When you go to your financial aid office to think about getting a student loan, do you think that financial aid officer is working in your best interest? What if you just have to click the mouse three times on a webpage, and suddenly you are approved for $20,000 in student loans? Who do you think is winning? How is that possible?
When you get a student loan, most of the time you are getting a federal student loan, which means the federal government is insuring your loan. Yes, the school or university you are attending facilitates the loan, but it is still usually a private lender that loans the money, which is insured by the government.
As such, nobody is advocating for you, and you need to make sure you understand what you are getting into when getting a student loan. Think of the financial aid officer like a used car salesman. They work for the university, and are trying to help you finance your education any way possible so that the school gets paid, not so you can go there. They will work any payment plan, loan plan, work study possible so that they make money, not for you. Keep that in mind at all times!
Student Loans – Banks Always Win
If you look at my diagram on the right, you can almost see why the banks always win. With Federal student loans, their loan to you is 95% insured by the federal government. The bank doesn't care who you are, or your ability to repay the loan. Want $200,000 to go be a social worker, who may make $46,000 after 5-10 years of work, and whose entry salary is probably going to be around $30,000? Sure! It's not my money!
That is the mentality that banks have since they have no risk – only reward (sound similar to the housing crisis?).
Government Won't Lose Either
The government, since it is essentially on the hook for your debt, has made it hard to not pay. One of the biggest strings attached to all student loans is that it is nearly impossible to get discharged in bankruptcy. So, you basically owe your loan for life, unless you qualify for some type of government program to get it forgiven (which is still decided at the hand of the government).
Here is a statistic recently reported by the White House Office of Management and Budget. The federal government actually nets $111 for every $100 in student loans that has been defaulted on. If you have never defaulted, the lender usually gets $122 for every $100 borrowed.
Ummm…nobody seems to lose? Not the bank? Not the government who insures the loan? Even if you refuse to pay or can't pay, the government will ensure it gets its money back – and it does this through wage garnishment and other means.
Bottom Line – YOU Lose
At the end of the day, the only person on the hook for these loans is you, and you will pay for them one way or another. The government, even though it insures your loan, isn't going to let itself lose money. And the bank…the bank doesn't care either, because it either gets $122 for every $100 lent if you pay, or the government gives it $95 for every $100 lent if you default.
At the end of the day, you are the only one that can lose with student loans.