Student loans are becoming pricey lessons in economics.

This "Business Week" story deals with the plight of college students who find that life after graduation might not be as "profitable" as they thought...and it's the student loans that helped pay the way through college that are pinching the pocketbook:

High-priced student loans spell trouble

By MARCY GORDON

Copyright 2000-2007 by The McGraw-Hill Companies Inc. All rights reserved.
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While scholarship, grant money and government-backed student loans -- whose interest rates are capped -- have taken up some of the slack, many families and individual students have turned to private loans, which carry fees and interest rates that are often variable and up to 20 percent.

Many in the next generation of workers will be so debt-burdened they will have to delay home purchases, limit vacations, even eat out less to pay loans off on time.

I am sorry, but if this is all the new graduates are facing in order to repay their loans, it's difficult to cry for them. Their degrees should have gotten them better earning power, even if the first few years will be "cheap apartment, ride the bus and eat mac. and cheese" times. That, in part, is what the lenders were looking at when they issued the loans to begin with: The potential income stream.

Also, why did the borrowers (and their parents) not carefully READ all terms of the loans and simply refuse to borrow the money if the terms were not acceptable? This whining and moaning about the bill now simply makes the grads look stupid...and the lenders show sympathy to them...all the way to the bank!

Yes, the bank...and these private lenders will get their money back! Read on...

Kristin Cole, 30, who graduated from Michigan State University's law school and lives in Grand Rapids, Mich., owes $150,000 in private and government-backed student loans. Her monthly payment of $660, which consumes a quarter of her take-home pay, is scheduled to jump to $800 in a year or so...

"I could never buy a house. I can't travel; I can't do anything...I feel like a prisoner."

A legal aid worker, Cole said she may need to get a job at a law firm, "doing something that I'm not real dedicated to, just for the sake of being able to live."

Oh, boo hoo hoo! I feel SO sorry for people like this (NOT!). When one takes out a loan, one should borrow only that which they will be willing to earn the money to pay back. A job at Legal Aid for a new attorney should be only a "stop-gap" to getting a REAL job. One which will pay the loans AND make life a bit less of a "prison" while doing it. After all, people live on far less than she makes, and pay student loans, too.

It's stories like that which make the private student loan industry wealthy...and look a bit "seedy" at the same time. The reasons? Too many college students and high costs of education working together to lead up to the "perfect storm" of high debt loads:

[As far as financing college is concerned]...the dynamics were radically altered in recent years as tuition costs soared and sources of readily available and more costly private financing made higher education seemingly available to anyone willing to sign a loan application.

Students with no credit history and no relatives to co-sign loans (or co-signing parents with tarnished credit) were willing to bet that high-priced loans were a [decent] trade-off... But high-paying jobs are proving elusive ...

"This is literally a new form of indenture ...said Barmak Nassirian, associate executive director of the American Association of Collegiate Registrars and Admissions Officers.

More than $17 billion in private student loans were issued last year, up from $4 billion a year in 2001. Outstanding student borrowing jumped from $38 billion in 1995 to $85 billion last year....

The guaranteed student loans (backed by the government) have a low limit on the total students can borrow to pay for their education ($23,000 total over four years) while tuition can be double or more of that amount. To fill in the gap? Enter from stage right: The private student loan market...starting with the biggest lender of them all, never mind the nastiest collection agency in America: Sallie Mae!

Sallie Mae, formally known as SLM Corp., has been on the winning side of the loan bonanza. Its portfolio of 10 million customers includes $25 billion in private and $128 billion in government-backed education loans. However, private-equity investors who had offered $25 billion to buy the company backed out last week, citing credit market weakness and a new law cutting billions of dollars in subsidies to student lenders.

Those investors made a big mistake, for unlike other forms of consumer loans, the student loan is truly almost 100% guaranteed to be repaid. This is no doubt why Citigroup Inc., Bank of America Corp., JPMorgan Chase & Co., Wells Fargo & Co., Wachovia Corp. and Regions Financial Corp. are also big players. Never mind that specialized student loan lenders, such as EduCap, Nelnet Inc., NextStudent Inc., Student Loan Corp., College Loan Corp., CIT Group Inc. and Education Finance Partners Inc are popping up like poison mushrooms after a rain.

Steady income and a future customer base in some cases are nothing to sneeze at!

There is not total joy in "Mudville State U. Financial Corporation, Inc.", however. Complaints about private loan marketing tactics are way up and Congress is considering ways to control that. The Senate Banking Committee, in August, approved a bill which would force lenders to disclose their terms and rates more clearly and fix the terms and conditions for 30-days afterwards to allow the borrowers to shop around.

Good luck getting that law passed, though. Also good luck if overburdened borrowers might want to get out from under by defaulting or filing BK:

A 2005 change to bankruptcy law puts private student loans on par with child support and alimony payments: Lenders can garnish wages if someone doesn't pay.

Under current bankruptcy law, it's almost impossible to discharge the student loan debt, whether the loan is private or public. Never mind that defaulting and attempting to walk away from the loans (informal BK) will help due to the fact that private student loans MUST be repaid, just as the government ones have to be. There are few ways to get out of THAT, either (short of 100% permanent disability).

The truth is, if the borrower fails to repay, other "official" pieces of paper could well end up issued to the former student/borrower as well: A judgment and garnishment order. And the creditor WILL and CAN execute on them! In other words, it's a nightmare waiting to happen, to the delight (and profits) of Sallie Mae and OSI (a CA they bought recently of not-so-nice repute).

If you think that Guido the Loanshark's "enforcer" "Louis the Legbreaker" is scary enough, the borrower that defaults will be facing the institutionalized abuse and all around crappy attitude of Sallie Mae...and "she" has the law behind her to enforce her collection activities! No amount of consumer law litigation has worked to stop the abuses. From all too many reports I have seen from consumers, I would have to agree that "her" initials--"SM"--are all too appropriate a description of "her" attitude toward borrowers. The money is just way too good and settlements are just a cost of doing business...and continuing to give borrowers the business. In other words, I sincerely doubt that the industry will dry up and blow away anytime soon because of the guaranteed payment schedule and inability of the borrowers to get out from under the loans...although....

New regulations could dry up access to education financing, he and other industry executives argue. Some experts are skeptical, predicting waves of student loan delinquencies and defaults on what is outstanding.

"Should private student loans suffer the same sort of failure as (subprime) mortgages, as students graduate or drop out and find themselves unable to pay, we will do serious damage not only to the lives of many students but also to the economic and social fabric of our country that depends on college graduates for its strength," said Luke Swarthout at the U.S. Public Interest Research Group.

PIRG is wrong here. Student loans--unlike the sub-prime mortgage industry--have that "guarantee" (forced repayment by law) to back them up. Mortgage lenders and other credit issuers, in contrast, have no guarantees they will recover what they risked should the economy go "south" (that's why the high fees and interest rates or "front-loading" is so common).

Student loan lenders do. So, the student loan lenders will continue to grow and prosper if things continue as they are. IMHO, the only way these firms will quit the business is if the usury limit on such loans stops being...about the same as one's credit card rate (in the stratosphere whenever they can get away with it). Only if the "front-loading" is limited by law and their debt collection a$$h*les are made to "play nice" will the abuses--and the availability of private student loans--diminish.