How to Estimate the Monthly Repayment Amount

Any one who is in debt needs to have a clear idea about the debt payment obligations in order to manage effectively the future expenditures and the future income stream requirements. That is true of countries as well as corporations, households and students. In the same way that states need to manage their sovereign debt so as not to exceed certain guidelines such as the Debt/GDP ratio among other yardsticks corporations target earnings that are in excess of their interest rate obligations and their anticipated dividend payments. As we have stated in an earlier post the most common guidelines for students should be the maintenance of total debt obligations not to exceed their anticipated annual earnings for their first year of employment after graduation. The following schedule will provide you with a rough estimate of the monthly repayments that you should expect. The major three variables are the total sum of indebtedness, the anticipated interest rate and the length of finance period. If one is to assume an interest rate of 6.8% , which is the most common student loan rate at the moment then this is the monthly repayment schedule that one should expect per $1,000 of debt.

Interest rate............................................Finance period.........................Monthly Repayment

6.8%..........................................................10 years...................................$11.05

6.8%..........................................................20 years....................................$7.6

6.8%..........................................................25 years....................................$6.9

Illustration: If a student graduates with $60,000 student loan then the most common financing period is 10 year. The expected monthly payment , at 6.8%, for 120 months should be about $663.00. If the lending institution is willing to offer a 20 year financing option then the same amount of debt will result in $456.00 per month for a240 months. Some institutions might be willing to offer a 300 month option and in that case the monthly payment would be expected to amount to $414.00. Please note that if one graduates at the age of 22 years old then the student would be burdened by the student loan repayments until either the age of 32, 42 or even 47.

Two Real Student Loan tragedies

The following two letters appear in the new book "The Trouble Is The Banks: Letters To Wall Street". Don't let this happen to you.

Letter #1 Student Loan

I'm writing you as I'm waiting to be heard in a courtroom in Queens, New York. I'm here fighting an eviction. I get $200 a month taken out of my paycheck because I am in default in my loans. I take home $1500.00 after taxes and my rent is $1200, which is considered "cheap" in NYC. Those $200 would allow me to pay my rent.

Thanks
 Fernando 
Kew Gardens, NY 11415

Letter #2 Student Loan

Dear Lloyd,

In May 2007, I became the first person in my immediate family to get a degree, at age 38. I graduated owing more than $100,000 in private student loans. Payments were more than $1,100 a month. My 74 year old retired father is the cosigner for most of these loans, but in September 2008, my dad lost $70,000 of his pension with the banks' collapse.

After just one year in the workforce, I was laid off due to cut-backs. For most of 2010 I wasn't able to find steady employment. In January 2011 I ran out of deferment with my private student loans. The banks started chasing my father as the cosigner. They have wrecked his line of credit and called in his home equity loan on which he never missed any payments.

In June 2011, my father saw a lawyerto try to get the payments reduced to something prportionate to his fixed income. In October 2011, he got word that the lawyer failed to get payments reducedenough. My father wrote me a letter saying he had to sell his life insurance and rearrange his will to protect my sister and step mom.

The letter arrived last Saturday.

He had a stroke on Sunday.

Now Wells Fargo is harrassing him for payment of another student loan. I am asking you to please suspend collection actions against my father until I have a job that will pay me enough to make the payments myself.

I always believed getting an education was the only way to succeed in life. Now I regret it every single day.

Sincerely,
Deena DeNaro

Durham, NC 27701

A Number to Chew At !!!

Total student loans in default are over $76 billion. According to the NYT this figure is larger than the total tuition and fees for all students registered at public 2 and 4 year colleges in the nation. This figure represents 1 /6 of the total number of loans outstanding. Do not compound this tragedy by taking out loans without thinking carefully about all possible consequences. These are loans that will haunt you for the rest of your life if you allow them to overwhelm you. Remember the golden rule: Never allow your borrowings to exceed the total expected earnings from your first year in the labour force. If you expect to graduate in 2013 and work at a job whose wages are approximately $40,000 a year then the sum total of your borrowings, from all sources; must not exceed $40,000. If you violate these guidelines then you do so at your peril. Do not become a statisti.

Debt Profile of a Typical Pace University Student

As in everything in life the typical profile of a hypothetical person can be misleading since it might not describe any one in particular. It is possible that all members of a population are situated either above or below the resulting profile although it is not possible for everyone to be above the profile and obviously it is not possible to have everyone beneath it. Yet this should not be taken to imply that the general profile is not helpful. Our interpretation of the data must be judicious in order to guide policy and in order to be effective. It would be silly to commit the error attributed to a statistician who assumed that since the average depth of  water in a river was 3 feet then it would be safe to walk wade to the opposite bank. Unfortunately he drowned when the water was at a depth of 10 feet in the center of the crossing :-)

Keeping in mind that there are many students who are better off than the profile suggests but others are much worse off the following few data points should prove to be helpful:

The average student debt carried by a Pace graduate (2010).... $38,035.00

Percentage of graduates with debt (2010)..................................69%

The estimated tuition and fees at Pace (2010)...........................$32,816.00

Proportion of Pace graduates in debt (2010)............................51%-75%

Graduation Rate of Pace students (2010).................................51%-75%

Enrollment size at Pace (2010)................................................5001-10,000

Number of Private Institutions in the same size group (2010)...36

Rank of Pace Graduates by debt load (2010).........................3

Note: Once Pace crosses the rank to be included with the private Universities with enrollment above 10,000 then Pace will become only second to NYU in the average load of student debt carried by the average graduate. & out of every 10 graduates at Pace University are in debt. It cannot be much higher than that, can it?

The most common and most widely accepted general rule about the maximum level of student loan debt is that it should never exceed the expected first year earning after graduation. The above data suggest that many at Pace are probably in violation of this yardstick

It is also to be noted that the level of debt carried by the average Pace graduate has increased from $29,622 in 2008 to $34,115 in 2009 to $38,035 in 2010. This rate of increase is neither healthy nor sustainable.

The Politics of Student Loans

The following is a copy of an Op Ed by Gail Collins that appeared in the NYT of Sept. 15, 2012. It highlights , again, the great dangers associated with the Student Loan problem. Simply stated, college students are borrowing amounts that they can never pay back at interest rates that are exorbitant and under very harsh and inflexible conditions. Why in the world would any one need to borrow at 6.8% when money the going rate is practically zero,  why would anyone borrow without the possibility of refinancing or even the option of declaring bankrupcy and then why would anyone want to borrow and accumulate a debt burden that will never be able to be paid back in one lifetime. The system is broke and we need to fix it.

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                                                    THE LOWS OF HIGHER EDUCATION

Although we are sort of worried by those bleak stories about student debt, which suggest a lot of you may graduate owing a ton of money and unqualified to do anything more remunerative than selling socks.

This year, Newsweek cheerfully welcomed the Class of 2016 by asking, “Is College a Lousy Investment?” And in The Times, Andrew Martin reported that the Department of Education is paying more than $1.4 billion per annum to folks whose job it is to collect on $76 billion in defaulted student loans. “If you wait long enough, you catch people when their guard’s down,” one debt collector told Martin after garnishing the savings of a disabled carpenter.

Look on the bright side, students. Perhaps when you graduate, some of you will be able to qualify for a good job in the booming accounts receivable management industry.

Higher education is still the key to most good jobs, but the nation is starting to ask some questions about the way we finance it. Shouldn’t there be more of a match between the cost of school and the potential earning power of the graduates? Who speaks for the art history majors? And why is tuition so high, anyway? (Parents, if your kid is planning to take out student loans, you might want to avoid any college where the dorm rooms are nicer than your house.)

“People don’t believe much any more about the altruistic motives of colleges and universities,” sadly noted Pat Callan of the Higher Education Policy Institute.

Not without some reason. In his reporting, Martin uncovered a newsletter aimed at college admissions officers that advised them to avoid using “bad words” such as “cost” or “pay” in their admissions materials. Instead, it suggested: “And you get all this for ...”

In Washington, Congress is holding hearings! The Senate Health, Education, Labor and Pensions Committee is considering a bill — co-sponsored by Democrat Al Franken and Republican Charles Grassley — that would require all schools to fill out the same form telling the student loan applicants useful facts like exactly how much per month they’ll be forking over when they start paying.

That would be the superminimum, right? How amazed are you that this isn’t happening already?

“Some of the packages don’t delineate what’s a grant, what’s a scholarship, what’s a loan,” said Franken. “And the information all comes in an award letter, so you’re thinking: Award!”

The Obama administration, which can’t do much about this without Congress, has been working to get the schools to voluntarily adopt a “shopping sheet” that would provide clear basic information so students could compare different schools’ financing before making a choice. “We’ve been encouraged by the feedback from the higher-ed sector,” one of the experts working on the program said. “I think we have 100 individual colleges and universities.”

The good news is that controlling college costs really does seem to be an administration priority. The bad news is that there are more than 4,000 colleges and universities.

People, don’t you think young adults should get the clearest, most easy-to-compare information conceivable before they sign a huge, life-changing loan deal? Don’t you think there should be somebody in charge of calling them up once a week and yelling: “Eight hundred dollars a month until you’re 51 years old!”

Maybe I’m underestimating the ability of teenagers to make serious, well-thought-out decisions about their higher education. All I can tell you is that when I was 21 years old, I signed up to go to graduate school at the University of Massachusetts because I had always wanted to live in Boston. I had no idea the main campus was on the other side of the state until I got there.

Franken is hoping the Senate might take up his proposal next year. I presume you weren’t expecting anything sooner. Congress can’t even get it together to keep the Postal Service from defaulting. And the Senate leaders admitted the other day that they’re not going to be able to pass a bipartisan bill to legalize Internet gambling on poker, which seems to be a really high priority for some important people. If they can’t do poker, they are not going to get to student loan transparency.

The House is planning hearings on student loans, too. The chairwoman of the subcommittee assigned to this task is Representative Virginia Foxx, a North Carolina Republican who once said that she worked her own way through college and had “little tolerance” for people who complain about their huge student loan debts.

“New ideas to advocate for financial aid transparency are always welcome in this discussion,” Foxx said in an e-mail on Friday. “But we have to question whether the federal government’s dictating the terms of every college and university’s financial aid communications will actually achieve the desired results.”

So maybe a little less sense of urgency there.

Student Loan Debt Cannot Be Discharged !!!

The above 5:13 video clip is very informative. Take a look and then follow the Link to watch the full documentary.

Student Loans: Indentured Labour

Student loans in the United States have already surpassed the $1 Trillion mark. That is a huge sum of money that requires about $60 billion  in debt service every year. Such a level of indebtedness is equivalent to the sum of the official external debt of the Canadian government , $1.18 trillion, or that of Australia , $1.16 trillion. Actually there are only 13 countries in the world whose total sovereign debt exceeds $1 trllion and each of them has the power to tax.

We live in a world where education is the single most important factor in determining employment opportunities and consequently earning potential. That is a given. But what is equally true is that the above potential rewards make financial sense only up to a certain level of expenditure. When the student loan program was initiated the ROI was clearly attractive. Students borrowed relatively manageable sums of money to invest in a college education which in turn allowed the students to have an earnings stream that is sufficient to meet moderate living expenses, pay back their accumulated debt and yet set aside some savings for the future. This is no longer the case. Students often graduate with a debt load $100,000  and have to work at a job that pays $32,000 per year. That sum is not sufficient to pay rent, food and taxes not to mention student loan obligation.

So how did we get here from there? As is often the case, the explanation is complex and different groups have different  interpretations. It is safe though, to present this is a classical case of a blowback, a case of unexpected outcomes. The government had every intention to help students meet the expenses of higher education short of making it free ( remember that free education is not compatible with a market economy); the financial institutions were happy to oblige since the federal guaranteed program offered a safe outlet for loans; the colleges and universities rejoiced because they did not have to watch their expenses since .in the presence of "free" money, the tuition and fees can always be increased and   ;excuse the expression; the gullible student who at the tender age of 18 is willing to put her name to the dotted line with the unrealistic expectation that the degree earned in 4 years will increase earnings so much that making the required payments is not something to worry about. Yes all parties are to blame, just like the financial mess created by sub-prime mortgages. This is almost a parallel development. Instead of making money available to individuals with no job and no possibility of ever paying back the loans once the music stopped we are in this case advancing 18 year old students; who cannot otherwise find financing to buy a second hand car; huge sums of money without explaining to them clearly the potential ramifications of such behaviour. We never took the time to tell them that "There ain't no such thing as a free lunch" ; TANSTAAFL.; and that they are ordering a lunch that they will never be able to afford.  Unfortunately the sub-prime mortgages is not the only relevant analogy. Sovereign debt and fiscally irresponsible spending by many governments all over the world is another example that is in essence very close to what student loan debt has wrought. Governments all over the world were told that they can have their cake and eat it too. They were encouraged to borrow as if there was no tomorrow and to use the funds for all sorts of unproductive services. They were told that they can borrow their way into prosperity no matter what they do with the borrowed funds. Unfortunately that is exactly what our students have been told. Borrow as much as it takes, go to college, have a splendid four years and do not worry about the cost. Guess what, reality has a way of disrupting irrational dreams. Subprime borrowers lost their homes, governments are shrinking their public sector and college students in the US have become the new Indentured labour.

This is a nightmare and it does not have to be this way. If we all work together we can and we must overcome this problem for the sake of all of us and not only the students. The first step must be to stop the denial and recognize the problem. Once we do that then we have to coordinate all our efforts to find a fair solution. Please share with us your experience and let us know whether you think that such a blog can be helpful, if for nothing else but sharing information and giving you a voice.