Student-Loan Debt Is Crushing Millennials
bloomberg.com
bloomberg.com
[1] http://www.levyinstitute.org/publications/the-macroeconomic-...
Going forward. It's tough to stomach retroactively applying this to existing loans.
My wife and I chose private loans specifically to retain bankruptcy protection in case of serious life issues. A couple years after we took them, the law changed and we were stuck with the higher interest rates of the private loans without those protections.
For a time, we considered a Constiitutional challenge to that, as we believed it to be an ex post facto law. We didn’t want to incur the negatives of a bankrupty to gain standing, though, and couldn’t afford the astronomical legal fees that would certainly accompany that sort of case. As far as I know, no one has pursued it.
Ideally, if you truly want to help low income people get an education through loans, it should be structured more like SBA loans. The lenders should take on a big enough % of the risk that they want to avoid defaults but not so little that they act recklessly and fund loans or schools that are unlikely to perform. I'm sure that if SBA loans were non-dischargeable, there would be an explosion in bad SBA loans that drag on the economy.
Or we can have a tuition-free public education system like we used to. But you know...
"Omg, it costs $5000 to get a degree! That means only the rich have access to education and increase the gap between rich and poor! We need a solution!"
"You can't just go giving education for free! Communism!"
"We never said that! Let's lend up to $5000 to anyone without the mean to pay for education! That will level the playing field and in the long term we get back the money, it's win all around!"
<fast forward a few years>
"Omg, it costs $10,000 to get a degree! Poor people can get loans, but they have to repay them in addition to paying $5,000 out of pocket! That divides the rich and the poor, etc etc! We should load up to $10,000 to even out the playing field! win win!"
<fast forward to now after a few cycle>
"Omg, we have a student debt crisis!"
Like, did someone really not see it coming? Without some form of cost control, this is just government sponsored cost inflation. Because of where Im from Im just used to government paid education. It's not always as good, and there are a lot of friction, but costs are kept a little more under control. I guess you could also, in theory, just not have the loans at all, or much fewer, and if it had been that way from the beggining, cost wouldn't have gone up nearly as fast.
You are from Europe, right? And you have rigorious exams to sort out the folks who will get the government-paid education and who will not. And this is ok, since Europe is more or less homogenous. Hans goes to university and Peter and Mark and Bernard all go to work in mcdonalds instead. No outrage here, it was just a hard exam, and only Hans was able to pass.
Now guess what will happen in US if you don't provide free education for everyone, but require to pass a hard exam first. It's not that hard to imagine, really.
But yes, I've lived in the US long enough now to know that in the current political context, people's expectations of what the Government should provide are not realistic or in line with the reality the country is in.
I also strooooongly believe in everyone (who is part of the system through one of the many legitimate methods) having a right to equal opportunity, but not necessarily a right to equal outcome. That is also very, very difficult in the US because of its history as well as its current political climate, for both some good and some bad reasons.
Then the law was changed as well so only student debt was not dischargeable in bankruptcy while every other type of debt is.
It's disengenous to imply that these were freely made choices. Well running capitalism relies on information parity between both sides and not interactions where it's all of society and a massive industry trying to convince undeveloped minds to make bad choices
Source: am a millennial and experienced the huge pressure to go to college, especially an expensive one.
Not only did my family perpetuate this idea, but my middle class suburban high school did as well. Our guidance counselors actively were involved with the local state universities. They spent a lot of time shoving the idea of attending college down your throat. Maybe they only did this with the higher performing students. I even was going on college tours in 10th grade, through programs at my high school. At the time, I really didn't think there was another option aside from college after high school.
This isn't always viable either. I started in entry-level manufacturing and worked my way up to production control and IT specifically because even at the highest level of manufacturing I wasn't going to be satisfactorily compensated. I would have been working long overtime hours for a decade or two only to be replaced by CNC machines instead of ever hitting the bigtime anyway. If I hadn't swapped collars I was destined for a life of sub $50k hard labor with shitty insurance and constant threats of bodily injury. Reporting to a "boss" who probably made as much as the manager of McDonalds and drove a Rav-4. Yeah, that's real potential right there.
A few of these friends pursued other careers in college but many of them went to the state college that's known for its music programs. There, they eventually came to realize the reality of the situation: if you want to continue pursuing music in a college capacity, you're looking at either education or performance. Performance is extremely demanding and unless you're the best of the best of the best... good luck finding work with that degree. If you go down the education route, then, being a state school, you're STRONGLY encouraged to teach at a school somewhere in the state... which has the lowest teacher wages in the country (correction: second-worst as of 2018, moving up!).
Many of my friends didn't fully realize the reality of the situation until they'd already got their degrees. One ended up a high school band teacher in our hometown and truly loves it. Another decided to purse computer science instead and just completed his degree in that (and is now realizing how hard it is to find work as a fresh grad with no internship). Another quickly got a business minor and is doing well in the banking industry. Another is a bouncer and photographer.
What I'm getting at is, these kids were all pushed into going to college and getting degrees in the thing they enjoyed doing in high school, without stopping to realize their career prospects with said degree. College is just a thing you do after high school, unless you're a loser (or you went to a trade school, which is "a step up but not college").
The whole system is completely broken for modern society in my opinion, we need something to shake the whole thing up and turn it on its head.
Giving lenders a lifetime claim on the maximum wage garnishment is undeniably one of the most backwards ways to decide we don't want to let them pick which educations to fund. But if we want lenders to decide what educations are worth funding, and incentivize them to do so, what factors can they consider?
You might find, for instance, that women get denied such loans more often - perhaps because of the degrees they pursue, or perhaps because they tend to get paid less. Is that fair?
Again saddling somebody with a lifetime of debt (that will never, realistically, get repaid) because of an idealistic choice they made as a teenager feels like one of the most idiotic solutions possible to this problem. It encourages constant tuition creep because there's always more money to throw at it.
But there is a lot of risk in letting a small cabal of lenders (as would inevitably emerge if it hasn't already) decide exactly who gets to have what educations.
Using taxpayer funds to make those idealistic and unrealistic choices more appealing and less immediately problematic doesn't help the student or society in the long term.
I was with you until this point.
What part do you blame them for? The federal loan guarantees were created for the express purpose of allowing people who otherwise couldn't get the loans to get them. The lenders are doing exactly what they're supposed to, and would be expected.
Lenders should be in the position of determining risk, but it's not their fault federal policy means they don't need to. They're not the ones raising the costs of higher education, they're just facilitating them as intended and expected.
If your outrage is directed at the lenders, you're barking up the wrong tree. Put the lenders back in the business of evaluating risk (like they do for home, auto, business, and other loans) and they'll do that.
There's a pretty common world view that financial viability should not even be a concern in young people's choices of what field to pursue, and subscribers to that are what created this policy. Lenders benefit, but this is driven by what a large group of people want society to look like.
Even if the government subsidized all higher education and removed the lenders from the equation completely, we'd still have increasing numbers of young people graduating in their early and mid-twenties with degrees in fields like gender studies. They won't be in significant debt, but they're still comparatively behind by four years and woefully unprepared for the workforce.
Are the students better off from being financially enabled to get in that situation? Is society better off from enabling thousands of people to do it? I don't think so.
California has free higher education until Reagan became governor. It worked well then and provided it is only available to qualified students I don’t see why it can’t work now.
It's fairly simple--if you incentivize people to do something, they are more likely to do it. If universities start offering degrees in Starcraft or beer brewing or marijuana cultivation, there will not be many students if the students are responsible for paying. If they have a free ride regardless of what they choose, more of them will choose them despite unfeasible economic prospects.
It's not absolutist, either--the easier you make it to pay (like by guaranteeing federal loans for lenders), the more you will see. Even if it does load them with a lot of debt. And that's what we've been seeing.
> Europe does not appear to be overwhelmed by gender studies graduates.
They don't need to be overwhelmed--just creating a lot more than the market demands. And gender studies is just one example, of course. The root problem is subsidizing and turning out graduates who are then unsuited for the market in which they intend to find work, and the lost opportunity cost of those who would have been more successful entering the workforce instead (and perhaps attending college later with a broadened perspective).
> Given the sexual harassment problem at Google, Uber, etc perhaps it would be good for there to be an increase in gender studies.
Maybe, but the market would provide those incentives. How many gender studies graduates do Google and Uber need? If they're not hiring, do gender studies graduates working a coffee shop help solve the problem?
> California has free higher education until Reagan became governor. It worked well then and provided it is only available to qualified students I don’t see why it can’t work now.
It depends on how you define "well," and any redistributive program can "work" well enough until it runs out of someone else's money.
I don't suppose that Google and Uber will hire increased numbers of gender studies students. Fortunately though the societal, cultural benefits of such studies are not limited to the hiring preferences of Google. Furthermore it is fortunate that gender studies (or other degrees you don't support/like/care for/or want to see an increase of) aren't limited to working for Google or coffee shops.
I see you have no argument against the claim that California's free higher educational system worked well prior to Reagan. We've had universal free k-12 education for quite some time and we haven't run out of someone else's money yet so I gather you agree with me that extending this system to higher education would not bankrupt us. It may not be the right thing to do but we both agree that running out of someone else's money is not valid argument against it.
If it's actually the case that these loan guarantees were put in place by well-intentioned people with the same goals and ideas that you have, then the blame may be better placed elsewhere. And that might prompt some retrospection as we consider larger and wider-ranging initiatives proposed based on the same world views.
Europe filters which students are admitted college. Is this an unexpected result for the subset of high-performing students?
Which it mostly has; private student loans dropped off a cliff with the late 2000s financial crisis, and then private lenders were cut entirely out of the federally guaranteed student loan program, which is where most loans for study at fully accredited schools come from. For guaranteed loans, the only lender is the federal government, so everyone talking about the supposed effect of federal guarantees on lender behavior is missing a very important fact.
So, the federal guaranteed loans, with below market interest, various forgiveness options, income-based repayment, etc., are basically an erratic, bureaucratically complicated, inconsistent, method of federal subsidy which excludes private lenders.
Now don't get me wrong, I don't have some sort of magic plan to fix this (maybe allow them to declare bankruptcy would be a start?) but the whole industry just felt a little predatory to me.
I think it puts anyone looking to go to college and 'move up the ladder' in a very difficult position.
Or why do they continue to lend large amounts for degrees where there's a low probability of getting a good salary after graduation.
Or does the govt assume the risk of student loan defaults?
No lender ever asks that. Lenders ask themselves, "how will I be repayed? And in the case of default?" In most cases, the answers are "by the borrower" and "take the house or car, the sale of which will offset some of the loss".
In the case of student loans, the answer to the second question is "the U. S. government will pay it, in cash". There is zero incentive to determine how the borrower will repay.
No, it's not. While private student loans are still offered (sometimes, by predatory scammy for-profit schools themselves), none of them for quite a few years have been government guaranteed.
The former government guaranteed loan program has for some time had exactly one lender by law, the federal government itself.
I just bought a house and you're utterly wrong.
Yes it can, though it is more difficult to do so than it is for other unsecured debt.
Or was the tuition so low it didn't matter? (E.g., somebody who gets a psychology degree and winds up making $40k/year doing data entry still can afford to pay the relatively small amount)?
Here's a link that shows 2-3x increase in adjusted dollars:
https://www.cnbc.com/2017/11/29/how-much-college-tuition-has...
The fact is, while college administrators and presidents are doing just wonderfully, the actual discernible education has not become much greater for the student to warrant this increase.
So you're pushed in by a generation for whom the benefits were great, and the costs affordable to a college education where the costs are exorbitant and the benefits less so.
Yes. This is the start and the end. Bankruptcy will stop lenders from making predatory loans. It puts risk on both sides.
Tuition costs will naturally (and quickly) drop. Because there will be fewer people able to pay a crazy loan fueled price without a crazy loan given to them.
There's a pervasive idea that being able to actually afford things is abnormal. That everyone should just take a loan out for education. For a car. For a house. For a cellphone.
Yes, there are benefits to being able to get things 'earlier' than otherwise would be possible. And if everything goes right, the situation a borrower is in at the end of a loan may be better than had they not taken it.
But the actual result of this seems to be that, for example, ~everyone in Britain is tied into full-time employment to pay off various creditors.
It's commonly posted on here that the average American has savings amounting to effectively a bag of crisps.
That's the obvious result if you use every available bit of income, even if it's "investing" for a future that never comes.
but those sensible loans have also normalized loans for non-income producing assets, and that’s where it’s better to be able to pay up-front (unless you get an interest rate below inflation or the fed rate).
An individual human is N=1. It's a single trial. You only live once. ;)
An example would be taking out a mortgage. The highest EV is generally mortgaging yourself to the hilt. But in various circumstances, you'll then lose everything.
Oh, and during the period you've basically given yourself a guaranteed annual cost you can't discharge without potentially taking huge losses on a house. (In the student loan example, you stay for the period, or you get no fancy bit of paper at all).
but simply being alive is risky; there are no guarantees in life.
Cost of money went dramatically down, so tuition inflated something like 4x
But, since these are government backed loans, people are pretty much guaranteed to be funded, no matter their risk factors, are and the taxpayers are going to foot the bill when they default.
A) Interest represents risk as well as the time-value of money
B) A non-dischargeable loan is risk free to the lender.
Given those, there should be two products:
1) Offering a loan dischargeable in bankruptcy, at whatever rate the market will bear.
2) Offering a non-dischargeable loan, with interest capped at the current rate for a 10-Year Treasury Note.
If there's no risk, a bank doesn't get to add it in, and the money is cheap enough that the student can pay it back.
If there's risk, a bank gets to charge whatever they can, and a student has recourse to bankruptcy.
The amount of money coming from students incentivizes a university to provide worse education to more students.
Easy loan money discourages discernment all along the pipeline--at universities, lenders, students, parents...
Two major possibilities come to my mind:
- US employers don't accept non-US diplomas.
- Studying in the US gives you networking opportunities. If you come back after Europe, you don't have enough connections to compete with local graduates.
However, the networking issue may be a thing.. The real networking though is in sororities and fraternities I think. Or those secret societies... Then again you can always do an MBA.. ;)
Quoth the wiki: "Approximately 43 million have student loans, with an average balance of $30,000. In 2017, average student loan debt reached $39, 400, an increase of 6% compared to 2016. Americans owe more than $1.48 trillion (44 million borrowers) which is roughly $620 billion more than the overall credit card debt in the country."
Just to compare to a communist I mean socialist country (Finland in this example), where we had an article about the massive increase in student loans (doubled in the last 10 years).
400 000 people with loans totalling 3 billion (about 7600eur per person). To scale that with the population of the US so about 60x we get the number 180 billion vs. 1480 billion.
Man you have it tough there :) Good thing that you all will be multi billionaires (or so everyone apparently thinks when voting) so no need for tax reform or any other kind of communist/socialist crap :)
My point wasn’t necessarily that millennials are uniquely stupid, rather that the voting age should be at least 25.
Indeed the restoration of bankruptcy would solve this problem, albeit at great cost to former lendors.
It is kind of a problem in the marriage market, because more women go to college and end up with massive college debt, which makes them financially unattractive.
Also, most/all of this generation are told that it doesn't matter what your degree is in, just that you get a degree. That idea combined with some generic distain for trades is what drives kids to college regardless of cost. Men are also taking out loans.
We need to respect trades and respect that not everyone wants or needs to spend 4 more years in school.
We also need to stop being misogynistic, but that should go without saying.
At the population level, women’s degrees are worth less than men’s because women more often exit the job market to raise children. If someone wants to do that - and I 100% stand behind that being a valid and important decision, for either sex - then college debt would be a very poor financial decision.
I’m not convinced it’s a systemic problem, but it would be interesting to see default rates broken down by gender.
Whatever your personal beliefs, a much larger proportion of women do exit the job market at or before the height of their earning potential to raise children. It’s not a moral judgement to say that this is could pose a problem.