Will Government Actions on Student Loans Backfire?

The Higher Ed Watch blog warns today that Federal measures to deal with the “student loan crisis” (I put the term in quotes because their article reports that there is no crisis) might ultimately make things worse for borrowers:

We are particularly concerned that some policymakers, in giving in to the scare tactics employed by the student loan industry, may in fact be positioning student lenders, as well as high-priced colleges, to game the system to their advantage.

The writers take issue with several recent actions and rumors of action.  Among them, they note that the government’s recent announcement that it will buy up more private student loans may be premature and point out that “there is no guarantee that lenders will use the help they get to make new loans.”  They are also concerned with the proposal to increase loan limits:

To create more paths for students to go into further debt from which they have no way to get out from under is irresponsible and in most cases, unnecessary.

I couldn’t agree more.

“If I had to do it all over again…” – John’s Student Loan Story

John* was supposed to be a success story.  He grew up in a middle class home in Elk Grove, CA where his father was a captain of a dredging ship and his mother worked as a chemist for the state.  John was a precocious child, earning straight As throughout much of his early education.  When he decided to major in history at the University of California-Berkeley, his parents were happy to help to the extent they could.  He graduated in 2003 with about $5500 in student loan debt, substantial, but much lower than the national average.  He felt lucky.

Buying a Home v. Paying Off Your Student Loans

A reader posed a question in Michelle Singletary’s Washington Post column today about whether she and her husband should pay off their student loans – $70,000+ so far – before buying a house.  Singletary said yes and that they should also consider temporarily reducing what they’re putting in their retirement plans in order to put more money on the student loans:

I suggest that even if you have student loan debt, save up enough money to cover a few months of living expenses. Stop saving at that point and use any extra money to pay down the student loans, even if the interest rate is low.

Temporarily you could also reduce how much you have going into your workplace retirement plans. At least put in enough to get a match and then use the extra funds to pay down the student loan debt. When that debt is paid off, you can go right back to maxing out your retirement and building up a savings cushion.

For me, I just wouldn’t want to buy a home with $70,000 in debt. What if one of you loses your job? What if one of you gets sick? It’s better to get rid of the student loans before taking on the largest debt in your life.

Wow.  Considering that many people take at least 10 years to pay off their student loans, we are talking about a whole lot of people out there being unable to afford a home…because they went to college.  On top of that, now they are being advised to save less for retirement so they can pay down their loans.  So by the time they actually pay off the loans and can maybe start thinking about that house, they instead need to start funnelling money into their inadequate retirement accounts to make up for all of the time they lost. 

Something is seriously wrong with this picture.