No private student loans without a waiver
To understand why this is important, I'll need to give you a quick tutorial in education funding.Student loans come in two basic flavors: federal and private. Federal student loans these days are the bee's knees: They have low fixed interest rates and flexible repayment plans. It's virtually impossible to overdose on them before you're 21, since the total amount you can borrow as a typical undergraduate is limited to $31,000. Even those college graduates who wind up in lower-paid professions, such as teaching, should be able to handle the payments. (For more, read "How much college debt is too much?")
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Private student loans are another story. Their rates are variable and can soar to nearly 20%. There are few restrictions on how much you can borrow, so you could easily rack up tens of thousands of dollars more than you can comfortably repay -- and many, many young people have.
As mentioned earlier, this debt is yours until you repay it or death do you part. There are isolated, but disturbing, instances of despairing borrowers who took the latter route, committing suicide because they were overwhelmed by unpayable student debt.
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What's more, some private student lenders aggressively pitch their products to young people without any mention that there's a better deal -- federal student loans -- that they should exhaust first before tapping into the private student loan market. The worst of the for-profit trade schools act as little more than pimps for these high-cost lenders. (For more, read "How did student loans get so sleazy?")
So let's cut them off at the knees:
- Nobody under 21 can get a private student loan until they've applied for, and exhausted, federal student loans.
- Anyone who applies for a private student loan, or a federal graduate loan for that matter, should be warned that borrowing too much can be fatal to their financial lives, and that smart borrowers limit their education debt to no more than they expect to make their first year out of school.
No zero-down, 72-month car loans
Another area where people overdose on debt in buying cars. More than 80% of auto loans these days last longer than four years, according to car research site Edmunds.com, and one out of five new car buyers still owes money on his or her trade-in.Long loans and the absence of down payments mean way too many drivers are upside-down on their vehicles, owing more than the cars are worth, which is potentially catastrophic for their finances. (For more, read "What a car wreck could cost you").
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IRAs for kidsWant your children to be rich when they grow up? IRAs can put them on the right track.
We can help make sure young car buyers get off on a better foot by insisting they have some equity in whatever they drive and that the payments suit their incomes. We should impose rules that should be common sense for everyone. If people under 21 can't pay cash for a car, they should be required to:
- Make at least a 20% down payment on any car they finance.
- Limit financing to no more than four years.
- Have car payments equal to no more than 10% of their provable incomes.
Will that condemn some teens to used Kias? Of course it will -- and that's not the worst thing in the world. A Kia is a heck of a lot safer than some of the rattletraps we drove in my day, by gum. But more importantly, teenagers won't get accustomed to driving more car than they can afford, at least not while the ink is still fresh on their drivers' licenses.
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