A Student-Loan Payment Pause Led Borrowers to Take on More Debt
marginalrevolution.com
marginalrevolution.com
The education system needs a stupendous amount of reform, not the least of which is the ridiculous debt load we put on young adults in what should be the years they're laying the foundation for a productive, happy life.
It's a result of the US Government guaranteeing loans of ever greater sums regardless of the ability to pay them back. It's an extraordinarily obvious outcome to that foolish approach. Try it in real-estate or any other sector and see what happens. If they tried it in healthcare, a new US Government guaranteed healthcare loan program (need a $1 million loan (at 9% that you can't discharge) for your surgery? step right up), it's similarly obvious what would happen.
The only solution being offered by the left is to generate a lot more debt in one of a few different ways (and the right is largely proposing no solutions at all; both sides are captive morons (to their dogma) when it comes to solving the student loan mess that the government created).
https://studentaid.gov/help-center/answers/article/how-much-...
> If you’re an undergraduate, the maximum combined amount of Direct Subsidized and Direct Unsubsidized Loans you can borrow each academic year is between $5,500 and $12,500, depending on your year in school and your dependency status.
> If you're a graduate/professional student, you can borrow up to $20,500 in Direct Unsubsidized Loans each academic year.
Most people aren't going to graduate school, and the full amount of government loans one can get for undergraduate don't make most private schools in any way affordable to those without jobs or family support.
On the left a potential solution is to increase the share of corporate profits going to workers.
On the right (and part of the left) a potential solution is the reduction of credentialism.
How "willing" are the debtors when the whole system seems to built around the idea that a student will take out a loan to pay for the education, an education which is priced around the idea that anyone that isn't wealthy takes out a loan? I mean, yeah, I guess they willingly went to college...
I have $70k in loans. I also paid a boatload of cash directly to my tuition so my loans weren't even the full price.
I don't care if it isn't supposed to be easy. It wasn't and to the day I am struggling with it. Something has to change. You can act like its a moral failure on the students' part all you want but that doesn't make this system sensible or sustainable.
If we discharge a loan on a house or car your possession is confiscated no matter how much you had paid off...should the same go for your degree if you want to get out from under your student loan?
As more direct comparable, consider the Small Business Administration's loan process. These loans are guaranteed by the federal government in essentially the same way as student loans or FA/VHA home loans.
If Bob gets an SBA loan to start a restaurant (famously a bad risk...about 30% fail their first year) and it goes belly-up, he can file bankruptcy and eliminate the debt. That will ding his credit rating, but that's all. The government might (or might not) get a few thousand bucks from selling the restaurant equipment (commercial stoves, freezers, and such), but all the money spent on employee salaries, decorating (quite expensive), advertising, taxes, insurance... it's just gone, and the government can go whistle for it.
Why is Bob allowed to file bankruptcy, while Steve, who took out a student loan, is not?
The only way to get around this would be for most to not be able to go to college with a loan at all, which isn’t going to happen.
Also, though credit card debt is unsecured, the creditors can garnish your wages, and since your limit and hence debt scale, in effect they can generally take a high percentage back.
Any reason why? Why should education be this expensive to begin with? Why make students work 2 jobs while having college?
Here in Germany we have a student loan model, where as long as your making progress in Uni, you get around 1.3k a month, only have to pay back at most 10k with 0%. Oh and if you pay all at once you can get up to 50% cheaper.
So why should students be forced into 30k dept with crazy interest rates, just because they wanted to study something?
Genuinely curious
Also, does everyone get to go to university in Germany or are there restrictions on who gets to go? In the US you basically just have to have a HS diploma and money to go...
1) Quality of the classes (most classes at all schools are pretty much made to fit the abilities and interests of the average student, which can be a big negative in transferring or even getting hired.)
2) Time to, and odds of, completion can lower for CC > Uni transfers, mostly depending on how well the 4-year schools partner with CCs in enabling transfers.
> Luckily with the internet you can study a lot of things for free...no need to pay some overpriced college anymore.
It's only rarely about what you know. The first step in the door is often gate-kept by a credential requirement.
The reason government support for tuition exists is because as a matter of policy society benefits from: 1) a more educated public; and 2) taxes from the higher wages educations historically commanded.
The problem is guaranteed government loans allowed schools to begin charging students tuitions that resulted in an inability to payback loans on average market wages over lifetimes.
Now imagine if the government guaranteed car & homeloans for all borrowers starting at 17 years old. That bad policy would result in Homeowners/car dealers charging more than a kid could ever expect to pay off in a lifetime, historic defaults due to inability to service loans and no net benefit to one’s income tax bracket for federal taxes. Is such a system existed I hope everyone would demand reformation, not demand some other unrelated debt be forgiven.
Existing federal student loans should be forgiven & the current guaranteed federal student loan/university system reformed…mortgages and car loans really have no relationship with federal student loans.
Many people weren’t given the opportunities nor had the privilege to be given basic social safety nets like a way to finish high school. Most people don’t have easy lives. No one loves to part with money to pay for the “decisions” of others. I quoted the word because i don’t understand the notion that people are making such major decisions independently of capitalisms grasp on all of us.
Don't forget you'll be told you are lazy for not affording a house unlike your friend who just had his debts cancelled and was able to save up!
I've seen a lot of people graduate, get their first job and then buy a car that is more expensive than their yearly salary. "Well I want to be able to enjoy having an income now"...not doing the math on what that costs and what they will need to pay back.
Adding a financial literacy course in high school and requiring completion of that course before getting loans for college should be a must.
https://research.collegeboard.org/media/pdf/trends-college-p... (pg 18)
There are lots of influential professional students (doctors and lawyers) who want $100k+ handouts, but they are a loud minority.
Average Student Loan Debt: $39,351
Median Student Loan Debt: $19,281
Average Student Loan Payment: $393
Median Student Loan Payment: $222
Half of student loans are $222/mo or less. I'd also like to mention that if student loans became a lot harder to come by, people like myself could not have afforded college.
[1] https://thecollegeinvestor.com/32031/average-student-loan-de...
Yes but why is that? all I paid for 5 years of university education was about $30 in administrative fees, and I have no complaints about its quality.
Without being able to borrow (or making it very expensive to do so), it would require a part-time job on top of a full coursework, or taking longer to get a degree, which has it's own costs associated with it via lost earnings.
50 years ago was a pretty special time, if we're being honest. The ratio of home prices to income was an all time low. Go back to the 50s and it was the more typical 4x ratio. Clearly the 6x and 8x bubbles we've recently experienced aren't sustainable, but we're also probably not going back to the relative utopia that was 1970s house prices.
What did the people in the 70's do differently?
Since then we've ratcheted up expectations for what minimal housing should be, which raises the price floor. Dropped interest rates, which pushes up demand. People not getting married need their own home, pushing up demand some more. Forcibly constrained sprawl, pushing down supply. Zoning, etc. It's hard to imagine how we actually lower prices significantly (aside from the bubbles, which I'd guess have as much to do with interest rates as anything else).
With enrollment trending down many colleges appear to focus on making up the loss through raising tuition.
To attract students the universities invest in prettier buildings and more "college experiences" to attract students.
Meanwhile information is cheaper and more easier to replicate than ever in human history.
Books ought to included in tuition, a good professor can note any updates needed.
Lectures ought to be digital. Let classroom time be for students to work or ask questions or discuss. Saves both students and professors money.
Integrate and use/teach open source software. This would lower costs to students and long term lower the technology costs to the university (especially if universities are aiding each other in development).
That's three core parts of modern college that can and ought to be reduced in costs.
There's no (good) excuse for academia to not do this in my opinion and if they (universities) fail to keep up with the rate of opportunity sadly I believe we'll see a lot of knowledge lost.
We shouldn't have lectures at all, IMO. They arose in medieval times before the printing press, when the lector (which means "reader" in Latin) would read a book, very slowly, while the students copied it down verbatim. At the end of the course, you'd have your own copy of the book. Of course, this actually made sense at the time. You couldn't pop down to Barnes and Noble and get your own copy of Aristotle, after all.
The fact that we're still doing this in the 21st Century has more to do with the ego of academics who like to hear themselves talk than it does with any bona fide educational purpose.
We already have technology that can help tailor instruction to individual students, and that capability is only going to get better with time. The university as we know it is doomed, IMO. The corpse just hasn't stopped twitching yet.
I really like the idea of having a personalized copy of your class/book once you're end of term.
Universities function far beyond just teaching undergraduates. They often function as essential research hubs, protect & disseminate knowledge.
However I agree we having technology that changes the need for traditional college lectures. Though I struggle to see how to adapt the need for accreditation & proving someone is qualified, which is a nice function of colleges.
This debt load is also voluntary, is it not?
I mean, when I went to college, I went to one that I could afford.
And that's where I have a problem. If I pay $613 per month for the next 10 years (https://www.forbes.com/advisor/student-loans/average-student...), and all of the sudden that gets paused, I will not go out and think: oh let me get a new car with on a 5 year, $400 / month note.
and yes, we shouldn't give the rich tax breaks either.
No one has said that to you?
Every person of age gets up to $X in the way of loan debt payoff and/or tax credits. The results will be filed in taxes. A progressive tax rate based on wealth can be up to 100% for this specific money.
If this is still an ambiguation of the issue to you, I can clarify further.
You can’t hand wave away a policy proposal with “no rich person will have 100% taxation”. Since it’s a tax credit and it’s getting taxed immediately. Rich people won’t be getting the money.
> Simply give poor money people exclusively.
I guess we just have to disagree. I assume you’re too liberal? I come from a leftist perspective. For me policy, end results, class, and material changes are more important than liberal progressive mentality of a charity/welfare state of affairs.
Also you stated no rich person pays 100% taxes yet you’re stating something that never happens too: poor people exclusively getting money.
What I am saying satisfies what you’re saying.
These measures make the debt easily manageable. At 7% interest the debt would suck.
The final goal behind this is to get more people into higher education, not incone distribution.
I believe parents who took out loans for since deceased children should be forgiven. Not for economic reasons, but because every single month they pay the bill they are gut-punched anew.
I believe students (and parents of) who became disabled, such that they could not work in the field they went to school for, should have their loans forgiven, as debt has a particular psychological toll on the disabled compared to the abled.
When it comes to giving money to poor people circumstances matter. Some of the poorest people will be members of cults that provide for all of their needs, for instance.
https://www.aplu.org/our-work/4-policy-and-advocacy/publicuv...
Second of all, your emotional plea around students being disabled is salient but irrelevant. If they’re that poor they would get money through a straight “give poor people money scheme.”
No matter how you slice it there will be poor people who fit any scenario you can conceive who also did not participant in college. Any sort of prioritizing or preference on college participation is regressive.
> If they’re that poor they would get money through a straight “give poor people money scheme.”
That then goes to paying off their debt. https://www.tateesq.com/learn/can-ssi-be-garnished-for-stude...
"Student loans can’t stop you from getting Medicare. But defaulting on federal student debt can lead to your Social Security retirement and disability benefits being garnished."
> Any sort of prioritizing or preference on college participation is regressive.
For students who had federal loans for predatory schools an argument is that the government (through accreditation) was responsible for validating the school prior to giving loans to attend the school. The fact that it fell down on this job, leading to harm for the loan recipients (both money, and time, only one of which can be compensated), justifies eliminating the debt. Otherwise you can make the argument that the money from any compensatory judgement should go to the poorest first, and not the person seeking compensation (which would have a regressive effect of wronged parties not seeking to hold the people committing the wrong accountable - which is some of the force behind holding entities such as predatory schools accountable).
You solve the problem by re-allowing student debt to be dischargeable through bankruptcy again. This is the root cause of the problem. The fact Clinton and Bush allowed this to happen is disgusting. All it did was allow banks to give loans to EVERYONE without any fears. Then schools could raise rates knowing kids would still pay the predatory prices, and that's how we get into the mess we are in now.
By allowing student debt to be dischargeable, banks are now taking a risk of losing their money, which means that they won't give loans to people who frankly are wasting their money. A parent at my workplace was asking how she could afford to pay her daughter's $80k/yr tuition for a sociology degree. The fact that this completely stupid idea was even being considered shows the depths to which society is fucked up.
Even the most creditworthy student is more risky to loan to when a bankruptcy would cancel the debt. So even they should get a marginally higher interest rate.
https://www.savingforcollege.com/article/historical-federal-...
Freely available student loans have pumped enormous amounts of money into the system, and tuition prices increased accordingly, driving the need for yet more loans.
In the end what we have is young people taking on unthinkable amounts of debt to get the same level of education that they did 40 years ago, but now with nicer student centers and bigger stadiums (and, somehow, instructors who are paid less than before).
If we cut off the endless supply of loans, and instead use limited grants to continue to foster diversity, we can reverse the cycle. Schools will once again have to compete on cost.
Then we can talk about loan forgiveness for those who were victimized by the current system. But doing the forgiveness before fixing the system only makes the problem worse.
Many state schools have their tuition controlled by the state government.
>Initially, private banks provided capital for students loans, with parameters set by the government under the FFEL Program. These loans were owned by lenders and guaranteed by the government; in the case of default, lenders were reimbursed. In 1992, the DL program was created under which loans were directly made by the US Treasury. For many years, both the FFEL and DL programs existed side by side, and colleges could choose the source of funds. Despite the different source of funds and ownership, FFEL and DL loans were otherwise identical in terms of limits, interest rates, and repayment plans available, and many students likely were unaware of the different source of funds when taking loans through their schools’ financial aid offices. In 2010, following analysis and a bribery scandal of college administrators, the Health Care and Education Reconciliation Act of 2010 eliminated new loans under the FFEL program. Since 2010, all federal student loans have been made under the DL program.
https://www.nber.org/system/files/working_papers/w31247/w312...
[1] - https://www.forbes.com/advisor/student-loans/best-private-st...
> Private student loans are best used to pay college costs after you’ve borrowed the maximum you qualify for in both subsidized and unsubsidized federal student loans. Private student loans come from banks, credit unions and online lenders, and unlike federal student loans for undergraduates, they require a credit check. That means most undergrads will need a co-signer in order to qualify. Private loans also are more expensive than federal loans and typically don’t offer the flexible repayment options their federal counterparts do.
[2] - https://www.bankrate.com/loans/student-loans/private-student...
> Before 1976, borrowers could discharge private and federal student loans in a bankruptcy, just like credit card debt or medical debt. But the introduction of the U.S. Bankruptcy Code in 1978 caused a major shift with regard to student debt.
> At the time, the intent of Congress was to protect educational loans from bankruptcy abuse. The amended bankruptcy code stated that funds received as an educational benefit would no longer be discharged unless the borrower could demonstrate undue hardship, which is no easy feat.
[2, 2nd]
> One notable case came to the U.S. Court of Appeals for the 2nd Circuit from the U.S. Bankruptcy Court for the Eastern District of New York. In the original case, U.S. Bankruptcy Judge Elizabeth S. Stong concluded that private student loans were not part of the Bankruptcy Code Section 523(a)(8)(A)(ii), which states that any “obligation to repay funds received as an educational benefit, scholarship or stipend” is typically not eligible for discharge.
> She maintained that the section of code did not define student loans or educational benefit, and that referring to a loan as an educational benefit would be “an unconventional way to discuss a loan.” The appeals court affirmed the lower court’s ruling, arguing the U.S. Bankruptcy Code did not prohibit the discharge of a private student loan in bankruptcy.
> Some see the 2nd Circuit decision as hope for a loosening of the criteria in private student loan bankruptcy discharge. However, in June 2021, the U.S. Supreme Court refused to hear the case of a Texas woman who sought to have her private student loans discharged under a different standard — so it appears that the undue hardship requirement may still be in effect.
It actually happened under Carter. https://www.bankrate.com/loans/student-loans/private-student...
> But the introduction of the U.S. Bankruptcy Code in 1978 caused a major shift with regard to student debt.
> At the time, the intent of Congress was to protect educational loans from bankruptcy abuse. The amended bankruptcy code stated that funds received as an educational benefit would no longer be discharged unless the borrower could demonstrate undue hardship, which is no easy feat.
I took up debt to study at the graduate level, I won't use that past painpoint to defend forcing people to enter into debt now.
Hmm... by that reasoning, wouldn't people who default on SBA business loans or FHA/VA home mortgages be doing so "at the expense of those who have paid"?
And yet they're allowed to file bankruptcy. What's different?
As I observed before, in the case of a small business there often aren't any recoverable assets, or only a small amount. In the case of real estate... I saw a story the other day where a San Francisco office building changed hands for only 25% of its price the last time it was sold, and I don't think we've seen the bottom there by any means.
For example, not everyone gets the same amount loaned. What does that distribution look like? Map it to higher edu schools? Map it to tuition? Map it to high schools? Etc.
The point is, there are a lot of students and therefore a lot of debt. Naturally, such a big pool is going to have outliers. When the media parades a student loan "victim" is that (e.g.) $100k of debt typical or atypical?
It's atypical. Only 10% owe $100k or more: https://www.federalreserve.gov/publications/2022-economic-we...
> Most student loan borrowers owe less than $25,000 on their loans. The median amount of education debt in 2021 among those with any outstanding debt for their own education was between $20,000 and $24,999. One-quarter of student loan borrowers had less than $10,000 in outstanding student debt (figure 40). Student debt balances vary across different demographic groups. Borrowers with an income of less than $50,000 a year were more likely to carry lower balances of student loan debt.
There is also a lot of debt taken on by graduate students. To be clear, only around 30% of Americans overall have even a bachelor's degree. The need to take on graduate school debt just simply isn't there in the way the taking on debt for undergraduate is. So I think these numbers should break out graduate students, especially those who went into high-earning professions with credential gatekeepers, like medicine (law is debatable -- we've minted way too many lawyers).
Otherwise I agree with you. Grad-degree credentialism is a problem, especially in the STEM fields.
Plenty of people, including some with student debt, can't afford a new Corolla (even ignoring the debt). They buy used.
It's been a collective effort.
The fact that so many of the students taking on the loans have no concept of debt, compound interest, costs of living, etc. boggles the mind. And sacrafic? And adversity? Not even on their radar.
This seems so blindingly obvious to me that I'm really worried I've become totally disconnected from reality that no one else has floated the idea.
a loan used to buy a degree
a degree which isn't generating enough income to pay off the loan
if you buy out other underperforming assets like foreclosed homes, there is a discount...where is the discount on these underperforming degrees?
why do I want your underperforming asset? I already have a degree, but thanks!
But is it more in real or nominal terms?
[1] - When you're hourly, and maintaining a household, it costs money to take time off from work to go to school.
To be clear, I'm not really in favor of debt forgiveness, but not because I believe it's "unfair", but because I think it actually makes the root cause problem (the astronomical cost of college) even worse. I think modifying bankruptcy laws to make more student debt dischargable is a much better solution.
Basically I strongly believe that pretty much every generation up to the millennials got a much better deal when it comes to education and housing costs, even if they do get 10 or 20k debt forgiveness. Dude, you were one of the lucky ones (and you've got a pension to boot!!!).
Various of these Millennials and GenZers are in superior financial situations to me thanks to debt forgiveness.
Meanwhile later GenZers are looking at the roll back of credential requirements. Which allows them more options for decent paying jobs without college debt.
Though, yeah, I'm really lucky compared to the early Xers and late Boomers who are sitting on 6 figure debt repayments as they stare retirement in the face.
My pension only came in to play in my late 30s. I don't plan on staying in this job for many reasons, but if I did I would be working into my late 70s to fund it at full compensation. Edit sometime later to add: They also take 9.5% off the top of my paycheck to fund it.
I still want my less lucky peers and the zoomers made whole after they were sold a bill of goods. Chaining the better part of a generation to an anchor isn't a winning move for any civilization.
> Chaining the better part of a generation to an anchor
Most Millennials never took on student debt. Or if they did, already paid it off.
I read these Borgesian lists of acceptable kinds of hardship (which can be and are routinely bike-shedded ad nauseam) as calls for pointlessly increasing government bureaucracy and expenditure. Far cheaper to simply offer blanket forgiveness at some appropriate level.
And for income, at least, the IRS should be able to easily do this.
Blanket forgiveness of loans comes with a societal cost for those who are in precarious situations but do not have loans to forgive. By increasing the money available to be spent for non-basic purposes there is almost guaranteed to be a demand-driven inflationary effect.
This inflation would hurt those on the margin the worst. The parent comment that I originally replied to wants this forgiveness, in part, so that Millennials and GenZers will bid up the value of their house in order to help fund their retirement. This is the housing situation we've been in for the last couple of decades. In general it's been to the benefit of current homeowners, but not so much for the rest of us.
This is the nuance that we must bring to the discussion. I am pro student debt forgiveness, but in a way that isn’t a massive handout to people like me. I paid off the majority of my student loans with the signing bonus of my second FAANG job. No way would I have any business getting my debt forgiven.
https://www.whitehouse.gov/briefing-room/statements-releases...
> The Department of Education will provide up to $20,000 in debt cancellation to Pell Grant recipients with loans held by the Department of Education, and up to $10,000 in debt cancellation to non-Pell Grant recipients. Borrowers are eligible for this relief if their individual income is less than $125,000 ($250,000 for married couples). No high-income individual or high-income household – in the top 5% of incomes – will benefit from this action.
I also question the need for full forgiveness, and wonder what the inflationary impact would be on something like “everyone’s student loans from the federal government are now 0%. Your minimum payment is 5% of your AGI and your tax returns will be used to pay down the balance until it’s paid off. future loans will be capped at prime rate +.% fixed at time of borrowing”. Leave private loans untouched, but dischargeable at bankruptcy. This would pressure on student loan private lenders to lend based on certain conditions (I.e, grades and academic progress) with a minimum amount lent by the federal government. It would result in a lot of withholding changes, but I think that’s a good thing.
More complicated and potentially more room for fraud.
Overall, I think we ought to do something for people struggling. But I agree that nothing should be done for the wealthy.
This is different from say EV subsidies (which I also think lived passed their usefulness) because car makers are incentivized to serve more customers to make more profit. Colleges don't gain anything from increasing their enrollment and would rather raise their tuition to hire administrators and build shiny buildings that boost their rankings.
I will gladly invest in my communities knowledge base any day of the week. Tax me. Please. Pay the teachers what they're worth and make the NIMBYs and FYGMs cry.
More administrators? More useless degrees?
The entire premise of student loans is everyone is eligible for them, regardless of their potential future financial ability to pay them off. They're also not ever allowed to default on these loans.
These loans should be dictated by the free market for a multitude of reasons. One, it prevents the sociology student from incurring a 200k student debt that they'll not be able to repay because loan issuers will in fact realize that these students will never repay these bills. Two, if students cannot afford these outrageous loans, they'll have to cut back on their overpriced degree fees.
It is a crime and tragedy that education needs loans at all. Students are not for your personal profit.
Yes, my analogy ended up being a stupid system that doesn't make sense. That was my intent. Asking 17-year-olds to make decisions about taking on 6 figures of debt is also a stupid system that doesn't make sense.
So do government loan guarantees in the first place, though.
IMO the subtle reason why republicans hate it is because loan forgiveness effectively signals (to borrowers) that no need to pay this loan, just wait around for a Dem president to show up defer/cancel etc it. which is a step towards discharging the loan in 'special circumstances'.
The basic economics politicians dont seem to get about education cost is that if you dont increase supply and just increase demand pool by making loan cheaper/federally backed all you will get is price inflation & thats been happening at rate way outpacing inflation.