Makeover needed: Student loans

Two-thirds of students have to borrow to attend colleges, according to FinAid. They leave campus on graduation day 2004 with an average $19,237 in debt, but some owe far more. About one-quarter borrow at least about $25,000, and one in 10 borrow more than $35,000.

Fannie Mae and Freddie Mac were recently taken down for (among other things) taking advantage of the all the market had to offer for returns while meanwhile cashing in on a government backup for its loans. But their cousin Sallie Mae and lots of other private student loan lenders are still playing that game.

While some rates, even on existing student loans, have come down, many have not. My husband consolidated his law school loan shortly after graduating. He's stuck paying 9% for the rest of the loan.

Don't miss the rest of our series on Makeovers Needed!

More and more students are turning to private loans to bridge the gap between their federal loans and what colleges are charging. They're paying ridiculously high rates-- up to 20%--like what you would expect to pay on a credit card. But the difference is that if they default on a credit card, the bank is on the hook. So if they are a high risk customer, they should have to pay a high rate. But student borrowers are almost no risk customers. In the federally backed loans, the government guarantees the loans. Private student loan companies got a provision slipped into the latest bankruptcy bill that private student loans are discharged in bankruptcy.

One again we've turned capitalism on its head: companies take no risk, but get paid. The government takes the risk, but doesn't get paid. Students graduate with
way too much debt. We now expect them to start saving for retirement in their 20s. In fact with Social Security in jeopardy and pension plans disappearing, they better start when they're young. But there's just no way they'll be able to with these enormous loan payments.

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