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Editorial: School-loan defaults show risk-reward analysis vital

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There was a time when people had the quaint notion that borrowing money was done with the understanding you would have to pay it back, with interest, whether for a car, a house, a vacation or college.

But a New York Federal Reserve Bank report calls into question whether many people made that mental check mark, then went through the calculation of how much they were borrowing and how they planned to repay it, when they took out student loans that have snowballed into nearly $1.2 trillion in outstanding debt.

Even more shocking is that people over 50 are on the hook for 16 percent of that debt, or roughly $192 million. The average is nearly $30,000 and can be much higher.

Take the case of Andrew Jones, a 63-year-old New Jersey man whose student loan debt tracked him into retirement. Jones defaulted on nearly $5,000 in loans he took out in 1970. But they won’t go away and can’t be discharged in bankruptcy. Jones has now paid more than double the initial balance but still owes $18,000.

His Social Security check was recently garnisheed to pay back interest and fees. Laid off and living on a fixed income, that monthly $145.50 deduction from his $970 check is a real hardship.

President Barack Obama recently ordered a program expanded to limit monthly payments to 10 percent of a person’s income. And U.S. Sens. Marco Rubio, R-Fla., and Mark Warner, D-Va., have introduced the Dynamic Repayment Act that would put borrowers on an automatic 10 percent of their income repayment plan instead of the standard 10-year plan that often leads to defaults.

But a little financial literacy on the burden of compounding interest is in order for prospective students. If Jones had paid off his principal in a timely fashion, he wouldn’t be looking at a debt more than four times that initial balance 44 years after the fact.

The still-recovering economy, a lingering scarcity of higher-paying jobs and the escalating costs of college have contributed to the growing student loan debt. Nearly 7 million borrowers have defaulted on more than $100 billion owed. The Federal Reserve has said that “implies that a fundamental change has taken place in the way we finance higher education in the U.S.”

As well as how/if we pay for it. And while U.S. Sen. Tom Harkin, D-Iowa, recently unveiled the Higher Education Affordability Act, which would allow student loans to be erased in bankruptcy, “affordable” should not equate with on someone else’s dime.

The reality is that like a car, home or vacation, a college education is a financial decision. Unlike material goods, it should also be an investment that leads to better economic outcomes, not a lifetime of debt and fixed-income garnishments.

As such, student loans have to be weighed on a risk-vs.-reward basis, including whether the borrower is going to ultimately at least get back what they put in.

This editorial first appeared in the Albuquerque Journal. It was written by members of the editorial board and is unsigned as it represents the opinion of the newspaper rather than the writers.

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