Student Loan Debt and Low Income Families

Posted by Student on 2009/10/12 @ 2140 Comments (0) (show tags and categories)

The Wall Street Journal recently reviewed the ways low income families are impacted by the US credit crunch. In addition to consumer purchases, The WSJ points to student loan debt as a major factor — sometimes the largest — in the composition of individual debt portfolios.

Excerpt from: http://online.wsj.com/article/SB125511860883676713…

“We saw an extension of credit to a much deeper socioeconomic level, and they got access to the same credit instruments as middle-class and mainstream Americans,” says Ronald Mann, a Columbia University law professor. Now, “it will be harder for families at the bottom of the income ladder to get credit cards,” he says.

The financial crisis has forced lenders to be especially cautious with the riskiest borrowers, a category that low-income families often fall into because their debt tends to be higher relative to income and assets. The ratio of credit-card debt to income is 50% higher for the lowest two-fifths of Americans by income than for the top two-fifths, Federal Reserve data show.

Although the tone of the article tends to focus on young people and their consumer behaviors, there is also a glimpse at a much more troubling problem.

Treasury Secretary Timothy Geithner, testifying before Congress in July, said: “We now know that millions of Americans were…unable to evaluate the risks associated with borrowing to support the purchase of a home, a car or an education.”

Student Loan Bubble is curious to hear more about Geithner’s perspective on the inability of Americans to evaluate risk, and if this can be remedied by better information, better financial education, different regulation, or perhaps something else entirely.

Education is an excellent vehicle for elevating one’s socioeconomic status, but The WSJ has identified a major issue for those in greatest need of elevation: disproportionate debt levels, coupled with the previously unheard of suggestion that education might be a risky investment.

Credit cards are a fatally attractive gimmick for managing student loan debt

Posted by Student on 2009/02/12 @ 0630 Comments (0) (show tags and categories)

The student loan bubble is a unique debt situation that spans multiple generations, with the younger doing its best to remain independent, and the older finding itself impotent to help even if it wanted. This requires students to reexamine their consumption patterns, which may have included using a credit card for discretionary items. While this can be seen as a good sign, more troubling is the notion of using short-term debt, including credit cards, in a futile effort to pay for the longer term.

The practice of leveraging credit cards against student debt is a recipe for disaster, because it isn’t the interest rate of credit cards that makes this behavior attractive, it is the debt repayment terms that make the more expensive option attractive. Students are unable to default on their educational loan debt, but they may have more options for dealing with poorly managed credit card debt.

Excerpt from: http://online.wsj.com/article/SB122756709839854439…

Recent graduates traditionally live on a shoestring, but they were often protected by a financial safety net: their parents. Now, as 401(k) balances erode and home values plunge, many families are coping with other financial problems and are less able to help the children.

Mandy Kakavas graduated in 2007 with $25,000 in student loans and $3,000 in credit card debt. Her mother raided her 401(k) to help her daughter pay for a degree in mass communications from the University of California, Berkeley, and can no longer help her financially.

“I look at the headlines about the bad economy, and I feel like I’ve already been there for a while,” she says.

Although Ms. Kakavas has cut corners on dining out and taken a second job to earn extra cash, she says she often uses her credit cards to pay her student-loan bills. In January, a new batch of student loans that were deferred will land.

“It’s going to catch up to me,” she says. “It’s hard to see financially where you’re going to be 20 years from now when you don’t know how you’re going to make payments next month.”

Some are taking out loans to cover the loans. Lindsay Fletcher of Wilmington, N.C., has $50,000 in student loans. To make ends meet for the next couple of months, she has taken out a $2,500 personal loan at a 13.9% interest rate to help pay off her credit cards and student loans, which come out of forbearance — deferment due to financial hardship — in November.

“There’s been a lot of tearful calls to Mom,” Ms. Fletcher says. “And I know that if she could help me, she would. But I don’t want her to have to. That’s why I went to college.” Unlike mortgages and credit cards, student loans are not forgiven in bankruptcy proceedings.