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Comment by magnusss | Hacker News Reader

It seems like the majority of the commenters here are missing the point. The increasing rate of student loan default is not a result of kids who go to a four year college, graduate with an unmarketable degree in philosophy, fall on hard times and then can’t pay their bills. It's kids who go to barber or cosmetology school, take on $30k of debt, then realize they don't make enough money cutting hair to support themselves, much less pay back a loan. There's a huge population of people like that. Source: https://www.ed.gov/news/press-releases/us-department-educati...

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Sure, the most relatable problem is that a lot of college grads have debts they can't pay off.

That's not really the focus of the article though, which is an introduction to a potentially calamitous systemic problem.

The 2008 crash happened because there were about $1.7T of mortgage-backed securities (MBS) floating around in the financial system. These were essentially sliced up pieces of numerous mortgages that had been made to credit-unworthy home buyers. When these buyers started defaulting due to a weak economy, the MBS became worthless and financial institutions started going belly up.

So with that said, here are a few facts:

- There's about $1.6T of outstanding student loan debt today, and it's growing.

- Many of the borrowers who took out these loans are demonstrably credit-unworthy, as the .gov link demonstrates, they are already defaulting in growing numbers.

- Sure enough there's a thing called SLABS out on the market (Student Loan Asset Backed Securities). Very similar to a MBS but the collateral is student loans.

I don't know how widely SLABS are spread throughout the financial system at this point.

There are also differences vs 2008, biggest one is that most of the student loan debt is government guaranteed.

That last point gets used to promote SLABS but it seems to me that it just makes their value leveraged to political winds. Here is an example scenario: economy softens, leading many holders of student loan debt to vote for Bernie Sanders because he promises to forgive their debt. He gets elected and follows through on his promise. SLABS all over the system become worthless, banks end up much poorer than they thought they were, and the death spiral begins again.

I don't know what will happen, you can't simplify the workings of the economy into tweets and soundbites. But there is certainly cause for attention and concern.

Further reading:

https://www.investopedia.com/articles/investing/081815/stude...

https://www.natlawreview.com/article/rmbs-to-slabs-history-r...

Also to supply some context for those numbers (this is probably way too simple and wrong in some way though)

The size of the US economy in 2008 (US GDP) was around $20T. There were $1.7T of MBS. That's about 8.5% of the economy which mostly didn't exist, it was all debt for which the collateral was a fiction because the borrowers didn't have the money to pay off their mortgages.

The size of the US economy today is around $25T. So student loans are around 6.4% of the economy at present (and growing) and that money may mostly not exist either, because we know these borrowers are having real problems paying and the economy isn't even doing all that poorly at the moment.

Food for thought.

You’re not comparing equivalent quantities. GDP is an annual figure (Gross Domestic Product), and you are comparing it to total outstanding debts that are paid off over decades.

Total asset value of the US economy is about $270T with about $150T in outstanding debt. So the relative proportions are not as extreme as you’re representing.

I knew there would be some sort of issue with that comparison, thanks!

If the value disappears overnight, wouldn't it be fair to compare it to the yearly figures?

If it disappears "overnight", then would the right comparison be to daily GDP? which would increase the computed percentages by a factor of 365.

Clearly it is not sensible to compare two quantities with different dimensions of $ and $/time. It is like comparing distance (miles) to speed (miles/hr). Changing units to (meters/sec) doesn't change the absurdity in any way.

I run a business. If I had to 'write off' some asset today because it has proved to be worthless, it will affect the yearly report.

> I don't know what will happen, you can't simplify the workings of the economy into tweets and soundbites.

Honestly, thank you so much for adding this bit to your post.

It's incredible how everything is just treated as if you could handle it in 140 characters or whatever the Twitter character increase has been.

Right, so the difference here is that you can be foreclosed on, and the bank takes your house. You can even go bankrupt when you lose your house.

But you can't get out of student loan debt via bankruptcy, nor lose the education. I figure the banks figure they're going to be fine, because rather than the SLABS market collapsing, it'll just suffer a correction: the enforced debt peonage of making payments all one's life will ensure those "securities" represent (forcibly and fraudulently extracted) income streams.

Except that all of those angry debtors can vote, and elect representatives who change the applicable laws. So one way things are different this time around is that government action could precipitate events in unpredictable ways.

Remember Bernie is talking about straight up forgiveness: the debt just disappears. He probably won't be the next President but student loan reform (including existing loans) is a hot topic for many candidates.

Any forgiveness is likely to be executed by the forgiving entity paying off the loans.

The federal government is not going to use a pen to steal trillions of dollars from lenders holding contracts for repayment. That’s a banana republic action.

The federal government is the one holding all that debt, so that is exactly what is going to happen.

If we're being cynical, I think they would forgive the debt and bail out any large financial institutions who are damaged by the act of doing so. It would be very in character.

There is a high 8/low 9 digit inventory of private student loans, not held federally.

> Remember Bernie is talking about straight up forgiveness: the debt just disappears.

I don't think this would harm the financial system. Debt held by the govt disappears, privately held debt is purchased by the federal government and then disappears.

I don't know the structure of student loan backed debt but this sounds the opposite of the cataclysmic: the government is guaranteeing they will "print" all the money needed to cover debt owed to 3rd parties, which should mean banks will do better than ever.

I'd be more concerned of cataclysmic outcomes if we changed laws in a way that fundamentally shift the risk profile of student debt as held by 3rd parties

> He probably won't be the next President

He IS a top polling primary candidate, but more to the point I don't think even a democratic Congress would pass a lot of his policy

Speaking has someone who co-runs a hair salon, those numbers don't make sense. $30K should be a reasonable loan compared to how much a single stylist can make annually (easily $50K, up to six figures if they are any good). Just shopfitting a hair salon costs $10-20K. New or relocating salons do that routinely and will expect to recoup it comfortably in the first year.

Why do you need a degree for a "trade" should not the industry have apprentices for that.

Regulatory capture. In many states the industry successfully lobbied for licensing requirements on the (questionable) basis of it being necessary for public health.

While the basis for regulation makes sense on paper anyone who's done anything with a low margin service industry knows that whether good practices are followed in a particular workplace has almost nothing to do with education (everyone knows how to keep things clean) and everything to do with management (does management actually want these things done or does it consider them a waste of time).

They do. In my state you can do a 2 year apprenticeship in cosmetology, but they can be hard to come by. You need to find a stylist willing to not only train you in practical aspects but follow your bookwork and write/grade tests. It's a two-year unpaid commitment. My wife owns a salon and has taken on a couple apprentices. It is a considerable amount of work. Alternatively a beauty school program can be done in a year, then after a six month internship you can get your license. The apprenticeship is the better option but being able to complete your training in a shorter amount of time with a lower barrier to entry is probably appealing.

Unpaid!! I know hairdressing Is one of those industries that have medieval practices but realy.

In Japan you need to do a 2 year course before starting as a hair stylist. In the UK anyone can set up (although they may have difficulty getting insurance so will probably be operating without).

Maybe in some high end markets or very high end or speciality salons, but I'm having a very, very hard time seeing an average stylists making 50k, let alone six figures(!!) anywhere I've ever lived. The BLS says that the 2018 median pay is $24,830 per year.

https://www.bls.gov/ooh/personal-care-and-service/mobile/bar...

FWIW all my peers that I went to high school with who got their cosmetology license 1) did so for free as our public education system offers cosmetology school for free and 2) no longer are practicing 20 years later

That average will be brought by junior stylists, but someone who goes to college shouldn't start as a junior (or only for a very short time). Juniors are usually the ones who start at 16 with no training at all. They're not allowed to do anything more complicated than making coffee for the customers and washing hair, and are paid accordingly.

Also not all stylists work full time because it's a relatively well-paid job. One of the colleagues at the salon I was talking about has worked a 3 day week for years, and another works 2 days a week (but she does have another job).

On your other point about older hairstylists, it's a very physical job where you stand in an awkward pose for long hours. Many retire (or semi-retire into salon ownership and doing occasional special customers) by their 50s.

At which point do US student loans start to resemble indentured servitude?

10 years ago?

At least indentured servants only had a 7 year time span before payback was complete. Kids are getting lifetime loans these days.

Anecdotal counterpoint - I have an MS degree in information security from a top-tier engineering school that cost me $70k, am gainfully employed, and still have quite a difficult time paying this debt off. So no, this isn't universally true.

welcome to the rent seeking effects of occupational licensing, where you have to put more hours to do hair than be an EMT in some areas. either to pad the pockets of those providing the "education" or those in the industry looking to keep competition low.

I would love to see how many of these loans go towards low wage jobs all because licensing issues force people into this racket

It costs $30K to go to Barber School in the US?

An apple can cost $30k if someone is willing to pay it. I’m sure there are more reasonable prices, many community colleges are far cheaper.

Problem is 18 year old that down know how to do a simple cash flow analysis being given tens of thousands of dollars as they see fit, as long as it’s at a “school”, however that’s defined. Obviously the “schools” have figured out how to best benefit from the hydrant of money available to them.

No, in my area the public school system offers cosmetology school for free.

I'm sure there's some fancy for profit private schools that cost $30k though.

For a lot of the programs through the public school system you need to enroll as a junior in high school. So if you don't choose that career by the ripe old age of 16 or 17 then public school isn't an option. A high school senior who decides to go into cosmetology only has the option of paying for school or finding a two-year unpaid apprenticeship.

There is also a huge number of people who don't graduate at all.

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