By John W. Schoen Senior Producer
msnbc.com
updated 4/23/2007 11:25:54 AM ET 2007-04-23T15:25:54
COMMENTARY

As a fresh crop of college graduates prepares to enter the world of personal finance, lenders are lining up to sell them all manner of consumer credit. As Cathy in Texas is finding, these lenders can be persistent. Which makes this a good time for parents to make sure their kids are getting sound financial advice to counter the barrage of marketing students face from lenders pitching consolidation loans and credit card companies looking to get a new generation hooked on debt.

I have a small student loan for my daughter and get half a dozen phone calls A DAY about wanting more.  Some of the people say that I was prequalified off my credit report that they buy from the big three credit agencies in bulk!  Other said they got my name off the “database.”… Make it stop!
--
Cathy D., Richardson, Texas

Once upon a time, back when the Student Loan Marketing Association was set up in 1972, the idea of lending money to students them was to help them better their lives by getting a college degree. By guaranteeing these loans, Sallie Mae increased the pool of money available for loans and helped keep rates as low as possible. Taxpayer money was used to help finance higher education, not to help make student lenders more profitable.

No more. Today, student lending has become a lucrative slice of the multitrillion-dollar consumer financial services industry — the same people who flood your mailbox, at home and online, with junk mail offering low-teaser-rates credit cards, no-money down mortgages and “free” credit reports from fee-based “credit monitoring” services.

The last vestiges of student lending as a public service ended last week, with the $25 billion buyout of Sallie Mae by a group of private investors. The sale came just a week after the company agreed to pay $2 million to settle a case with the New York state attorney general’s office and agree to end abusive lending practices that included payments to schools in exchange for preferred treatment, hiring college officials to work for lenders, and lenders identifying themselves as college employees, among other practices.

As for what to do about that barrage of annoying phone calls, if you’re not already on the Do Not Call list, try signing up and see if that slows them down.  Unfortunately, there’s a loophole in the law that set up this service, allowing telemarketers to call anyway if they have an existing relationship with a customer.

You should also call the lender holding the student loan and ask for a form barring them from selling your information to other credit providers. Many of these privacy provisions are “opt out” rather than “opt in” — meaning that if you don’t specifically ask that the lender not sell your information to the highest bidder looking for “leads,” they are free to do so.

Most important, you should talk to your daughter about predatory lending.

As the New York attorney general’s investigation has highlighted, some colleges and universities — trusted by parents to look out for the students they are educating — are complicit partners in the aggressive marketing of debt to your kids.

Financial aid offices, for example, are required to provide “exit interviews” with students carrying loans; the purpose is to teach students about debt and help them better understand how to manage their loans after they graduate. As the New York Times recently pointed out, some schools have turned over this task to the very loan companies that are looking to sell students more debt — often in the form of “consolidation loans” that claim to save money by wrapping up multiple debts into one monthly payment.

Depending on the student’s individual circumstances, a consolidation loan can be a good idea — especially if interest rates have fallen since the loan was originally taken out. But consolidation loans are also a lucrative vehicle for selling more debt. Unsophisticated borrowers jump at a lower monthly payment and fail to price the total cost of the new loan — either in higher rates or longer term.

In any case, if the purpose of financial counseling is to help students make wise choices, sending them to a sales presentation from a lender is like hiring the manager of a local fast-food outlet to teach nutrition.

Credit card companies, who also have learned that college students are a lucrative pool of new borrowers, often can be seen setting up tables in the student union or food court — again with blessing of the host university. If your son or daughter calls home to ask about one of these pitches, ask them if there was more than one card issuer signing up students. By obtaining exclusive marketing rights at a closed location like a college campus, card companies are able to avoid the market competition that allows prospective borrowers to compare terms and pick the best offer. If this is not made clear, call the dean's office and ask if the college was paid for this exclusive shot at selling your child a credit card or loan.

If your son or daughter signs up without asking you, explain the pitfalls of using the monthly minimum payment as a benchmark for a reasonable debt load. It’s a safe bet the credit card issuer didn’t explain credit cards this way. Some lenders issuing these “starter” credit cards offer a $50 credit when the account is opened — just to get the student in the habit of using the card.

Students looking to get off to a good start need sound advice on the responsible use of credit, Unfortunately, as long as the financial services industry sees this group as a profitable market to be exploited, it will have a hard time earning anyone’s trust as a reliable provider of guidance and advice for first-time borrowers.

Will you explain the (Social Security) "lockbox" and "interest that the government pays itself for Treasury debt that it keeps 'off-budget.’?
-- Liz M.,Hereford, Ariz.

I’ll try, but my guess is it will make your head hurt.

In order to pay for a very large anticipated bill for future claims on Social Security and Medicare, the government is taking more from future retirees than it’s paying out to current retirees. Which only makes sense: If you’re going to owe a big pile of money to the bulge of baby boomers when they retire, you had better save up for the day when they collect. It’s not much different than your own individual retirement account.

The problem is, if you’re the government, where do you put all this extra money? If you put it in the general fund, it goes to pay for new jet fighters and bridges and farm subsidies and expenses that have nothing to do with future retirement and health care costs. When the time comes, you have no money for those expenses.

You could put the extra money in CDs or other money market instruments. You could invest it in the stock market (which is what the White House would like to see by “privatizing” Social Security.) But if the stock market hits another dot-com bust, you could have a lot of people with little to pay for retirement.

So the government does what many people do with their own retirement funds: They buy good, solid, interest-bearing U.S. Treasury bonds. Just like a private citizen, the government knows the money will be safe. And these bonds pay a decent, predictable return on the money.

So now you have one part of the government (the Social Security and Medicare systems) buying hundreds of billions of dollars worth of debt from another part of the government (the U.S. Treasury.) This sets up some interesting accounting issues.

Technically, the government is borrowing from itself. So while the resulting Treasury securities generate interest payments for the Social Security System, they cannot be sold like ordinary Treasury bonds. For this reason, they are considered “off-budget” — the interest paid does not show up in the list of annual government operating expenses like the ones we spelled out in last week’s column .

All the “extra” money pouring in from Social Security and Medicare taxes is still going to buy Treasury debt. But some of the money raised from selling Treasury debt is being used to pay for “on budget” spending that can’t be covered with taxes (the federal budget deficit). That has some people worried that Social Security and Medicare funds are going into a black hole – and that these accounts will be broke when the boomers begin collecting. In the 2000 campaign, Democratic candidate Al Gore talked about these fears and suggested we needed a “lock box” to prevent this from happening.

But even if you took all this Social Security and Medicare money and put it in a lock box, you’d still have to invest it somewhere. You could buy Eurobonds, and the folks in Europe would love it: Their interest rates would go down as all this money started flooding in.

The real problem is three-fold, and the strongest lockbox in the world won’t solve it. First, the government needs to pay its bills with taxes, not more paper debt. Second, the Social Security System needs some adjustments — just as it did under the Reagan administration. And last, but certainly not least, Medicare (and the entire system of paying for health care) needs a major overhaul. It's in serious trouble — not because of accounting shenanigans but because health care costs are out of control.


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