While the press has done an excellent job in recent months to illuminate the problems that go along with taking out student loan debt, many Americans are still not aware of basic facts about these types of loans. There are millions of Americans who have outstanding debt with Federal or private student loans, with many people not having much knowledge of the loans before signing the contract.
If you’re looking at taking out a student loan, here are 6 common student loan myths that you should know.
Student Loan Myth #1: $1 Trillion In Outstanding Student Loan Debt? No Big Deal.
In recent months, several notable higher education policy analysts have claimed that this figure – $1 trillion in outstanding student loan debt – is not a problem, and insist that no one should be concerned about it. One notable figure, Dr. Sandra Baum, has said at several panels in recent months that Americans should not be concerned with this figure. She continues to insist that student loans are a “good investment.” (More on why that terminology is problematic below). It seems that Dr. Baum, and others who insist that this troubling figure is fine, have failed to take into account the millions of Americans who are struggling or unable to pay back their loans. Indeed, the personal stories from struggling student loan debtors and the fact that the United States has now surpassed that troubling figure suggest that there is a student lending crisis which is affecting the economy and the health of the middle class. However, not all experts, whether they are in the fields of higher education policy or elsewhere, agree with policy analysts like Dr. Baum. In fact, Rick Palacios, a senior research analyst at John Burns Real Estate Consulting (JBREC), argues that young, indebted Americans – ages 24 to 34, a coveted demographic for the housing industry – are causing a drag on the economy. They can’t buy new homes. They can’t buy cars. They can’t start families. Even worse, a large percentage of them have moved home. These facts do not bode well for the well-being of the middle class and the economy.
Student Loan Myth #2: Student Loan Debt – Federal and Private – Can Be Discharged in bankruptcy.
If you aren’t already aware, and most people now are, student loans, aside from exceptional situations, cannot be discharged in bankruptcy Congress began rolling back the possibility of discharging Federal loans for several decades. In 2005, Congress passed legislation, called the Bankruptcy Abuse Prevention and Consumer Protection Act, making it virtually impossible to discharge private student loan debt in bankruptcy. Advocates for student borrowers argue that this bill entirely stripped consumer protections from student loan borrowers. In addition, bankruptcy attorneys, despite wishing to help you, are generally not schooled in this area, so you might wind up in bigger trouble when filing for bankruptcy. There have been several cases in which judges have ruled harshly against borrowers and their attorneys with fees and penalties when a struggling debtor has attempted to resolve the problem through the court system.
(Also read: How Your Student Loans Affect Your Credit Score.)
Student Loan Myth #3: The Majority of Student Loan Debt Does Not Comes From The Federal Government.
Like many social services and loan programs, most Americans aren’t aware that the bulk of student loan debt – as much as 90% of it – is originated from the Federal Government. Suzanne Mettler, author of Submerged State: How Invisible Government Policies Undermine American Democracy, discusses the fact that, after polling, she discovered that most Americans are unaware of the Federal Government’s role in originating and disbursing student loans. But that is certainly the case – Uncle Sam is the biggest student loan lender.
Student Loan Myth #4 : Sallie Mae Is A Government Entity.
Sallie Mae (SLM Corporation) is actually a private corporation – even though it was born out of the Federal Government as a Government Sponsored Enterprise (GSE) in 1972. It became a private company in 2004.
Student Loan Myth #5: For-Profits Degree Are Not Riskier Than Traditional Schools.
This is also false. If you attend a for-profit school, such as Kaplan University, Phoenix, or Strayer University, you run the risk of becoming heavily and indebted and degreeless. Default rates are the highest at these proprietary schools and dropout rates are extremely high. Even worse, there have been numerous cases in which programs literally had no opportunity for completion. In fact, a former employee- David Goodstein – at a Kaplan campus outside of Philadelphia filed a suit against the corporation in 2010. He accused the school of misleading and defrauding students in a medical program. The students were expected to do externships for this particular program before they could graduate. However, they weren’t able to qualify or enter these externships. Goodstein won the case and many of the students he fought for received compensation for being misled.
Student Loan Myth #6: Higher Education Is An Investment. While there is plenty of evidence that shows that Americans who have degrees earn more over the course of their lifetime, versus those who only have high school diplomas, the continued assertion that higher education is an investment is fallacious. Of course, it can be argued that you are investing in your brain power and expanding your knowledge about a particular area or field. However, the fact that these loans can’t be discharged in bankruptcy twists the notion that it is really an investment. After all, if a person decides to take a risk and take out, for instance, a small business loan. They aren’t stuck with that debt for life, and punished harshly if they are unable to succeed in making their business work. Of course, there are consequences, but they pale in comparison to what happens to student loan borrowers who default.
Again, press outlets have done a superb job in recent months to raise awareness about the problems that taking out student loans can cause borrowers. However, many Americans are still unaware of the ins and outs of these issues. That is why it is important to understand and debunk these student loan myths, especially if you have children who are college bound.