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"the psychological effect of borrowing from the government - I think people tend to feel safer doing this than borrowing from an obviously competitive private firm. If you read the article, the casual attitude of student debtors to defaulting on their loans shows this - the government has no teeth. The private firm goes bankrupt if it doesn't get a return on investment. "

All of the above is incorrect.

(a) Student loans in the US are mostly not from the government in the first place, they are from private investors or banks that the schools have made deals with. The USG role is guaranteeing them.

(b) Generally, in classical capitalism, firms will go bankrupt if they don't get adequate returns on investment - but this situation has been distorted by the government guarantees. They get reimbursed if the debtor defaults, and carry on. By exploiting this subsidy they make big profits, that's why they're in it.

(c) I don't know about student-loan-borrower attitudes, but their debt and enforcement of it are not casual. The GSLs are not dischargeable in bankruptcy, so they are basically a lifelong burden unless paid off. And defaulters are subject to wage garnishment and other onerous court judgments.

Thanks for the clarification, but it sounds like the net effect is exactly the same: bad loans are made, money is lost, the taxpayer is forced to subsidise the indiscriminate purchase of education.

As always with such schemes, there is an ongoing push to implement them in as complicated and opaque a fashion as possible, to try and hide the naked fact of what is going on. So no one will admit "we take money from taxpayers and make loans no sane private investor would ever consider," they'll just talk about FDCRP-approved rates this and Fannie Mae-that and fiduciary-backed iron bond multiplexing high-yield 7.5% rederived blahblahblah.

Same bullshit that happens when bank deposits are federally insured.

It seems to me that you have a-priori decided to whip a particular horse regardless of the context/relevance. Not arguing that particular horse should not be whipped, but its not the main horse in the race that is being discussed.

Sorry, I have no idea what you're talking about. I've simply been trying to show that these allegedly disconnected economic phenomena (government lending, high fees, high students loans, defaults, political pressure to drop interest rates) are actually all the result of a single misguided policy direction.

> (a) Student loans in the US are mostly not from the government in the first place, they are from private investors or banks that the schools have made deals with. The USG role is guaranteeing them.

Your information is several years out of date. Prior to July 2010, the bulk of student loans were made through the Federal Family Education Loan Program (FFELP) which were as you describe. But that program was eliminated in the Health Care and Education Reconciliation Act of 2010. Since then all Stafford, Perkins, and PLUS loans (i.e. the lion's share of all student loans) are made directly by the federal government.

Only non-program student loans are no made by private banks, and they are not government guaranteed -- though they are still non-dischargeable in bankruptcy. Such loans only accounted for only around 5% of the total borrowed last year.

In addition, many of the loans issued privately prior to July 2010 made their way into the government's hands during the financial crisis, so that of all outstanding student loan debt around 85% of it is currently held by the government.

Refs: http://www.asa.org/policy/resources/stats/ http://febp.newamerica.net/background-analysis/federal-stude... http://files.consumerfinance.gov/f/201207_cfpb_Reports_Priva...

I agree with what you said about the toxic market and the poisonous blend of state and capitalism - I'm a moderate libertarian, but the evidence overwhelmingly indicates if you're not going to have genuine capitalism in a sector, you are actually better off with honest socialism like we have in Europe than with pretend capitalism which gives you the worst of both worlds.

I must, however, take issue with your last sentence. That is, I agree education has benefits, but the current school/college system is hardly at all about education and mostly about potlatch: burning away some of the best years of your life in an attempt to obtain relative status. Sure, a college degree might improve your chances of getting a good job, but in most occupations that only means you got the job at someone else's expense; it's a negative sum game.

Proposed practical solution: outside fields like law and medicine (where college actually provides necessary training, albeit in a very inefficient way), make it illegal for hiring to discriminate on the basis of college degree.

You could also tax degrees: http://econlog.econlib.org/archives/2012/09/degree_pollutio....

If we were to combine this and the gp's system, won't we get into a situation where it is best to burn your degrees and just claim you know phd's worth of stuff? And then sue if someone with a degree got the job.

I have no idea what you're talking about. You can't analyze the current situation while ignoring the past and the changes (privatization) that have happened.

Tuitions went up in the US because the govt has progressively withdrawn subsidies.

Student loans amounts grew to match. Also, student loan writing was privatized, and collections have been given real teeth.

I work in higher ed at a "public" university, which is quickly becoming a private institution, meaning that the admin is planning to be 100% tuition supported within a few years. So now we're "competing" for the best (highest tuition paying) students.

This is exactly the kind of bubble (price inflation running ahead of real value) that occurs when public goods are privatized.

> This is exactly the kind of bubble (price inflation running ahead of real value) that occurs when public goods are privatized.

What public goods are being privatized? Student loans? Universities?

Diploma Mills like University of Phoenix and a million other clones started flourishing as gov student loans became widely available. That is what you're competing with.

> And again, because humans and humans, colleges, which in America have little government oversight as to pricing, raise their pricing. Why? Because people will still pay it. For whatever reason, colleges are able to bank on their prestige and identity, on the promise of access to important social circles, and so pure pressure for price is diluted

Harvard could double its price, and still have no trouble filling every available seat. Same goes for the rest of the Ivy League, and also MIT, Stanford, Caltech, and other top non-public schools. How do your theories explain their costs being so much lower than what the market would bear?

Furthermore, these schools have been increasingly replacing loans with grants. Stanford has gone so far as to waive tuition for students whose families have income under $100k, and to also waive room and board for those whose families make under $60k. If you theories were correct, wouldn't Stanford be telling those students to get loans? That would make more money for Stanford.

Top tier institution get a significant amount of their funding from alumni donations. Their motivation is to identify top tier students, provide them with a network of other top tier students, who when they graduate will become leaders in their respective fields.

Many of these top tier universities have endowments large enough that they don't need to collect tuition from the students. In fact, many of these universities allow free or reduced tuitions for low income students. (http://www.admissionsconsultants.com/college/ivy_league_fina...)

Here is the list of endowment per student: http://www.statisticbrain.com/college-endowment-rankings/

Here's the top 5 (per student) University Endowment / Student Endowment Total Enrollment

1 Princeton University $1,857,040 $14.05 billion 7,567

2 Yale University $1,436,384 $16.65 billion 11,593

3 Harvard University $1,304,492 $27.56 billion 21,125

4 Franklin W. Olin College of Engineering $1,096,595 $335.6 million 306

5 Pomona College $942,490 $1.46 billion 1,548

The motivation for alumni to contribute to the endowment after graduation is that the value of their degree is correlated to the ranking/reputation of the university. By contributing to the university, you not only help the university by help yourself.

So the economics for top tier universities are not similar to the rest of the colleges.

> How do your theories explain their costs being so much lower than what the market would bear?

All those schools could surely fill their seats entirely if they doubled price tomorrow. But there would be a social backlash. They still consistently raise prices faster than inflation.

How many of Stanford's class of 2018 qualifies for that free room-and-board because the families are in the bottom half of families? Since financial aid is just price-discrimination, Stanford isn't leaving that much money on the table.

Universities are run by people driven by a mixture of economic and ideological goals. I'm not saying they're purely in it for the money. I'm sure there are a lot of people involved who are genuinely passionate and excited about education.

But most people have a hard time saying no to a fancier car, house, and more holidays.

Alternatively, if you can get as much money out of your rich students/the government as possible, that's more money for grants for superstars from poor backgrounds.

Charles W. Calomiris and Stephen Haber made a similar point in a recent EconTalk interview discussing their book Fragile by Design. When the US government wants to promote a populist cause (college, home ownership, farms), it is easier to do so off balance sheet by reducing interest rates rather than giving a straightforward subsidy. Thus, we trade economic risk for a reduced federal deficit.

http://www.econtalk.org/archives/2014/02/calomiris_and_h.htm...

> the government takes risks with the taxpayers' money that private lendors would not take with their own

> Because as a country, you shoulder the cost - through your government's wasteful allocation of capital.

The US Government made $41.3 billion in profit on student loans last year.

http://www.usatoday.com/story/news/nation/2014/02/10/federal...

Mmmhmm. Several problems:

1) Is that the most money they could have made with these loans? Are they getting a market return on investment? If not, then they're wasting the country's money. It doesn't matter if it's still "profitable." A lot of shit investments still make money - just less than they could have if they were better invested.

2) Are the loans profitable at market rates? Then why have students taken on seemingly such high debtloads? Ah, because everyone knows that with governments, unlike private lendors, you get this:

>"I think they should break even, but it's just wrong that they are making money on it."

>"This is obscene. The government should not be making $66 billion in profits off the backs of our students,"

>Warren and eight other U.S. senators committed to wring government profits out of student loans and address the $1.2 trillion in outstanding student loan debt they say is crushing families and putting a strain on the economy.

>"It's time to end the practice of profiting from young people who are trying to get an education and refinance existing loans."

Great, look forward to any at-market performance of your loans being shredded through political pressure. Another way of saying that your government just threw away your money.

Wow, talk about moving the goalposts.

If you think that, I think you didn't read both of my posts carefully enough.

First I argued that the government was making bad loans. The respondent replied that they were making profit (implying they were good loans.) Then I noted that that doesn't necessarily mean the government made the most profit possible with the loans - I didn't say that was definite, just possible.

And then I showed how political pressure is mounting for even this meagre profit to be slashed to cost price. Because that's the great thing about borrowing from the government. If enough people do it, you can bank on political pressure to hamstring any honest attempt to get a market return. So you wind up with a distorted allocation of capital to this market (student loans.)

PS. If anyone remembers, this is exact same mistake which drove the 2008 recession - the American government's junk home loan program. Exact same high ideals - help people get into homes! - exact same result - people went for bigger homes than they would have otherwise - savvy hedge fund managers smelled the free money and pounced. And we all know how that turned out.

PPS. If you're interested, check out: http://mises.org/books/economics_in_one_lesson_hazlitt.pdf (pages 25-32).

That is not at all what drove what happened in 2007-2008. I suggest you read The Big Short by Michael Lewis.

If anyone in the private sector used the type of accounting that the government uses for loans, people would be lead away in handcuffs. Here's the somewhat understated footnote in the CBO report that underlies that news article.

"CBO’s calculations of subsidy costs for student loans follow the procedures specified in the Federal Credit Reform Act of 1990 (FCRA). Under FCRA, the discounted present value of expected income from federal student loans made during the 2014–2024 period is projected to exceed the discounted present value of the government’s costs. (Present value is a single number that expresses a flow of current and future income or payments in terms of an equivalent lump sum received or paid today; the present value depends on the rate of interest—known as the discount rate—that is used to translate future cash flows into current dollars.) Credit programs that produce net income rather than net outlays are said to have “negative subsidy rates,” which result in negative outlays. The original subsidy calculation for a set of loans or loan guarantees may be increased or decreased by a “credit subsidy reestimate” in subsequent years, on the basis of updated valuations of the present-value costs of the cash flows associated with the outstanding loans and loan guarantees.

FCRA accounting, however, does not consider some costs borne by the government. In particular, it omits the risk taxpayers face because federal receipts from interest and principal payments on student loans tend to be low when economic and financial conditions are poor and resources therefore are more valuable.

Fair-value accounting methods account for such risk and, as a result, the program’s savings are less (or its costs are greater) under fair-value accounting than they are under FCRA’s rules."

On page 63 of: http://www.cbo.gov/sites/default/files/cbofiles/attachments/...

See also: http://www.cbo.gov/sites/default/files/cbofiles/attachments/... (Fair Value Accounting for for Federal Credit Programs) and http://www.cbo.gov/sites/default/files/cbofiles/attachments/... (Fair-Value Estimates of the Cost of Federal Credit Programs in 2013)

Yes. People like Thomas Sowell have been arguing that endlessly. I dont think there are any "two way" of understanding debt crisis than this one. But Omaba and the left wingers have their own agenda to push.

> government that offers discount loans - i.e. loans with poor prospects/low interests rates - so that there is a higher allocation of capital to education than would occur in a pure private lending market

This is not nearly the full extent of the problem, just look at the housing market. Through credit, banks have been able to completely erode the concept of ownership and turn it into just another form of renting (except for those rare few with fuck-you money that we all dream of being)

1. Every loan is subsidized by virtue of any bank being able to effectively conjure money out of thin air. Giving out a loans would normally affect the backing of the depositor's accounts, but they have absolutely no concern due to FDIC insurance. So the only checks on how much a bank will loan out are the reserve requirement, and how accurately their own accounting model reflects what could go wrong (eg a massive drop in housing prices making all of that on-paper "collateral" worth less).

2. Overly strong enforcement of collateral, through both modern tracking technologies and a government that facilitates efficient repossession of property as if the debtor does not actually own it.

3. AFAIK student loan debt is not even discharageable in bankruptcy. (It is amazingly automatically discharged at time of death, but presumably private creditors are paid by the government when this happens, yet another subsidy).

4. The ridiculous overemphasis on credit scores, and how people are indoctrinated to constantly worry about them, and believe they will fail at life if they do not suck up to the rating companies.

5. People have been led to believe that failing to pay back a (good-faith-taken) loan is immoral, and that debts are absolute. Bankruptcy has been made to seem like a game-over death-equivalent where you've fallen off the path of a respectable life.

The systematic overemphasis on credit over assets has made it so that most people have a high monthly burn rate. Of course they take on more debt on non-capital expenses like new cars and further the cycle - they're no longer in control of their life, so they might as well enjoy what they can. Which then makes it so they always have to be working a full time job (and squirreling away a tiny amount with the idea of maybe not having to work when they're old and achy).

But this is happening concurrently with massive ongoing efficiency gains, so many of these jobs actually no longer need to be done! Due to a wider advertising/logistics reach, there are fewer market winners, thus less competition so companies have more surplus resources to employ these unnecessary people, who just end up being a detriment to the functioning of the organization. So with the current trends, we've got a future where robots are producing everything, but all the humans are essentially doing busywork (while completely stressed out as they believe they're not) just for access to the basic necessities of life.

By the time we reform government lending to "fix" this, education will already be disrupted with MOOCs and other internet tools. I am talking about 5-10 years from now.

The problem isn't with fields like comp sci or history where people don't need a degree to work as professionals. The problem is with institutions with guilds like like American Bar Association and American Medical Association. You need a license to practice, and almost everyone only gets that after spending over $100,000 on accredited schools. (Are there exceptions?)

Soooo ... the price of education in every OTHER field will go down, but not med schools or law schools or other schools which prepare you for licensing.

I am a firm believer that basic medical insurance and education should be collectively bargained by the government. And we do - most libertarians and republican fiscal conservatives are clamoring for vouchers over public schools. But vouchers are the same kind of sigle payer system they find so distatesful in medical insurance. It's really funny, really! American political views, like many others, are influenced more by media rhetoric and culture than logic.

Basic education and medical safety nets are something everyone in civilized society has come to expect. I think this should extend to basic courses online such as MOOCs on history and other "core" curricula. The government should switch from subsidizing community colleges with professors teaching 50 students at a time and slowly shift to subsidizing online universities and MOOC initiatives. Colleges subsidized by the government should be required to invert their classroom and prepare students to learn online, instead of spending so much $$ on traditional formats from 100 years ago.

On the other hand how many doctors and lawyers do we need? We don't know. The market needs to determine this. If the government subsidizes THESE professions, it will distort the market.

"The whole country just gave a shitload of money for nothing to university administrators and contractors."

Probably not. It is entirely possible that the shitload of money did improve standards of education and did benefit students, just not proportionally to the actual amount of money spent.

I get what you're saying. But, in a market-based system, where universities are highly profitable, we would expect that there would be an enormous influx of capital in to create more universities. But, we don't see that. There are very few new entrants into the university education space.

Because it's easier to compete with pre-existing universities. Better to spend $100 million on new facilities at an old university than $1 billion building one from scratch.

You sir are 100% correct.

tl;dr - The better solution is probably no public loans or grants whatsoever.

the US government issues student loans? really?

EDIT - sorry, just checked it out, and yes it does. incredible :D this is it's way of supporting college education, by making money off of it?