We are in a student loan crisis, and, as with every crisis, we want to point a finger at someone, anyone. With lending, almost always we zero in on the borrower. After all, they signed up for this debt. Shouldn't they have to pay it?
Absolutely, but pay what?
Join me in a world I am inventing in this column where the lender and the borrower finally have the most honest loan conversation of my wildest dreams. (Warning: This conversation does not take place in real life.)
Meet Suzie, a borrower, and Robbie, a student loan specialist:
Suzie, at eighteen, needed help. She walked into Robbie's office and sat down in the chair across his desk. "I've decided to go to college," she said.
"Great," Robbie replied, "and what job do you think a college degree is going to get you?"
"Well, I've always dreamed of being a history teacher," she said, "but, finance is interesting too. Do I need to decide now?"
"Absolutely not. Just commit to the investment now, and then after four years go out and get a job based on what you study."
"Just so I understand, I pay the same amount for this college education whether I make very little money as a teacher or a ton of money in finance? Is that right?" she asked.
"Correct."
"OK, how much does college cost?"
"That's cute," he said, "I think you meant, what will this college cost you, in particular?"
"Umm, OK. How much is this going to cost me?"
"Well, you see," Robbie said, "there are these discounts in your first year that may or may not be the same all four years. They're based on how you did in high school or your parents' finances. Also, it's impossible to know what tuition inflation will be. So, in truth I don't know how much the next four years will cost you."
"Well, I have $10,000 saved for college."
"It will definitely cost more than that."
She sat back, pushing against the armrests. "How do I pay for the rest?"
"How about a student loan?," he suggested.
"How much will the loan be?"
"It depends," he said. "Just sign right here like everyone else and after four years and lots of fun mitigating circumstances you will get a statement with the size of your student loan. They say it's the best four years of your life, you know."
"Wait, just sign?" Suzie asked. "Aren't there, like, terms, or something?"
"Great question. Yeah, we got terms. Anywhere from 10 to 25 years."
"Twenty-five years? I haven't even lived that many years!" Suzie said. She took a deep breath. "What's the interest rate?"
"This one is easy. It depends."
"You keep saying that," she said in frustration.
"It's the same for everyone and it doesn't depend on the term of the loan. The government just sets a rate for all loans disbursed that year. Over the last decade they've been between 2.75%-6.8%."
"OK," she said, "so I don't know the terms of the loan. I don't know the interest rate or how long it will last. Can you at least give me a sense of the payment?"
"It depends."
"Now I wish you'd stop saying that."
"Just tell me how much money you will be making in four years."
"How can I possibly know that? It depends on what I study in college and what kind of job I get."
"Fair enough," Robbie said, "then your payment is likely to be somewhere between $50 to $3,000 per month. Does that help?"
"Hardly. What if my payment is $50? Isn't there a chance that $50 doesn't even keep up with accruing interest?"
"Right you are. It doesn't keep up," he said. "But how great is it that we let you pay such a small amount to accommodate your budget?"
Suzie put her head in her hands. "What if I decide not to pay?"
"Yes, there's a great option. You can go into forbearance and pay nothing for a year. You can keep doing it over and over and over again. We'd be happy to help you do it. In fact, our customer service reps have figured out that they can more easily beat their quotas if the borrower chooses to go into forbearance rather than spend the time to review all the complicated payment options."
"Is there a downside to this forbearance thing?" she asked.
Robbie sighed, looked over his shoulder and in a whisper replied, "I'm really not supposed to talk about the downsides of student loans, but, between you and me, every time you choose forbearance, it capitalizes the interest accrued on the loan. Then interest starts accruing on a bigger balance. This is how people can end up owing double what they borrowed originally."
"What? So if I choose to do nothing, to not pay it, not go into forbearance, what happens then?"
"You suffer," he said.
"That's dark. What does that mean?"
"It's called defaulting," he said, "and those default programs are brutal."
"I've come this far," Suzie said brazenly, "tell me about the default programs."
"We do nothing, for a little while. Then over time we add penalties and start to garnish your tax refund and wages, causing financial strain and adding a dose of shame between you and your employer. Heck, before covid they even started to garnish Social Security."
"I'm only 18! I could still be dealing with this in retirement?"
"Oh, absolutely."
"What about bankruptcy? In America, I thought no one could be held under the oppression of debt without the possibility of relief. I think I learned that in high school history. Isn't it in the Constitution?"
"Nah, we worked out this special deal with lawmakers and agreed that student loans are a special kind of debt that the borrower cannot bankrupt out of," he said, "There is no relief. Unless, of course, you..."
"You what?"
"You die."
"That is patently un-American."
"Wow," Robbie said, "I see a civics teacher emerging in four years." He glanced at Suzie's information packet. "With you going to a private liberal arts school, you could be in the two-timers' club."
"Do I even want to know?"
"Just our little inside joke for borrowers who end up with income-based payments that don't cover the interest accrual. It accumulates over time to be more than double your annual income, nearly impossible to pay off at that point."
"But, what about public service loan forgiveness? I was under the impression that a teacher could get forgiveness after 10 years of income-based payments?"
"In theory," he said. "We keep the rules for PSLF just complex enough that folks can be lulled into going into public service with a notion of future forgiveness but keep it just out of reach. Taxpayers should be proud and grateful that in 2018, 98% of our first applicants to the program were denied forgiveness."
"What? OK, what if I just pay them? What if I live in my parents' basement and I put every last dollar toward my student loans until they're paid off?"
"Your parents will be needing the basement for Airbnb revenue to pay off their parent PLUS student loans for your education," he said.
Suzie tilted her head quizzically.
"I don't mean to rush you," Robbie said, "but I've got a waiting room full of people. Are you ready to sign and start your future?"
"Thanks," Suzie said, "I'll pass."
Sarah Catherine Gutierrez is founder, partner and CEO of Aptus Financial in Little Rock. She is also author of the book "But First, Save 10: The One Simple Money Move That Will Change Your Life," published by Et Alia Press. Contact her at sc@aptusfinancial.com.