Tuesday, January 20, 2009

Bad credit, wrong school, student loan

You just got to love this story:
Tracy Kratzer, 27, enrolled in the International Academy of Design & Technology in Orlando, Fla. in 2003. With visions of making big bucks as a Web designer, she didn't give much thought to the interest rate on her loan from Sallie Mae. . . . Kratzer didn't know it at the time, but she was part of an experiment that has proved disastrous for borrowers and shareholders of Sallie's parent, SLM Corp. It's called "nontraditional" lending.
"That's not a sociological term," Albert Lord, chief executive of SLM Corp., told an audience of financial analysts last fall. "It's basically kids and parents with poor credit who are at the wrong schools." [emphasis added]
Sallie Mae . . . began nontraditional lending in the easy-money heyday of 2002, when it cut deals with dozens of trade schools to become their preferred subprime student lender. Over the next four years Sallie doled out about $5 billion to people like Kratzer, waiving the credit scores and cosigners formerly required for its loans.
The bill arrived last year after nontraditional borrowers began entering the workforce. . . .
Shortly after graduating with an associate of arts degree, she discovered that the high-paying jobs she'd hoped to qualify for go to people with bachelor's degrees and years of experience. After a bout of unemployment, when she lived off credit cards, Kratzer recently found an hourly job as a clerk at a magazine, where she earns less than the average high school grad. In the meantime her $14,000 student loan has mushroomed to $27,000 -- more than she makes in a year--and continues to accrue interest at 18% a year.
I mean, it's like some kind of Aesop's fable of economics, isn't it? Loan thousands of dollars to poor kids with bad credit going to trade schools that won't qualify them for any especially lucrative employment and in what sense are you "helping" them? Tracy Kratzer could have gotten that clerk's job without ever setting foot inside the "International Academy," but now she's on the hook for $27,000 in loans she can't repay. And yet you gotta know that Sallie Mae executives were trumpeting how this program was "helping" the loan recipients.

Hat-tip to Megan McArdle, who writes:
The question to contemplate is who benefitted from making it easier to pursue degrees that don't get you very far? Not Ms. Kratzer, obviously, but not the "greedy" loan company, either. No, the beneficiaries are the schools that take peoples' money in exchange for worthless degrees.
Megan tells her own interesting saga of paying $5,000 to get a worthless certification.

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