The Student Loan Bubble is Starting To Burst
cnbc.com
cnbc.com
Normally the interest you pay is the combination of three things:
1. The (inherent) time value of money
2. Expenses the lender incurs to keep up with the debt
3. The average default risk of those taking the loans
Student loans only price in 1 & 2 because of the near impossibility of not paying the loans back. Which is great in the short term as it means that more people are able to go to school because the interest rate is lower and thus they can afford more debt.
But a college education is a lot like a house. The price of a house isn't how much it's "worth", it's an artifact of how much money you have to pay every month for the privilege of living there. A house of a certain niceness is (everything else equal) going to cost the same amount of money per month whether the interest rate is 1% or 15%. A $1500/mo mortgage buys you $250k of house at 4% but only $150k of house at 9% and only $95k of house at 15% like in the early 80s. (http://www.bankrate.com/finance/mortgages/history-of-mortgag...)
By removing all the default risk from the pricing of student loans, more students are able to afford college which is exactly the intended effect of the laws. But the size of most academic institutions doesn't grow; most colleges don't admit twice as many students just because more are clamoring to get in. This excess demand and fixed supply means that colleges can raise prices. And thanks to the lowered interest rates those who could have afforded college prior to the law (and lower interest rates) are still able to afford it because the lowered interest rate has increased their borrowing capacity.
Those on the margin prior to the change in the law still aren't able to afford college once the price increases follow the increase in available money and additional demand for degrees.
The law was changed in 1978 and it's taken quite a few years for this unintended consequence to play out. It's really sad to see it happen. http://www.finaid.org/questions/bankruptcyexception.phtml
I knew several people I grew up with who went to these schools. They took out huge loans, 10k plus, and they never landed any kind of job with their "certificates" / degrees.
[1] Half of all defaults are from these kind of schools.
[1] http://www.businessinsider.com/career-education-corp-will-pa...
That means half of all defaults are from the "other" kind of school. And the loans from the "other" kind of school are much, much more than 10k +, and many of those students are "never landing any kind of job", too.
Sounds like a LARGER part of the problem is "conventional" higher education.
And isn't the median student debt something like 25k? Not really "much much more" in my book. Anyone with a real degree should be able to handle that sort of debt.
What we should be doing is allowing lenders to discriminate by major and school. Good school with a good degree? Lend. Good school with a shitty degree? Lend with extreme caution caution. Fake school with any sort of degree? Tell them to kindly fuck off.
No disagreement here.
I don't want to give the perception that I think "for-profit" higher education is problem-free. I do think they have severe problems, but putting a disproportionate amount of attention on them is distracting to the problem that the "non-profits" are - which has a bigger societal impact, since they are serving more people. "For-profits" are just an easy target because of the broad social perception that profits breed evil, where many of those evildoings are just as bad in the "non-profit" higher educational sector.
To put my objection more clearly: Don't use the IRS designation to whitewash "non-profits", which are in many ways acting just as atrociously as "for-profits" anyway. Your statistics miss something important - the socioeconomic class that is consuming the non-profit product comes with some inherently lesser risks vis a vis default (for example: I presume more "non-profit" college consumers are going to be able to cover their asses, debt-wise, with help from their parents). What happens when you correct for that, what is the magnitude of difference? The "non-profit" statistics also encompass schools where you are clearly going to have less of a problem getting a job afterward. What happens if you look at the LOWEST tier of "non-profit" university and compare it to the "for-profit"? I would presume that you would find very little difference.
http://www.mercurynews.com/education/ci_24041125/profit-coll...
The good news:
"Last year California cut from its tuition aid program more than 130 private colleges with low graduation rates and too many student loan defaults. Some wonder if the federal government will follow the state's lead to hold colleges responsible for their performance.
Today, only 50 for-profit schools in California remain eligible for state-subsidized tuition; 115 do not"
> hold colleges responsible for their performance
Sounds like a recipe for lowered standards...
To add to that, they tighten the noose with every legislative session. It appears to be the intention to make our pay proportional to "graduate success"; which will likely end up meaning GPA. That would put the same incentives in place for public college instructors that have existed in for-profit schools.
Which is not to say that should necessarily impact the degree of scrutiny those schools receive. But perhaps worth considering - if they are serving students who are likely to get no education at all, is it better / worse? Honest, question - no implications here. Just think its something worth discussing.
[1] http://www.bloomberg.com/news/2013-03-31/money-laundering-ba...
This discussion also seems to be missing the fact that students who attend many of these for-profit schools are poorer and thus more likely to default, regardless of the quality of education obtained. Any study is useless without an adjustment made for median household income of the student (and perhaps high school GPA).
"Most for-profit colleges charge much higher tuition than comparable programs at community colleges and flagship State public universities. The investigation found Associate degree and certificate programs averaged four times the cost of degree programs at comparable community colleges. Bachelor's degree programs averaged 20 percent more than the cost of analogous programs at flagship public universities despite the credits being largely non-transferrable."
People going to public schools are getting loans for unjustifiably expensive 'educations' which are nearly universally absolutely worthless. That is why such a staggering number of people attending for-profit schools have trouble.
You can dig up more and more data, looking for a way to make for-profit schools look good, but all you are really doing is shoveling more data onto the heap of reasons why they are predatory shitheads.
If not, the credits are generally non-transferrable and many businesses will simply toss your resume.
My college actually shouted "we're accredited" at the top of their lungs, but I didn't give a fart until I was half way through the degree, and one of my profs talked to me about why they worked so hard ensuring accreditation (for the same reasons you state) - at which point I said, "pheww it's a good thing this place is accredited"
I had no difficulty getting a job after grad. But I certainly didn't know that accredited was important before I entered the course.
Although I'm doing ok in my career I know many people who go to these types of schools do not. Now I don't know what to do. I would love to have gone or go to a 4 year state school. At this point in my life I make too much money and have too many responsibilities to be able to quit and go back to school. I also have 10 years in the field which I hope makes up for the education gap in some cases.
Are there any actually decent (accredited) programs that have hours for working people? The only way I see myself getting a BS is if there is a full night program somewhere but at this point I'm not even sure that it's worth taking on more debt.
They should have. :( It's sort of important.
School accreditation is done by a regional accreditation organization and validates every diploma the school grants.
Program accreditation is only available for certain degrees to begin with, and is usually under the authority of a professional group in that area of study.
Practically every state university is an accredited institution, even if they offer (i.e.) accounting or engineering programs that are not accredited by a relevant organization.
the issue is that public money is being used for this scheme, not that there's anything wrong with taking money from idiots in general.
Hence the argument that public money[1] should not be involved. The school management can't say "no" to it (from any angle), and the would-be students think it's free; nobody, lender in particular, hammers home the point "if you don't do the work, you'll be in deep financial $#!^".
It's the borrower "putting them into debt". Society pressures kids into getting a degree, the school makes it easy to start the process, government makes it easy to borrow the money, but ultimately it's up to the enrollee to sign for the loan and do the work to make it pay off. Every self-appointed pundit is pointing fingers at the school (for "fleecing" students) or the government (for "wasting" public funds), but nobody is pointing at the students for not making the effort.
[1] - "public" insofar as it was legally confiscated from the public at implied gunpoint.
I'm calling complete bullshit on this one: isn't that the very definition of admissions? Even if you claim it's not, I think that if you look at any student's previous grades / work experience / references, you can quite reliably determine who will do the work and who will not.
These schools simply don't want to: they want to admit everybody so they can take their money in exchange for basically nothing. I would fully support legislation to bar for-profit institutions from receiving any federal tuition aid (whether loans or grants).
> public money[1] should not be involved. The school management can't say "no" to it
This is false: schools are not required to accept federal loans.[1]
[1] http://www.deseretnews.com/article/865576111/No-more-student... to accept federal loans
By "won't do the work", I mean really simple things. A student has a week to take a simple on-line 10-question multiple-choice quiz, but doesn't even look at it. For every creative assignment, I make clear "submit something - even if it's just a text file saying 'I have no idea', I'll work with you on it", but nothing is submitted. I'll take a submitted "program" of pure gibberish, write a detailed explanation of what's wrong and how to make it work, tell them to fix it, and give them until the very end of the course to do anything & everything to make it passable, but no resubmission is attempted. Online group discussion participation is required with a weekly N-post minimum (N very small) with very low content standards, a very simple requirement, but little or no participation occurs. These are students who passed high school, hold jobs, can hold competent conversations, show up for class, etc.; I have no reason to doubt they have references, adequate prior grades, and work experience. Yet...when given a very basic collegiate task, they won't do it to a mere 60% sufficiency.
There's a fundamental difference between high school and college: the latter is not obligated to pass you. Every opportunity is given, every task may be simplified to near-triviality, but if the student won't take the steps on their own, they reap the consequences of willful inaction.
But, of course, you refuse this experiential insight and insist it's all about malicious greed.
You miss my point: it's not about rejecting federal loans, it's about rejecting an applicant who does satisfy grade/work/references/funding criteria when there are openings, but the admissions personnel concludes admission still isn't a good idea. The mortgage industry knows what I'm referring to.
No it wouldn't. Admission to selective schools isn't based on criteria, it's competitive among the other applicants in the pool for a limited number of slots. Counselors routinely state that the vast majority of their applicants are academically qualified; students are selected based on interestingness (communicated through essays & recommendations), extracurricular talents, race, gender, and other factors. Sometimes even virtuosos are rejected because there are already enough virtuosos with that particular talent in the university.
As far as I know, it is only very low-end schools in the US that run admission solely off of standards.
But if tiny community colleges start turning people away when they have half empty classrooms, there will be a lot of negative press.
They could probably figure out how to sell it as "raising the bar," talk about providing a more individualized education, ride the negative press as actually increasing the value of their degrees, etc.
The process of getting accepted to a school and receiving financial aid may be long, but considering the student is borrowing tens (and sometimes hundreds) of thousands of dollars it's also incredibly simple.
If public schools are going to promote using public funds for continuing education, it's their responsibility to teach how to use those funds.
The for-profit schools being accused here have no way to not accept those monies. Public agencies advocate public school graduates use public funds for continuing education, but do not teach what not to do with those funds and punish any organization which does not accept those funds. Looks like it's the "public" at fault here.
I don't know how anyone would look at the cost and their future earning potential and decide that paying for a for-profit is a good idea. I know people who have gone the that Full Sail program and ended up 100+k in debt, and with nothing useful to show for it.
Education in this country is in a terrible, terrible state.
Since the job market doesn't necessarily need double the number of college grads it means that competition for the jobs that do need filling is fiercer. And that means that people who need to pay back loans for school don't necessarily have the ability to. A race to the bottom in terms of accepting a lower paying job ensues, and people are left with very little agency.
Sometimes it seems like the better-intentioned a social justice law is the worse it'll end up being years down the road.
http://www.mckinsey.com/insights/economic_studies/talent_ten...
If it's easy to graduate once you've been admitted, increasing the number of graduates isn't going to help alleviate the "shortage of college graduates" because the real shortage is in talent.
In other words, not so much "half of all defaults" but "at 4 times the rate."
As an engineer working in medical imaging this I loved!
When even state schools spend money on facilities, staff, and materials, not directly toward educating the student, they are for profit.
Further, as easy as it is to be offended by brand-new facilities, you'll find that 1) many are paid for by oustide grants and the money never could have gone towards reducing tuition, and 2) those that are paid for with students' money amount to pocket change per student.
A for-profit college educates students as cheaply as possible (in terms of cost to the institution, not price to the student) to maximize the amount of surplus the owners can pocket.
Furthermore a cheap college degree might be so inexpensive that the hit to your credit isn't worth the expense dodged. Banks can loan on cars worth as little as $5k even though their cost to repossess and auction it might approach the cost of the car. For small debts the shame factor can't be underestimated.
From this what can we conclude? Prior to the change in the law college had to be fairly cheap so that banks could make uncollateralized loans for people to go. Because students could only afford so much, colleges had to figure out how to deliver an education for that amount. If a college wanted to charge more, it had to pull risk out of the loan to the student so that a bank would issue it.
This is the fallacy of comparing the upper classes of one period with the masses of another. A far smaller fraction of people went to college in the century before 1976, and those who did go from lower-class origins often did so through direct scholarships like the GI bill. The college loan market was not very viable at this time. None other than Milton Friedman discusses the problem in his 1962 book Capitalism and Freedom. Actually, he proposes some form of legally undischargeable debt as a solution.
I've heard plenty of people talk about working their way through school by having a summer job to pay for room and board and tuition and that it was possible to do it that way, even if it was uncomfortable. That really sounds great but maybe a little bit too great: it's a good narrative about how things were better back in the olden days when things were still good and not fucked up. I WANT to believe it but I'm not sure that I should. And it's all anecdote, no data.
I did some searching for pricing and I found this: http://www.collegeview.com/admit/?p=1858 It looks like a decent summary. In 1960 the minimum wage was $1.00/hr and the cheapest tuition I'm seeing is $960 for the University of Texas. If you made minimum wage for three months of summer that's a total of 40 * 4 * 3 * $1 = $480 pre-tax. So definitely not enough to pay for a whole year of school from just the summer job. At an Ivy League school you're at about 1/4 of your yearly total.
Today if you work a minimum wage job for a whole summer you'd get 40 * 4 * 3 * $7.25 = $3480 (pre-tax of course) which wouldn't even pay for your tuition (nevermind room and board and other expenses, that's another $5k per year at least) at the University of Florida, arguably the best deal in college tuition in the last decade. Comparing it to an Ivy League these days, it's not the 25% it used to be but rather about 10% if you go to one of the cheaper schools.
There are a few things that have changed since back then:
* College tuition has gone up faster than anything else in the economy. Anything. The UC system was a great deal at $1500/yr, but back then you could go to Stanford for $13k or so. The increase has been driven mostly by easy money from student loans, but also by administrative bloat related to government dictates. Books have become an extortion racket - $150 for a stack of unbound pages?
* Almost 20 million illegal aliens have entered the country since I went to college, completely wiping out the low end of the job market. My 1986 summer job is now done by illegals in their late 20s, and they're making about $0.50 more per hour than I made 25 years ago. My old employer doesn't pay more because he doesn't have to.
* The rise of unpaid internships. You work a summer for free so there's a chance you can get a job when you graduate. I think this is another consequence of easy loan money. If you offered me (or my classmates) an unpaid internship we would have declined - we needed to get paid so we could afford to go to school in the fall. Between the low wages and easy loan money today you can almost see the wheels turning - "What the hell. It's not like a job at Burger King will make a dent in my debt."
A half-decade ago, Stanford waived tuition for students from families of income less than $100k [1]. Median household income in the country is roughly $57k.
[1] http://www.reuters.com/article/2008/02/21/us-education-stanf...
Where is the citation for the amount students pay hasn't gone up? College tuition was already past the "this math doesn't make sense" mark when I was in school a decade ago. One of my room mates couldn't borrow anymore money and had to drop out half way through. $90 textbooks back then are $150 now. And so on.
A few things about your calculations. First back then, unlike now, no college degree didn't mean automatic minimum wage job. Second, he worked while in school, not just over the summer. Third small scholarships back then actually made a difference. Today if you get the national merit scholarship for doing well on the PSATs, it's meaningless at $2000. Back then he got a $500 a year regents scholarship and it really helped.
So if you work 15 hours/week during the year and 40/week during the summer and take the winter break completely off that would be 40 * 4 * 3 + 15 * 4 * 8 = 1140 hours. If you manage to bring in $2.00/hr that would be enough to pay your way at Harvard.
That sounds doable for a person who isn't a genius and willing to sleep only three hours a night or otherwise make really big sacrifices. Truly exceptional people will always be able to bootstrap. But one thing I think is important is to make it possible for those who are talented but not insanely talented (I don't know what the percentages are) to get a degree and learn enough to be useful to society. It's remarkable that people really could (at least in some cases) do that without going into debt.
Harvard's tuition back then adjusted for inflation is around $18,700. Assuming 10 classes a year an using an average class size of 40 students (which is what Harvard reports), that's a budget of $74,800 per class. You should be able to run a college on that, even taking into account some overhead for libraries and such. Yet Harvard today charges more than twice that.
The issue is, after the most endowed schools ($/student), there is a steep drop where schools suddenly aren't able to provide the same opportunities for their low-income students, but still compete for students capable of paying in full. This leads to escalating costs, as schools construct nicer gyms, study areas and dorms, pricing out the mid-to-low income students.
Furthermore, you are letting them completely off the hook for exploding expenses. Check out the administrator to student ratio changes from 1960 to today. College payrolls are now stuffed to the gills with deanlings and deanlets with no educational purpose whatsoever.
http://ofr.harvard.edu/site/policies-issues/financial-aid/
So that seems to me to say that if a family is in the bottom half of average household income, Harvard is free.
I just don't think we should be using Harvard as an example of the high cost of a college education when it seems to me that they are committed to making it affordable for their students.
In other word the insurance covers the cost.
If that is the case, where is the debt?
1. US Healthcare is too expensive. Two weeks after I first came to the states, my wisdom teeth (all 4) started growing. I had to pull them out. That was a $2,000 bill and a good lesson to get insurance asap. If you get into a car accident and you don't have insurance, your bill might be about $25K. More if you need continuous care and more surgeries.
2. Doctors are doing unnecessary tests and operations. Sometimes, I feel like they just want you to test for every single disease with a similar symptom. What a joke.
3. Some patients are stupid. Why on earth do some people need to call ambulance for flu. Even if they don't have a ride, just find it, use a cab, or use a bus if you are that broke.
Common sense is like deodorant. People who need it most, never use it.
Probably because you would rightfully have a slam-dunk malpractice suit if they didn't test you for diseases with similar symptoms and missed a diagnosis.
But I agree, ortho/cosmetics is a different beast to deal with.
FWIW, I have no student loan debt so I'm relatively neutral on this.
With student debt its different, if you went to undergrad at MIT then did an MBA at Standford - you are probably looking at north of $100k in debt. If one year after college you defaulted and it was discharged, you would still retain the 'asset' (your education). You could go out the next day and get a nice job at google and continue to earn income from your asset. The bank has no recourse to prevent you from continuing to use the asset they loaned you money for. This is one of the main reasons that you can't discharge student loan debt. No one is going to come take your degree away from you if you don't pay.
I realize the loan in these cases is not directly from the university.
I went to Harvard, its just I lost the degree in bankruptcy, so they claim I didn't go. Just call my references (which are actually burner phones held by my brothers)
Interestingly higher ed already requires all bills to be paid to graduate... they don't care if you default on your credit card the week after graduation, but you aren't getting the diploma until the library fees and tuition are paid off by "someone, somehow". Once its the loan servicers problem, they don't care and you get your diploma. I vaguely recall having to get a slip from some different offices proving I owe no money to the school, in order to graduate, and threats they wouldn't provide transcripts to students in collections, etc.
I'm not saying the judgement / assumptions would be correct, but it's quite possible some employers would act this way all the same.
Therefore it's a big incentive to pay your money back.
Plus, if the potential employer checks your credit history and sees you defaulted on your student loan, they may make assumptions about your behavior or character, having a definite impact on their hiring decision.
Call it professional courtesy.
Regardless of the students' situation, that money going to get paid, come hell or high water.
Late billing fee: $10,000 Processing fee: $1,500 (Etc)
edit: My point in the post above was simply that _if_ it is possible on average for an 18 year old to have a 'good' credit rating, _then_ credit ratings are practically without meaning.
In carrying out its fiduciary duty the firm that issued the loan came to the conclusion that the person would be reasonably able to pay the loan back with interest. Of course, since the risk of default is off the table with student loans, why not hand out a bunch of money that will get paid back with some accrued interest before it is discharged, if it ever is at all?
In a world where fake private schools didn't accelerate the loan bubble, and one that probably treats student loans like any other debt, it would be a different story. Boils down to whether or not they think the prospect of their client finding gainful employment after school is worth taking on the risk of the client defaulting.
That, and there is virtually no way to accurately measure the default risk of those taking the loans.
It would be very interesting to live in a world where your choice of major affected your loan rate. For example, as a political science major you would not be nearly as employable as a computer science major, which would translate to more risk of default. This would ensure that only those who are serious about a political science degree would pursue it, and at a big picture level things would shift so that people would think about the real value of their education much more carefully.
Imagine a situation where you are looking at a list of majors, and next to each item there is a percentage score, which is the loan rate. For electrical engineering it might be 2.5%, whereas for art it might be 9%.
But then you would also have to consider the risk that someone who is not qualified for or interested in electrical engineering would most likely drop out of it. So the formula would also have to take into account the person's background. If they scored high on their SATs and Advanced Placement tests for math and engineering, the loan rate for EE might further go down to 2%. For those coming from a non-technical focus in high school, it might go up to 3.5%.
Hmm...
Just like car insurance when you first start driving. They don't know (or care) if you're a good driver so they just average beginner drivers and base the price around that average.
11 USC 523(a) Exceptions to discharge ... (8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for -- an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or an obligation to repay funds received as an educational benefit, scholarship, or stipend; or any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual;
Per http://www.moranlaw.net/student_loan_brunner.htm, "undue hardship" means '(1) that the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.'
If colleges raise prices, won't this make it more attractive/affordable for new colleges to open, thus increasing supply?
Furthermore the job market doesn't necessarily support the need for additional college grads. In a "normally functioning" (total bullshit I know but go with it for a second) job market high wages and high employment does two things:
1. Increases people's ability to pay for loans post-graduation
2. Reduces the average default risk
When that happens, interest rates for college loans go down and more people are able to go to college based on fundamentals: the job market will (with some lag factor) still be good when they graduate and thus loaning to them is a good idea. This is a "natural market function" which, though imperfect, tends to balance out the supply of college with ability to demand. I would estimate that college loans would tend to lag the job market by somewhere between 2 and 10 years depending on how agile a bank was to react to the job market. So you would have a period of heightened wages for at least 4 years as people worked their way through school and then potentially a period of lowered wages for a few years as people slowly figure out that the crazy high wages are gone.
But with these subsidies you get all the downside of the glut with none of the upside of the scarcity. It's not awesome.
Prior to Griggs v Duke Power employers could just give you an IQ test, and all the big ones did. If you wanted to work for IBM you could get a job even without a college degree if you did well on the IQ test. But with that single court ruling employers had to cast about for another way to rank applicants, and the most obvious solution was by college exclusivity.
So if you went to Harvard they want you. Not because you were likely to learn anything at Harvard you couldn't learn at State U. It's because they know you have to be pretty smart to get into Harvard as only one in about twenty applicants is actually accepted.
So Harvard (with the highest rejection ratio) can charge whatever it wants (and it's worth every penny), whereas schools that take everyone can't charge more than enough to keep the lights on.
It's hard to establish a new school. Parents will want to know "Is it a good school?" Since this is one of the biggest decisions in Junior's life, they're going to go conservative and try to get him into established colleges with solid reputations. Your new college has a chicken and egg problem - you can't get a lot of applicants unless you reject a lot of applicants.
Yes. Hence "bubble".
The government did everything in its power to funnel money into housing back from 1999 through 2005. If someone was against this, they were against people having homes. This resulted in a housing boom.
Today, the government gives out giant loans to students who will never be able to repay them. If you are against this program, you are "against people getting an education".
In the case of public schools, the evisceration of public subsidies has left them operating as public schools in name only. Even in my very liberal state, state support for colleges and universities was cut in half as a share of budgets over two decades. Most states fared worse. At the same time, medical insurance costs for faculty and staff have been increasing by ten percent per year on average, causing this expense to crowd out other necessary costs.
In the case of private schools, the rising cost of public schools has contributed at least as much to their ability to charge more. For profit schools seem to be able to get away with ridiculous claims, leaving graduates jobless and defaulting on large loans. However, they would not be able to justify their prices if public schools were too much cheaper.
That doesn't make sense. In the short term, we can hold the housing stock and income as fixed, and as the interest rate varies, the amount of capital available to buy homes varies as does the price. That isn't to say it is the primary effect -- income, net household formation and the housing stock are the other main determinants -- but the level of interest rates is important.
http://online.wsj.com/article/SB1000142412788732416520457902...?
"Politicians subsidize the purchase of a good or service, prices inevitably rise in response to this pumped-up demand, and then the pols blame the provider of the good or service for responding to the incentives the politicians created. Think housing finance and medical care."
...
"We've got a crisis in terms of college affordability and student debt," said Mr. Obama, without a trace of irony at the State University of New York at Buffalo. The same man who three years ago forced through a plan to add $1 trillion in student loans to the federal balance sheet over a decade said on Thursday, "Our economy can't afford the trillion dollars in outstanding student loan debt."
An awfully expensive $70B over ten years, I think.
The savings of $70B comes from eliminating a profit layer that was enjoyed by the banks.
The government insured the loans before and after the change in 2010. So the taxpayer was on the hook for losses. Now it is still on the hook for losses, but also benefits from profits.
The $70B is simply from cutting out the middleman.
Will it have been worth all this damage to prevent the eeeeeeviiiiil profiters? It really already wasn't, and the accounting for the evil of our current policy is only going to get worse.
Don't deal in the fuzzy-wuzzies of how wonderful education is in a perfect world. Deal with the world in front of you, the one on the news, the one generating a trillion dollars in crushing debt on those least able to pay it back. People are exploiting your willingness to hide in glib, pretty generalities.
So now we have : debt slavery where your debtor is actually the one making laws. This could be really good or really bad. Really good if it is decided that transferring the education debt to all taxpayers is deemed acceptable, really bad if the government gets into the business of debt collection from people with no assets (ie. actual slavery).
No one is ever forced to borrow any kind of student loan. Using language like "debt slavery" is really over the top
Maybe there was a lack of alternatives available to them, or at the very least they didn't themselves believed other good alternatives existed (the same as with student loans), but it still required them to agree to it.
It's Dean Baker's critique on coverage of this type from the Post. The most important thing to take from it is that the housing bubble popping turned $22 trillion of household wealth into $14 trillion. The sum of all student loans add up to around $1 trillion.
Banks getting out of an industry because they don't find it profitable anymore (since the government turned off the free guarantee taps) has nothing to do with cascading defaults due to excessive leverage and lack of regulation.
If there's a bubble out there, it's in Asset Backed Securities (ABS) like auto loans and credit card debt. And housing is currently looking like the bubble that wouldn't die.
The student loan market is now valued at $867 billion, less than 1/25th the size of the housing market at its bubble peak. Furthermore, all of it will not default and the defaults that do occur will be spread over many years.
Also, just wanted to say that Dean Baker is great, that's all.
[1] http://www.maguireassoc.com/services-challenges/optimize-net...
[2] http://collegeresults.org/search1b.aspx?institutionid=166027 (See the "Finance and Faculty" tab on the page comparing similar colleges for any college you are curious about.)
Maybe, just maybe, the root problem is our financial scheme for higher ed, in particular, the idea of foisting the cost on the student prior to enrollment (let alone graduation, or gainful employment). Say what you want about our K-12 system, but its costs haven't spiraled completely out of control. Nor have the costs of highly state-subsidized public universities in many other parts of the world. I don't think enough people are seriously considering the idea that we have shot ourselves in the feet by demanding that the government and private industry make a return on investment on a basic service that provided all sorts of positive externalities when people have access to it. We've encouraged colleges to compete with one another for market share.
Maybe the incentives that aren't working for us are a result of our cultural infatuation with winner-take-all competition.
And what's the viable alternative? Not going to college? The survivor's bias for people who that's worked out for is even worse!
Sure, people willingly sign these loan papers, but we should also be honest about the level of agency and information the average aspiring adult has.
Wouldn't it dissuade people from taking $50,000 loan for a communications degree?
As a previous (sadly I had to withdraw due to time and work commitments) UCSD student I can tell you that student per-quarter costs went up about 25% over the time I started and the time I left. During that period as well there were certainly no administrators begging to have their pay brought down, only calls to cut teachers, teaching hours, maintenance staff, etc.
During that same time period as well, there was a building boom on campus with no stopping in construction of many new campus housing projects (even some which have consistently NOT been anywhere near capacity), new administrative building and a few new campus buildings here and there (where they can fit them between all of the new administrative buildings and housing projects). Of course this was all going on during the period that UC regents were (and really continue to) say that the state was cutting far too much money and thus the reasoning for raising tuition year-over-year.
So, really I guess my question is: How much did/has money 'talking' in an election cycle contribute to the situation the entire student loan system now finds itself? I'm by far no conservative, but I can't help but personally see this as the public being sold out.
[1] http://www.opensecrets.org/pres08/contrib.php?cid=N00009638
These conspiracy theories are really interesting, especially in light of the facts.
[1] http://newscenter.berkeley.edu/2013/04/18/campus-announces-2...
(I wish I was joking...)
The majority of fault lies in the previous generation of parents, who both failed to vote out politicians supporting these policies and who pushed their kids into enslaving parts of their lives to lenders.
EDIT: nevermind, apparently both you and drcode are discussing hypotheticals only.
This way students would get a free higher education... at least those that make at least some actual studying.
As someone who really hasn't thought about it very much, I'd love for someone to expand on this. What's the expected fallout? In the housing bubble, many people lost the places where they lived. But it's not like someone can "take back" your education if you default on the loan, so what happens instead?
The fiction of student loans is tricky because under Bush they changed bankruptcy rules to exclude student debt. But fundamentally when banks are forced to write down bad student debt, their rosy asset picture becomes non-rosy. When that happens they are required by regulators to not lend. And this is ugly for the whole economy.
In 2008 we resolved the problem by having the US government find ways to lend tremendous amounts of money on very favorable terms, and then the Fed picked this up with a similar policy that they call quantitative easing. This creates lots of money in financial markets so that things like banks can continue to operate. The bigger long-term problem is how we'll ever exit the policy.
To give an idea how sensitive this situation is, a while ago Bernanke announced that if things continued to improve faster than expected, in a year the Fed would evaluate whether to exit QE 2 faster than originally planned. You can't come up with a milder statement that the policy might end. The markets went crazy. A few days later, Bernanke came out and said we won't be doing that after all, then markets calmed down.
There is no question, a student loan debt crisis will be responded to with more QE. The problem of exiting the mess will become bigger. Historically countries have exited this type of policy only after the crisis of a currency collapse. But so far the market players seem to be betting that they will get out of the USA before the other guy when the crisis hits, and in the meantime the USA looks safer than China and Europe.
However the financial economy is always a mess. And they are always finding another way to kick the can down the road. That will certainly happen again. And again. And again. Until it doesn't. Every time the doomsayers say, "We don't see how we can kick the can down the road again!" But we do. The dot com bust was resolved with easy interest policies that resulted in a housing boom that resulted in the financial crisis. That was resolved with QE.
Take your best guess as to whether we'll kick this can down the road as well...
Just ask the people who have been long-term unemployed since 2008 about that.
So instead of losing your home, you may never get it in the first place.
The consequences of defaulting on a student loan are also quite severe.
I am 25, and since my first serious job (I was 23) I've been in the government category for the most rich as possible in earning amount (the category is everyone in the top 5% of income... granted, there is still a GREAAAAT gap between the top and low of that... I reached the top 5% with 20k USD/year)
I don't own a vehicle (not even a bicycle), much less a living place.
I think if I sum all my possessions (literally, including my clothes, glasses, phone... without depreciation) and my debts, I am still negative.
According to my calculations, I will be able to buy my first apartment when I am about 35 years old, unless I move back with my parents and stop paying rent. Also I won't bother in buying a vehicle, unless it become really, really necessary (and then, I will buy a chinese QQ or J2)
When I think about that, it is really, really, really depressing and ridiculous.
- All these young people who can't afford homes, cars or kids will cause the economy to not grow as fast as it otherwise would.
- And if the economy is slow, fewer jobs will be created, keeping these young people poor even longer.
Of course, not everyone has parents that they can move in with, and those who don't have that safety net will suffer the most.
http://www.rollingstone.com/politics/news/ripping-off-young-...
Short version: The government makes money off student loans, and there is no defaulting on them (unless you die of course). There are no incentives to keep tuition costs in check because the lenders (government) are happy to put more money into the asset class. We're getting to the point where the price of education can't be made up with an eventual increased salary. The author considers this to be an unfair tax on the lower middle class and an eventual drain on the economy.
If profitable, that would imply that commenters calling loans a subsidy are simply incorrect.
If the banks did this and the student/graduate had to default, the bank would have to take a loss. The government isn't allowing default on the loans they themselves give the students, so they'll make sure they get their money back.
Government subsidies are there because the government knows that a kid who goes to college will be able to give a better return on it 'public' investment, since lifetime earnings for a college educated individual are about 50-100% higher than a high school one. This will make them pay more taxes etc.
The schools on the other hand are taking the subsidized college loans in the form of tuition and fees and using them not to increase educational standards, but rather, invest in extracurriculars, building etc. The government does not tie college loan financing to college performance at all, so effectively it just subsidizes the borrowing costs for school in the form of cheap college loans.
(shameless plug) I wrote a blog post about this if anyone is interested to read more:
2. In theory, colleges compete on cost as well as other factors. There exist private colleges and even for-profit private colleges (although the data shows us that for-profit private colleges often have the worst outcomes).
It's easy to blame government for problems. Easy, but not always correct.
Colleges, in a theoretical free market might compete on cost, but in real-life they actually are competing on providing amenities and extra curriculars, not in any way associated with how well kids are educated. College prices, inflation adjusted, have gone up by 120-130% in real terms, while median family income is stagnant. Most of the increase in Net revenues in colleges is NOT spent on paying educators since their wages and teacher/student ratios have been increasing linearly. The rise is mostly attributed to budgetary items for Other Employees, coaches adminstrators etc and large infrastructure funding.
Student loans cannot be discharged even if you declare bankruptcy - while home owners could walk away and hand the keys to the bank.
Student loans are guaranteed by the government - the issuers just file for compensation.
The sickening part is that once the lender gets paid in full for a non-performing loan they buy loan back from the government for 10% or so and then file a lien on any future earnings.
And there are indirect losses, too: Imagine the government started running a program to pay people $20K+/year (think grants + loans) not to work for four years, provided they paid some of it back at low, capped interest rates. Surely a lot of people would take the government up on that offer, and instead of being productive taxpayers, contributing to the economy and to the treasury, they'll sit around playing XBox. Maybe it turns out that the average college degree program is a better investment than this, even accounting for the lost GDP and tax revenue. But there's no way to be sure, since there's no market at work.
The indirect effects are MASSIVE BENEFITS for taxpayers, not losses. College graduates have lifetime income of $1M+ more than non-graduates, and this income is of course taxed at each individual's highest marginal rate. They have half the unemployment rate of non-graduates so they consume less unemployment and incur fewer other costs to government.
In-state public school has a lower sticker price, but have less non-loan need-based aid so students have to come up with a high percentage of the sticker price. The top private non-profit schools have higher sticker price, but provide a lot more non-loan need-based aid, so students have to pay a much lower percentage of the cost. At Princeton, for example, the average debt at graduation is only $5k.
http://www.nytimes.com/2011/09/29/nyregion/seton-hall-univer...
This is definitely a trend in private education pricing as sticker shock is a real problem for students considering private schools and the privates compete for the same students the publics do.
This assumes no need-based financial aid, and doesn't touch on housing, which is assumed to be 10-13k these days regardless of public or private.
Just about everything in undergraduate education is well established enough that you'll learn the same material anywhere. You'll find variation in the material covered (e.g. Catullus versus Ovid), but it's mostly window dressing on the same core concepts. By the time you get to a graduate level, it becomes important to pick the right institution to ensure that your personal area of research was well represented, but paying extra for undergrad is simply a waste of money.
How are you supposed to afford spending that much on a single child's schooling and still have enough to afford the rest of the family, retirement, insurance, mortgage payments, etc? Sure they could have planned better and saved for 20 years but the reality is that a very small percentage of people do that.
If that realization happens too quickly for too many student loans, then there might be a sudden crash. Doesn't look like it yet though.
There are so many things wrong with the idea of a "bubble" popping. People can't walk away from student loan debt, like they can walk away from real estate debt. Interest rates are expected to rise, but only slightly with the 90-day T-bill yield. Not the insane rates 20% rates that banks were hitting people with in the subprime crisis.
People may find diminishing returns for college vs the rising costs, but that isn't the same thing as banks suckering people in with ARMs and then using leverage to make huge speculations on CDO's that lost 90% of their value.
Here's a madeup example from the subprime crisis. Someone puts $0 down and buys a $500k home with a loan from the bank. The bank expects to make $500k in interest over the lifetime of the loan due to ballooning interest. Now, let's say variable interest rates from the loan kicks in, and the person can no longer make his monthly payments.
In the past, when the real estate market was good, he could just sell the house for $600k, and keep a profit. But, lets say now the price of the home dropped to $300k. There is no way you are going to expect someone who put $0 down on a home he bought 2 years ago to cover $200k in debt for a home he doesn't even own any more due to foreclosure. So, now, instead of having something worth $500k in profit, the bank owns something that is a $200k loss.
Banks lost over a trillion dollars worth of assets in a matter of weeks.
Look at what was happening for years before the crisis though. In those times, it was very likely that a home could increase in value from $500k to $600k in a few years. How was that happening? A lot of it was because people figured out that they could put $10k down, and do this to make $100k, or 10x their investment in a few years. The true speculators are the people who just bought real estate only because they thought the price would keep going up. This in turn drives up the price without being tied to any kind of intrinsic value.
You simply don't have that kind of pure speculation in the college loan industry because you can't just buy and sell college degrees.
Also, people aren't just going to declare bankruptcy from their student loans in the same way as the subprime crisis because they legally can't. Wages can be garnished from student loans, and it's extremely hard to have the debt erased due to bankruptcy.
The "bubble" scenario is sensational, because everyone sees a trillion dollars evaporate in a few weeks. Instead, in the case of student loans, I think that we may see something just as bad for the economy, but it will happen over years, not weeks.
In a lot of ways, I think that's why this problem may be worse, because it may be just as bad, but much harder to notice than the subprime crisis. Journalists think that the only sign of economic failure is when a "bubble" pops though, which just isn't true. Slowed growth over 20 years could be just as bad if not worse.
Along the same lines, there is no incentive or ability to buy an extra degree in Vegas, Phoenix, or Miami, just because prices are going up there.
The real damage done to the economy by the mortgage bubble wasn't all of the people who lost money on homes when prices collapse. The most damage was due to the effect it had on banks' balance sheets when their assets (the value of debt-backed securities) lost value, which meant they had to call loans and restrict credit to make up for the difference. In that sense, a bursting of the student loan "bubble" could also have damaging effects on the economy.
When there's a decrease in the loans going out, there's a decrease in the demand for education services causing a reduction in the quantity available.
Repossession isn't a necessary condition for something to be in a bubble. Pulling demand forward and using laws/regulations/programs to funnel money into certain parts of the economy is what causes bubbles.
If student loan debt were bankrupt-able, and the degree revoke-able, I can see how that might remove some current problems (not that it wouldn't introduce others).
Student loans are not excluded from discharge if excluding the debt would "impose an undue hardship on the debtor and the debtor's dependents".
So it only requires a small attitude change of judges for the bank's assumption that non-repayment is impossible to blow up. Given the attitude changes towards student debt that are occurring in the papers, can this really be that far behind ?
The point here is that banks are starting to get it. Just because you can't walk away from student loan debt doesn't mean you have to pay it. Sometimes the numbers just don't work out. The odds of someone with 400k in student loans from a PhD in Philosophy paying them off in a lifetime with their job is a barista are very low.
Student loans are so cheap that the marginal impact of such a burst really only stands to impact greater lifetime earning potential of two distinct groups of the population: pre-poppers and post.
While that's unfortunate for the pre's, it's hardly comparable to the economic divide that has grown between the educated and uneducated classes.
For example, say you go to top elite 4-year liberal arts college and receive a degree in gender studies dropping $40k a year. Is that really worth $160k + interest for you? If the perceived value of the degree is substantially lower than expected, you mostly likely wouldn't want to pay back the loan. Consider this sort of scenario for tens of thousands of people. Banks that were expected to get the money back will be left with tons of debters just defaulting on their debt. Principles lost.
This is exactly what's going on. They're making the bet that they'll be in demand later and able to pay off their loans. Just like buying a house and being able to make money from it later. After all, everyone had a rationale as to why the price of their house would increase just like they do about the job market turning around for people with a degree/diploma in X.
Part of the collateral for student loans is, technically, your economic freedom. It's easier for banks to assume you will pay the principal of your debts, when government is the acting collection agency. It's very difficult to escape garnished wages.
However, if something changes and people have a way to shed their student loan debts, I think the bubble will pop very quickly.
Is this a reasonable bet to make? What is the earning potential of someone with a college degree? Isn't it something like a $1M+ increase over one's lifetime?
WSJ had article on student debt recently, with lots of data. Median debt load was 18-19k USD [1]
If it were all via Federal Stafford loan, the interest rate would be 3.9%. If the payback period was 10 years, the monthly payment would be a whopping $191 per month.
[1] http://online.wsj.com/article/SB1000142412788732443200457830...
I hate to be the bearer of bad news, everettForth, but this isn't going to be true much longer. (Something has to give, and this is what's going to give, I predict.)
What's really happened is that a college degree has been transformed into a very expensive writ of indenture that is required to get a job. This undermines the fundamental value not only of college but of the job itself. Why go to college to get a good job if a good job does not actually pay off in the end. You don't actually earn anything from the good job-- you just maybe make a dent in the writ of indenture you had to purchase to get it.
That's horrible. It undermines the entire economy. It undermines the entire reason for participating in the economy.
The problem is not the fact that the debt can be wiped, the real concern is that for some people the debt will not be repaid at all and they can't do anything about it. That debt, whether refinanced ( http://www.nbcnews.com/business/obama-signs-student-loan-bil... ) or wiped out, will make banks lose money.
Buckle up.
Under the government's new program, PAY-E, your payment is capped at 10-15% of discretionary income and unpaid interest capitalization is capped at 10% above the original principal amount. Debt is forgiven after 20 years.
Basically, there is no way for private lenders to compete with these generous terms. For the moment, at least, the government's program is running solidly in the black (indeed, with a big profit margin).
It boggles the imagination that NYU charges something like $60,000 tuition per student per year on top of all its other sources of revenue.
http://statspotting.com/outstanding-student-loans-in-the-us-...
Employers pay big money to find employees. Students pay big money to get educated to get a job.
Hackers roll in with apps that allow students to do courses for free on the smartphone/tablet, sell the info of the students to employers, who then hire the students. Everyone wins. Hackers are proclaimed heros.
A free app.
The data points of the app users are sold to employers.
If you can show employers that your app truly tests useful abilities they would be lining up. The current education system fails at producing workers with the right skills and employers are always complaining abou this.
See, what is Khan Academy really lacking at this point? Is the hard part their website with youtube hosted videos? Are they really just jonesing for some mobile developers? Or is producing quality content with broad coverage and depth their bottleneck?
Making an app is the easy part. Education is not failing for want of an app. Certainly not for want of a gamified app.
But hey, I can't stop you. Knock yourself out. Hell, pitch it to YC; I hear they are doing non-profits now.
Khan academy is definitely not it. They teach traditional curriculum which is isn't useful to business.
The app is definitely isn't the easy part - it is basically the whole part. The current education system is a failure for 2 reasons
- unanalyzed teaching
- unmotivated students
Apps solve both problems, every user interaction recorded and analyzed, gamification.
You can turn it around even and starting hiring those students yourself and create your own megacorp with the best employees and make megabucks.
2) An app that teaches people things but doesn't have anything to teach them is worthless. Of course the software is the easy part...
If you really think a for-profit Khan Academy that teaches... nontraditional... curriculum, but doesn't actually have any content since you seem to be completely ignoring that problem... is what the world really needs, then pitch it to YC as a for-profit startup. I ain't stopping you...
I think your argument comes from the traditional 'liberal arts' education angle.
I'm coming more from vocational type place. More of a rentacoder/odesk done more comprehensively.
Anyway, adios
I'm just wondering how you think making an app would be the difficult part of teaching thermodynamics or fluid mechanics to people.
Same with the app. It needs to be excellent, something Steve Jobs would be proud of, and it will make dent in the universe.
This is big, heady, stuff, and we'll kill the ed business with it. I like nothing better than to see government jobs disappear.
http://www.popsci.com/gadgets/article/2012-11/teenage-gamers...
[1] http://www.npr.org/blogs/money/2013/09/09/219372252/the-most...
Or make the education free and a % of each graduate's future earnings (up to some max $ amount or limit it to 20 years after graduation) are paid back into the endowment to fund future students.
http://www.studyineurope.eu/tuition-fees
I didn't pay a single cent for my education...
In the community college here (i went for ESL) i saw a bunch of youngsters who go to the college and work simultaneously, and some workers at the local Starbucks go to the state school. My respect to them.
I consider myself reasonably motivated, graduated with almost perfect GPA and I still struggle to complete MOOCs. It's just too difficult to force yourself to study without outside pressure and peer support.