So it was last week that I was having a casual conversation before a class with a classmate. She works in the retail-side of banking and I like to pick her brains about what she does, but more importantly, I like to hear about her customers.
We go through a slew of topics, but talk mostly about student loans. She tells me a story of a young woman who, having already borrowed $50,000 for school had no idea she owed that much, nor did she know from who she had borrowed it. My classmate told me she had to literally talk the student through the process of pulling her credit report, finding her lenders and creating a line of communication that would allow the young and indebted to see what her prospects were for obtaining another $15,000 for one more year of school.
Backstory: Basically, the student had allowed her parents to take care of the financing of her education, but something had happened that severed or complicated the lines of communication between her and her parents.
Having heard all this, I figured there had to be some very inexpensive way to fix what is undoubtedly a very problematic system; students do not understand the costs, methods, or practicality of financing a college degree. So, my solution is as follows:
How I’d Solve Student Loans
Most every student fills out the FASFA each year as a requirement to receive student aid, or to fulfill necessary steps to receive third-party scholarship disbursements. So, even if you’re worth $10 million, your children will still have to fill out the FASFA, for one reason or another.
Seeing as most people have to fill out the FASFA, I will use this as my entry point for my new program. It will make the FASFA process more difficult, but no, I don’t want to ask more questions about what you earn, your skin color, your dog’s name nor your blood type. This form is already too long.
Instead the FASFA should require that, prior to submission, a student goes take the time to speak with a financial planner about their future earnings prospects, debt loads, and consider generally their financial condition past and present.
Topics for discussion should include:
- Reasonable future earnings based on Bureau of Labor Statistics data for recent years and related fields.
- The cost of debt, showing the student an amortization table and the amount above the amount borrowed that is paid in interest.
- A reasonable cash flow analysis for the student’s first year out of school using cost-of-living data for the student’s current city, the city in which they’re going to school, and some randomly selected “brand name” cities.
- A comparison of schools and the cost of attendance. The advisor should highlight other cheaper alternatives (even if only for the first two years of undergraduate) and how that would affect the loan amount and the student’s responsibilities.
- The classification of student loan debt, and the inability for it to be charged off in bankruptcy.
This discussion might not last any longer than 90 minutes, probably not even an hour, and I think it would be reasonable for the Federal government to allocate some $50-100 to pay financial advisors for their time to speak with these students about the serious financial commitment they’re making when they sign any student loan forms.
According to the Wall Street Journal, two-thirds of all college students borrow for school, leaving college with an average of a little more than $23,000 in debt. Extrapolating these numbers across a $100 billion per year lending market (the stats on WSJ do not include the $25 billion in purely private loans), I can surmise that as many as 4 million students currently interface with the Department of Education’s Direct Loans for access to student loans. Of course, the Department of Education is a lender a student can reach only by filling out the FASFA.
My proposed program would cost no more than $400 million per year (at a cost of $100 per consultation) or roughly .4% of the total lending pool in any given year. Having run the numbers, I say “Good deal, Howie!”
Of course, these numbers are based on the assumption that the student would go seek a planner for every year in which they had planned to fill out a FASFA. But why not hit them only twice, maybe once before their freshman year, and again before Junior year?
From what I’ve seen with my own friends, it is at their junior years that they realize the devastating disease of debt-based consumption, and by then the easiest cost savings of going to a school near home has already been dismissed—it’s no longer academically possible.
If we require students to go only twice, you can further divide the costs of this program to $200 million per year.
Note: I hope you’ll take notice to the fact that I error generously on the side of those who disagree with my proposal by suggesting that the average student graduate in four years exactly. In terms of the calculus above, that would mean that the total lending ($100 billion) is divided by all student debt loads, when it should realistically be that I just go find the total number of students. Finding such data wasn’t so easy. That calculation means the costs of $400 million and $200 million are likely overstated, but the excess over and beyond can be reasonably applied to additional costs of administration and verification for my new program. Basically, don’t question the math. 😛
Why you should go with it:
My other solution (allowing people to starve after making serious errors in their personal finances) probably isn’t something you’d accept. Therefore, accept this option.
- Financial advisors are dipshits who sell awful products to unsuspecting “investors” and know only about investments that are fee-loaded. – Certification program, duh!
- Financial advisors will try to cross-sell. – Having worked with someone who operated in the Medicare space, I can say that the Feds are pretty good at busting the balls of anyone who attempts to illegally cross-sell products.
- This would great a glut of financial advisors wanting Federal dollars. – Good, it’s a reasonable Federal outlay of cash, given that my alternative won’t be accepted.
- The student loan program gets even more expensive. – Pay for it with a 1% uptick in interest rates. Bam! Transfer of wealth from those who don’t take advice to those who can. Alternatively, up the origination fee from 1% to 1.4% of loan balances, assuming costs of $200M and a total reduction of student borrowing by 50%. (Current $100B lending market halved to $50B *.4% = $200M costs).
- The program would run in backwardation to the Federal Government, as after the lending program was shifted solely to the DoE, the government now profits from these loans. – You’re right, the government would be spending money to make itself less money in loan interest, but let’s consider also the structural problems that come as a result of spending too much on a degree that is not financially viable. And who knows, this may be the first real discussion about personal finances the student ever has. Maybe that will incite a desire to monitor their own personal finances, cash flows, and seek to further their financial education.
What do you think? Yea? Nay? Good money chasing bad or bad money chasing good? Would this be a good outlay of Federal dollars given that the student loan program already exists in some capacity?
Do you think the above guidelines for the conversation would be worth their $200 million annual cost of a $100 billion lending market? Could we afford .2% increase in the cost of administrating the Department of Education’s Direct Loan program in exchange for a competent financial planner to make students aware of the costs, and benefits of having their degree?
Maybe we’d have fewer people selling organs to pay back loans.
I say so, but tell me what you think. Be as critical as you find necessary, the comment guidelines encourage very critical reviews of anything I post here. Do not hold back; doing so only further limits our abilities to learn, think rationally, and develop thick skin about how others see our world view. Being a wuss does the world a disservice, remember that.
On Thursday I will solve the very serious problems in retirement planning, and fix future Federal deficits by spending further the Federal Treasury. I bet you’re excited for that 😉