Ask Chuck: Are student loans a rip-off?

Dear Chuck,

When students were paying 10% on student loans, we couldn’t get 1% interest on the money we put in savings. It seems like students and families who continue to take these loans are getting ripped off. Would you please address usury?

Looks Like Usury to Me

Dear Looks Like Usury to Me,

This question has many aspects to it that I will attempt to address: first, the problems of usury and rip-offs, and then, some possible solutions to student loan debt. 

Usury

Usury, as defined by Merriam-Webster, is “the lending of money with an interest charge for its use, especially the lending of money at exorbitant interest rates.” Usury laws are an attempt to protect people from predatory lenders who tend to take advantage of people in desperate circumstances.

Typical federal student-loan rates for people with good credit today range from 4.99% to 7%. In the case that you cited, a 10% interest rate for student loans is above the market rate but does not fall into the definition of usury. It appears that way when compared to the market rate for passive savings, but you have to compare it to the available market for student loans.

Student loans are legal and optional, and most do not borrow the money under desperate circumstances but rather to pursue a desired goal. However, many students and families who take on these loans are unaware of the long-term consequences.

Rip-offs

Student loan debt is second only to mortgage debt in America, as millions borrow to attend school in hopes of a brighter future and an increase in lifetime earning power. But the “borrow your way to a diploma” method continues to get more expensive and is unlikely to change soon.

“How Government-Guaranteed Student Loans Killed the American Dream for Millions” by Daniel Kowalski reveals that there is absolutely no incentive for colleges and universities to lower their prices. He reports that in 1980, there were 3,231 higher-education institutions in the U.S., but by 2016, there were 4,360. In reference to a Forbes article, he says that the average price of tuition has increased eight times faster than wages since the 1980s.

Another Forbes article states that the tuition at Harvard in 1840 was $75 a year. If that price had risen at the same rate as prices (or the inflation rate), the cost in 2015 would have been $1,703, not $45,278. (2022-23 tuition is $52,659.) “But it is arguable whether today’s college graduate is in a real sense more educated than ones in 1840, when individuals like Samuel F.B. Morse and John Deere were revolutionizing communications and agriculture, and some with far lesser education (think Abraham Lincoln) were making big contributions in law and politics,” the article states.

Today, many college graduates are underemployed, but there is no evidence this was a problem among 19th-century graduates.  As federal aid has increased, so have tuition fees. The proportion of recent college graduates (the article is dated 2015) from the bottom quartile of the income distribution is lower today than in 1970 — before Pell Grants or massive federal loan programs. In addition, administrators now outnumber faculty.

Student loans have benefitted colleges and universities, with the burden falling on students, taxpayers, and those hoping to get a degree in the future. 

Many people are discovering that their assumption that a university education was necessary for financial security was false. The opposite has happened. Students often graduate with diplomas and debt, sometimes in the hundreds of thousands of dollars — but without job security. 

Merrill Matthews wrote a compelling article titled “University Endowments Should be the Primary Source of Student Loans.” “At the end of fiscal year 2020, the market value of the endowment funds of colleges and universities was $691 billion … If colleges and universities had to turn to their endowments as the first line of student loans, they might decide to get their costs under control,” the article states.

How to avoid student loans

Parents should not borrow money for their children’s higher education. If you want to help cover a university education, start saving early. Demand academic excellence from your schools to prepare your children to qualify for scholarships. I used to tell my boys that getting good grades would be the highest-paying job they could have in high school. Our rule was that nobody would borrow to attend college. Either we would find a way to pay for it via savings and scholarships and jobs while in school, or they would not attend. 

Here are some tips for students who want to get an education without borrowing money: 

• Start saving early and learn how to budget.
• Research average salaries for careers that interest you before going to college.
• Consider trade schools.
• Consider careers that do not require a college degree.
• Fill out the FAFSA (Free Application for Federal Student Aid) early.
• Apply for grants and scholarships early.
• Students should work part-time, live at home, and take advantage of community colleges.
• Accelerate time to complete the college degree by:
  • Taking AP and college courses in high school.
  • Attending summer and winter classes.
  • Taking more than the average number of hours of classes.
• Rent or buy used textbooks.
• Become a resident assistant (RA) to get free room and board.
• Pray, and seek wise counsel.

Dealing with student loan debt

If you have a student loan now, look at refinancing options to reduce your interest rate. Make a plan to apply all extra income toward the reduction of the debt. Attempt to pay it off as soon as possible. Ask the Lord to give you help in accomplishing this goal.

In addition to student loan debt, if credit card debt is a source of financial pain for you or someone you know, Christian Credit Counselors is a trusted source of help toward financial freedom.