Today I Solve Student Debt Forever

by JT McGee

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:

  1. Reasonable future earnings based on Bureau of Labor Statistics data for recent years and related fields.
  2.  

  3. The cost of debt, showing the student an amortization table and the amount above the amount borrowed that is paid in interest.
  4.  

  5. 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.
  6.  

  7. 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.
  8.  

  9. 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.

Obvious criticisms:

  • 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 😉

{ 17 comments… read them below or add one }

Barb Friedberg February 28, 2011 at 14:01

Great article, going in my next round up. Love your site and participation on Yakezie!

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JT McGee March 1, 2011 at 11:17

Thanks Barb, you’re always too nice 😀

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Debt Free Divas March 1, 2011 at 07:44

I think you may be on to something good here. Even simpler, let’s make it an unfunded mandate. Require college students receiving financial aid to visit with a financial adviser and make them pay for it. Same as you would a college application, other student fee, or new outfit for the weekend party. This way competition will keep the prices low as advisers compete for this new business. However, it’s done students need to speak with someone outside of the school admin system who push the loans as the best thing since slice bread.

Have you heard of Zac Bissonette? Recently college grad who wrote Debt Free U. I think you’ll enjoy that.

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JT McGee March 1, 2011 at 11:25

Either payment method is cool with me. My proposed method for paying for it would apply greater incentive to lower costs, since the cost is not flat rate. That is, if it were to be paid for with a .4% increase in origination fees, then those who borrow the most would subsidize the costs of those who borrowed the least.

I like your point about keeping costs into consideration, especially when it comes down to ensuring this remains a viable market for people not affiliated with the FASFA. I know that is a very common problem; subsidies and other benefits tend to push out people who use these services however I see greater benefit in someone speaking to a planner at 18 than someone speaking to one at 50. Again, though, a very serious consideration!

“However, it’s done students need to speak with someone outside of the school admin system who push the loans as the best thing since slice bread.” High five! That’s what I wrote about in another post…they label loans as if its free money, and then wonder why students spend it as if its free. Those people are…well, not good sources of financial advice and I’ll leave it at that. 😛

I just checked out that book on Amazon and it seems to be my strategy for getting through school…work! Ha! Amazing what a little work does to ease a debt burden. 😉 I might check it out, though to be honest, I’m not much for “debt free” books; many seem to be either too elementary or they appeal more to the emotional side of a debtor (Dave Ramsey’s snowball method, for example) compared to the logical side (Pay off the highest interest balances first).

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Jeff @ Sustainable Life Blog March 1, 2011 at 09:22

Great work JT – I like the meeting with the financial planner idea, but do you think it will actually sink in? Plenty of kids to to college to study art, even though the “starving artist” is so well known and played out that they have to have heard it before. Not only that – they have to realize it’s a saying for a reason, but they still decided on art.

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JT McGee March 1, 2011 at 11:34

I think it will sink in enough to make it worthwhile. Am I expecting that it will completely change the outlook students have toward an education? Meh, not exactly.

I do, however, think it would at least encourage some connection between students and their finances. I think it’s often understated how few students are actually involved in the decision-making process, and how few truly understand what debt, interest, etc mean for their future cash flow.

If nothing else, this step would require that students participate in at least one part of the lending process, as I know many who have absolutely no idea how much they’ve borrowed, what they owe, or their options for paying it off post-graduation. So, in that regard, I see it as a way to create an interest in students who might not even consider their finances, but I have no lofty goals for changing the behavior of those who don’t care anyway.

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LaTisha @FSYAonline March 1, 2011 at 09:33

I don’t know why I haven’t thought of this before. It’s definitely a service that has a need.

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JT McGee March 1, 2011 at 11:26

There’s a need alright! Problem is, few seek it out. So, either with incentives or by requisite, there should be some control on who gets to borrow from the public trust.

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Everyday Tips March 1, 2011 at 14:02

It’s too bad that high school counselors don’t educate the students better. My counselor was useless, and I had no idea what I was getting into regarding student loans and such. I just knew I wanted to go away to college.

Students definitely need a resource to turn to to help them make these decisions. Many parents need an education too.

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JT McGee March 1, 2011 at 15:45

Talk about a pipedream! With each passing day, the counselors’ job descriptions are diluted even further. Most all of them in the school system here spend 95% of their day doing schedules.

Heh, the parents need the run-through probably 10 times more than students do. At least students have some time to correct any bad decisions. 😮

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Jacob @ My Personal Finance Journey March 6, 2011 at 20:19

Very cool idea JT! I’m with you on this topic. Something needs to be done because the current system of educating students on finances is terrible. The only thing that would be tough to get the government to bite on is the $100 meeting with a financial advisor. That would take some serious leg pulling.

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Funny about Money March 8, 2011 at 04:39

It has some genuine appeal.

One potential drawback: some students can’t graduate in four years simply because their schools don’t offer all the required courses in a timely manner. Especially in times when states are inflicting Draconian budget cuts, colleges and universities simply don’t have the resources to offer every course in every major every semester.

It also will preclude holding a part-time job (from an instructor’s point of view, not a bad thing: too many students triage school while they try to work their way through–college itself is a full-time job, or it should be). To require students to graduate in four years will will guarantee that each student who borrows to pay tuition will graduate with the maximum possible debt load, and it could punish students who can’t get all their major courses through no fault of their own.

Educating 18-year-olds is not as easy as it seems. They have other priorities than worrying about some distant problem that doesn’t even make much sense to them. These proposed financial advisers would have to be trained in presenting complex, abstract information to post-adolescents in ways that make sense. A hundred bucks is not much pay for providing a service that probably will not lead to a future client relationship.

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JT McGee March 8, 2011 at 10:47

@Jacob – I’m thinking there has to be some way to pass the burden onto students. I think a higher origination fee for the loans would be an easy solution. Right now I think they’re 1% of the total loan.

@Funny about Money – I won’t be a four year graduate either, so I understand that entirely. Actually, I’m currently shuffling between 4.5 and 5 years because some of the necessary classes are offered only in spring, or only in fall, making it difficult to find a schedule that “works.” To be quite frank, though, I work a lot more and make far more “concessions” than your average college student.

I used the four year assumption only because it would error on the side of conservatism in my numbers. If one hundred dollars isn’t enough for an hour-long conversation, then we can up it. I think you’d find plenty of sociable people willing to talk to a new person every hour about their financial future for $100 per hour. But hey, let’s up it to $250 per consultation, still only $500m per year against a $100B annual lending market. Still nothing, and still worth it, in my opinion.

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KC March 10, 2011 at 12:08

At the state university I attended, this does exist, though in a simpler format. Before loan disbursement you have to sit through a computer guided workshop, that goes over repayment and other debt considerations. I remember going through the process, but it still didn’t sink in to me the damage of student loans and the reality of repayments.

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JT McGee March 10, 2011 at 13:14

@KC – Thanks for the input, I didn’t know there was anything out there like this. Do you think it would have been more effective if you spoke to a human being? Or was it just too complicated? Maybe too easy to ignore?

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Afford-Anything.com March 11, 2011 at 15:49

I just clicked on your link to the Huffington Post article about a someone (5’10, 200 lbs) trying to sell off their kidneys and other body parts to pay off their child’s student loan. How nauseating.

People do need to think clearly about whether or not they should take out loans for school. I am staunchly an advocate for borrowing ANY amount of money for an Ivy League education — even if you’re a liberal arts major. The connections you make, the network, will almost certainly be worth it.

If you’re attending a less-reputable school, however, then weigh your likely career and future income (are you more interested in engineering or art history? are you likely to work in your hometown, perhaps at a local school or for a small company?) against the debt that you’ll incur. In these cases, attending a cheaper school for the first 1-2 years might be worthwhile.

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Jack March 23, 2016 at 16:42

FYI, it’s FAFSA, not FASFA.

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