how private lenders create the conditions in which student loans mistakes flourish, and what students can do to counteract those conditions.
Meanwhile, all students who depend on student loans for their post-secondary education can now take a breath of relief, as the health care reform bill that was recently signed into law by President Obama included an education provision barring private banks from making direct student loans.
That said, the primary student loan mistake, from which flow all the other mistakes is when a student takes a loan from a private lender. Needless to say, were students to stay away from private lenders they will avoid many of the mistakes associated with student loans; but until the new student loan law kicks in, it will remain ‘easy said than done’ for many students.
To the private lender, a student loan is a ‘stock in trade’. A commodity he sells for a profit. The student is a number to him: a guaranteed source of revenue at least for the next 40 years. To set the record straight, however, private lenders are not involved in a sinister plot to exploit students and rob them of their future happiness; they are simply operating as private companies do: profiting from their ‘stock in trade’, and its completely legal.
Under present arrangements, the private lender is incentivized to offer students as much money as they want, including credit cards; not only because it afford lenders a lucrative revenue stream for years to come, but also the money they loan to students are guaranteed federal subsidies. This turns Capitalism on its head, allowing private lenders to invest without the risk of losing their own money.
Students who fall into that easy money trap, indeed, fall in a real trap. They are able to get money without the pressure of having to make immediate payment. For an 18 years old college freshman, that easy access to money can be intoxicating.
Once the private lender gets the student hooked on the student loan and credit card, the student acquires a certain lifestyle that he must maintain: unhindered access to money when he needs it. The credit card debt begins to rise. When it hits the limit, the private lender gladly increases the limit, so long as the student is making good grades. In the worst cases, in time, the student will begin raiding his student loan funds for additional money to support his lifestyle.
A student with that level of spending will finish college saddled with a debt of about $80,000 to $150,000. The bank’s adjustable interest and fees on that huge debt will begin to bite when the student discovers that a job is not waiting for him, and that some months or a year may have to go by before he finds one, and that the job is not going to pay $150,000 a year, but $70,000. Just after college, and having landed his first job, when he should be enjoying the good life, he will be forced to live an austere lifestyle while he labors to pay off the debt he accumulated in college.
This unenviable scenario could have been avoided if the student had not taken a loan from a private lender. He could have sought a federal direct loan. It takes time, but eventually he would have got it. Moreover, the interest rate on direct loans is fixed over the life of the loan, and repayment conditions are lenient compared with private banks.
Another avoidable student loan mistake that students on federal direct loans make is using student loan funds for things other than tuition, boarding and books. Once started, it is difficult to control, and often students find they don’t have enough money left to pay for tuition, and are then forced to accept loans and credit cards from private banks.
Students who do not raid their student loan funds, and consequently do not accept private loans and credit cards, and live within their means, can avoid student loans mistakes. Try it. It is doable.