Why The Student Loan Market Is Insane | Hacker News Reader

Why The Student Loan Market Is Insane

businessweek.com

50 pointstokenadult54 comments

Parts of this article bother me.

Let's say that banks could set rates based on risk and this did force lower quality colleges to reduce their tuition. Those colleges would bring in less revenue and program quality would likely suffer, possibly resulting in a feedback loop. Meanwhile, ivy league universities that are funded primarily by endowments would be able to raise their tuition without burdening their students, who would be able to afford larger loans given that they would be paying lower interest rates. In short, rich schools get negligibly richer while poor schools get significantly poorer. More importantly, Ivy league program quality would not improve significantly while lower tier college programs would spiral downwards.

If the goal is to promote quality education, the current system lets ivy league students subsidy lower tier college students to some extent. It makes more tuition dollars available to institutions that depend entirely on tuition at the price of restricting tuition dollars available to institutions that are less reliant on them. The status quo has significant advantages over what this article proposes. Higher default-rates are a problem, but the lesser of several evils (unless you happen to be a banker).

North of the border, university tuition is subsidied by provincial governments and regulated by them as well. It varies from province to province, but average tuition in Canada is far lower than it is in the U.S.. In most provinces, tuition is still expensive enough to be considered an investment, but cheap enough that thrifty living, summer jobs, and a minor scholarship or two can see you through undergrad without debt. It's a different approach that's worth considering.

College tuition has been rising much faster than inflation for probably 20 years now. That together with your example of Canada shows that it's still quite possible to offer a good education at a lower price.

If you want to help the poorer schools out, it's probably better to just give them money. It seems probable to me that the political desire to give every student a full loan to any college (for equality!) is one of two or three primary causes of tuition (and university spending and such) going crazy.

College tuition has been rising much faster than inflation for probably 20 years now.

Actually, not really. The average price students actually pay has only increased $320 in the last 12 years (from $12650 to $12970). That probably doesn't even cover inflation.

What has been rising much faster is the sticker price, but few students actually pay that.

http://www.npr.org/blogs/money/2012/05/11/152499671/figuring...

http://www.npr.org/blogs/money/2012/05/22/153316565/the-pric...

And yet in much of Europe (or at least where I'm from), colleges where you pay tuition are considered substandard whereas colleges without tuition are considered high quality.

Mostly to do with the expectation that if you pay tuition they will make bloody certain you get that degree, whereas colleges without tuition fail some 50% of their students.

Hell, Universities don't even want to accept tuition-based colleges under their umbrella because the quality just isn't there.

This just seems bizarre to me. How can state funded schools compete for good professors with rich private schools?

Professors in state funded schools get enough free time to run businesses on the side. They also get access to grant money. Also there's the prestige involved with being part of a University with 100+ years of tradition versus a college with 20 years of tradition at best.

In Germany the "rich" private schools are almost exclusively business schools. So it's only an option for you, if you're a professor of economics or finance, not if you're a physicist or a philosopher.

Well, I think there is one highly esteemed journalism school (not a university, but run by large media companies) and a pretty good law school.

(Interestingly enough all those "rich" private business schools here fail after a few years because they run out of money -- not without taking quite a bit of taxpayer's money trying to save them.)

The private schools don't care about having good academics, just about making money. Good professors want to be associated with the trusted and traditional publicly funded universities.

Excactly, "clients" would complain if getting a degree was too hard.

Nobody becomes a professor for the money.

Except those who want money and see being a professor as the means and not the purpose.

And those are usually VERY bad professors.

I didn't become a software engineer for the money, either. But if someone offered me twice the money to do the same thing, I'd move.

Sure, but it's not clear you'd be doing exactly the same thing. I imagine teaching in an institution that's trying to retain its students so that they can suck more money out of them vs teaching in an institution that has that as less of a concern could be quite different.

Same here in Poland. Only the free universities are the good ones. Any paid-for private university is immediately considered worse and is very unlikely to result in a good job. All top 100 universities in the country are completely free.

And like the commenter above said - private universities will push through 90% of their students, so the degrees they get are worth close to nothing,no matter how much they paid. Meanwhile, the most prestigious schools in the country lose over 50% of the students in the first year because requirements are so high,and because they are not afraid of letting people go(they are not paying, so they are not entitled to anything). Out of 200 people signing up for an engineering course,only 20-30 people will actually graduate(and those engineers are sought after by every company in the country,because they are guaranteed to be good).

oh you must be joking, i'm graduating from top1 polish university and even the professors are saying the quality of education is piss poor -but well whan can you expect when the TA's are getting paid around 1500 zloty (500$) and the professors are grabbing ~4000zloty (a bit more than 1000$). But there are parts in which you are right - the graduation rate is 30% and the quality of education in paid unis is even worse. And no we're not sought after in the country because we tend to leave it.

The problem with leaving the country is that your very good degree is now almost worthless. I got mine (from a good technical uni) issued in English, I even wrote my thesis in English. Not a single employer wanted to look at it. Yet, I earn the same as my colleague with a PhD from a local uni. Turns out no one cares about degrees in software engineering. Maybe it's different in your industry.

Software engineering is probably one of the specialties better suited for an apprenticeship-style program rather than a degree-based one.

Yeah. I got my job in the games industry as an intern programmer before even graduating. When I finally did graduate, they were like "oh , cool", and that's it. I guess that even if I dropped out of uni they wouldn't care - I was doing my job and that's what was important.

Nah i'm in Computer Science aswell, although i'm planning to hit data science instead of software engineering. As for the degree i'm mostly doing it in case i'd like to go and do a PhD.

While free universities are the default and fairly good quality in Poland, your post has some mistakes:

- there's no top 100, since only 83 universities qualify to even be included in the ranking

- place 15 in 2013: Akademia Leona Koźmińskiego - not free

- place 43 in 2013: PJWSTK - not free, costs around $330 / semester

- It's not uncommon to fail exams at private universities, because you pay extra to retake them. Same as in "free" ones (they're only free as long as you don't fail anything, or don't want to continue)

source: http://www.perspektywy.pl/portal/index.php?option=com_conten...

Because, for one thing, the private schools aren't richer. And for another, the best teachers in advanced and specialized subject are academic researchers who prefer proven institutions over newer, profit-oriented institutions.

Running private schools is difficult, and I know of several cases where German private schools are causing all sorts of grief to paying students.

In Ireland, for instance, the rich third level institutions are the state ones; they get reasonable funding from the state, they have donations, they have intellectual property license fees, and so forth. The private ones are mostly targeted at people who can't get into their preferred course at a proper university (the private ones are normally not universities themselves), so they're smallish, and addressing a small market. In particular, they typically do no research.

Same with Japan. The national universities are much cheaper than private universities, and are held in much higher regard.

#1~6 are all national universities, and 8 out of the top 10 are national.

http://www.uscollegeranking.org/japan/top-japanese-universit...

This is an interesting difference to bring up. I would trace the push for high graduation rates in the US to its inclusion as a parameter in the canonical US News college ranking equations. The oft-stated reasoning is that a top-flight college that allows even 10% of its students to leave without a degree in 5-years is failing them somehow.

To some extent, this is true -- I have personally seen brilliant friends drop out of a stressful college when clearly the university was not serving their reasonable needs.

Perhaps facing a crisis is what low-quality colleges need. The current system is a failure. It doesn't make sense that in an age where so many top-end study materials are available so ubiquitously, easily, and much cheaper than ever (even freely!), getting a diploma has become such an onerous undertaking, and that the accompanying tuition is proving to be increasingly inadequate to prepare its graduates for a cutthroat job market.

Throwing more money at the problem isn't going to solve anything when we don't even know what the hell the system is doing with all the cash funnelled into it in the first place.

Much of the cash is being funneled into administrator salaries and lucrative construction/service contracts.

I doubt the feedback loop would be very severe, simply because most tuition is not used to pay for faculty. Instead, most goes to the ever-increasing army of administrators whose actual responsibilities are harder and harder to pin down. The more likely scenario is that colleges would be required to trim the fat.

You are right. This is exactly how a free market works. A bad school starts losing money and either changes or closes. If the Government insured or backed all the loans, bad schools have no market incentive to change.

Random aside: I was under the impression that very few schools were funded by endowments in any significant way. Harvard was a big exception to that rule, which hit them really hard in 2008. They had a team of high profile Wall Street traders who did a pretty good job raising their endowment to the point where it funded at least a third of their operations. With this newfound wealth, Harvard started a whole lot of construction projects which were then cut short in 2008. Another response to the financial crisis: Harvard stopped offering their students free coffee.

> North of the border, university tuition is subsidied by provincial governments and regulated by them as well. It varies from province to province, but average tuition in Canada is far lower than it is in the U.S..

One thing that often goes unmentioned is that public universities in the United States are subsidized by state governments. In fact, the rapid fall in state subsidies is one major reason for rising tuition costs. Most states also fairly strictly regulate public universities; you'll probably find there's something along the lines of a Commission or Board of Trustees appointed by the state governor to oversee and regulate universities. The difference, of course, is the degree, kind, and aims of our subsidies and regulation.

Furthermore, most every public university offers free tuition if the in-state student scores sufficiently high on the ACT or SAT. I think these factors are important when comparing the US system to other countries, as is likely to happen in this thread.

Is this surprising to anyone, structurally it is exactly the same as the mortgage issue in 2009 with Freddie and Fannie. The government finances the lending of money (by absorbing the risk) and gives banks money at a few percent which they loan out at 5 - 6% or more. You combine that with for profit universities which have discovered that the bank and their interests are aligned, they charge what ever they want for tuition, the banks make sure the students can get that in the form of guaranteed loans and non-dismissable loans, and the students play their part by putting themselves into indentured servitude. There is no other way for this to play out.

I've written my congress critters and suggested they notify the banks that they are going to make loans dischargable in bankruptcy in 4 years, they are going to change the guarantee to be 60 cents to the dollar. Its going to get very very painful.

That's not how the system works anymore. FFEL which was the government guaranteed but bank issued student loans was ended in 2010. Now almost all student loans are made directly by the government (Stafford, PLUS, & Perkins), with a small rump private student loan industry. Those loans are non-dischargeable but not government guaranteed.

If this had been an actual article rather than a puff piece for SoFi, presumably that would have been made that a lot clearer.

Translation: they're government guaranteed by making the students seel themselves into loan slavery instead of by taxpayer money.

Note the evolution of public finances since this started : expenses increased.

Same thing will happen : government will bow to public pressure to make these things dischargeable, and suddenly the loans aren't worth their interest rate anymore. The government's companies panic and try to get back their principal.

Why ? Because these companies weren't financed by the government, in true American style they loan on the public market, then reloan to the students. Right now they're rated AAA of course, and loan at very low interest to people who probably aren't even worth BBB rating. And they roll over debt. As soon as anyone finds a way to discharge large amounts of student loan debts, there's more than a trillion dollar of loans that go from AAA to < BBB. Then at the end of the month, these loans need to be rolled over ...

There are no seperate bond issues that back federal lending to students. They are funded out of general obligation debt (i.e. treasuries). Despite being warned over and over again that bond vigilantes are just around the corner, for the better part of a decade now investors have been willing to take near zero interest on them. There's no reason to believe that a few hundred billion in lost repayment over 10-30 years, would move the needle at all.

That's actually true. Greece demonstrated what happens after a default, and then Cyprus did. In both cases it didn't prevent them from reissuing bonds and selling out.

So kids that can't afford/qualify for a top school would also face much higher student loan interest rates. Humm... that doesn't seem that much different from "tax the poor" style of economics.

Perhaps schools with a lower default rate should get a higher interest rate... the banks are leaving money on the table. Students attending schools with a higher default rate should get the lowest rate and more government support (grants/bursaries/scholarships).

Or perhaps the student loan "industry" should not be focused on how to make the most money from students. It should be focused on higher graduation rates, higher paying employment for graduates, and perhaps even employment in strategic fields (i.e. increase the amount of loans available for engineering, compsci, whatever fields will be important in 10 to 20 years).

And private industry (aka the banks) should not be in the business of student loans at all. It should be 100% government funded and run, with the goal of being a non-profit. It's hard for me to see any added value that private industry brings to the table for it's "share of the profits" (do they help sell a student on getting a loan? is servicing/tracking a loan so complex that the gov't couldn't easily run a loan servicing application?).

Profit is the incorrect incentive for student loans (again it should be graduation rates, higher paying employment, perhaps even employment in strategic fields).

"(i.e. increase the amount of loans available for engineering, compsci, whatever fields will be important in 10 to 20 years)."

If fed govt tries to do this, it's "meddling in the market" (or "distorting the market"). If a private co does this, it's smart/fwd thinking. ?

Tuition rates don't reflect the cost or even the value of the education, in many senses of the word "value", but rather they have a strategic aspect to them which justifies the high rates.

Tuition rates are essentially "costly signals". Those who have a degree are so sure of themselves, and had other people believing in them so strongly, that they were able to finance even the highest cost. This system both guarantees the elite students go to elite schools and that employers can sort applicants by school and degree.

Problem is, this kind of equilibrium in the modern economical world tends to blow up in the faces of the "players" at some point.

The missing link is insurance or a hedge with buyers/students opting for protection from the schools product or service if not delivered in spirit or letter of its premised promise (aka marriage of warranty/collision-comprehensive). Secondly insurance or hedge against themselves as students/buyers for when life happens or they otherwise screw up delaying, discontinuing, rerouting their pursuit (liability).

The fix for one sided finance is to add a second dimension in an equal and opposite direction.

I think an important step to take would be allowing lenders to discriminate based on students' course of study, considering the massive effect it has on students' ability to pay back their debt. Such a change would, all other things being equal, reduce interest rates for STEM degrees and increase those for arts, thus potentially increasing the number of STEM students to the benefit of the wider economy.

It should be in the public (government) interest to have Young adults date start and thus complete their degrees as early as possible in life.

It's also presumably in the public interest that as many as possible are included in the pool eligible for qualified jobs (you want the top students to be doctors, not the children of rich parents).

Social mobility is also a factor, if university studies are expensive that will severely limit social mobility.

The conclusion is this: higher education should be free, and governments should not only ensure that it is, but that the free education holds at least the same quality as non-free (perhaps surprisingly this is already the case in many countries with free higher education).

Even without tuition fees, housing, food and books are expensive, so grants or cheap loans are still necessary.

The solution in Sweden and many similar countries is to have state guaranteed (I.e subsidized) loans where there is no private entity wanting a premium for the risk of lending money. The result is that anyone can afford taking loans to study, and it usually pays off very quickly.

I would love to know when this "why"-titles fashion finaly ends.

I like it. It sets out a format that I think works well. 'Why' means 'This article is going to argue that xyz'

Much better than the 'is' titles which usually mean 'This article is going to ramble vaguely about xyz and avoid even attempting to answer the question in the title (even though the answer is obviously no)'

To me it seems most of the times like the author had no idea how to make up a title that would describe the text in one sentence. It becomes even worse if the answer to the question is not really there in the end.

Better than Gawker style: "The finance industry decided to screw over the nation's university students. You won't believe what happened next!"

Hehe yes there are ways to make it worse ;)

Gee cry me a river:

  'As a result, “the government has made it difficult for banks to price to default rates,” says Mike Cagney, founder of Social Finance, a socially based student lending operation known informally as SoFi. “By accepting FDIC insurance, banks lose pricing flexibility and can’t charge interest rates commensurate with the quality of schools—and default rates vary widely by schools.”'

How about the banks just get out of the student loan business?

Banks are make shitloads on the student loan program: all loans that default are insured.

The meat of the article is about the follow on effects from that. Higher default should mean higher interest rates is a higher cost which would push down enrollment in those underperforming schools (which also underperform for students) and/or push the the school's price down. To the extent that loans are insured, the banks profits aren't really affected by incorrectly priced risk.

I'm very skeptical of free market solutions to higher education affordability issues. I think it's nonsense. But, screaming your slogan (fuck banks!) at a sentence from an article making a point about a different point of view is basically youtube comments.

The "meat" of the article is PR hamburger for SoFi.

(Not that SoFi aren't doing something genuinely interesting. But this is a straight-up advertisement. I'd bet a nickel that SoFi's agency even made the graphs for it.)

Only if Mr. Obama would stay out of education market half the problems would get solved automatically.

Few NBA players make million dollars a year. But that does not mean if government provides cheaper loans for basketball training it would produce more millionaires or even increase overall quality living.

If government meddles in education, forces banks to give cheaper loans it only means one thing. A big "Student Loan Bubble".

Half the problems would get solved by the President staying out of it? Why were they problems at all before he started pushing for the reforms, then?

So the world has not solved any problems unless government wastes taxpayers money on solving them ?

The President was staying out of it. There are now reform proposals to fix issues. You argue that if he'd stay out of it - as he was - that the issues would go away, so why were they there in the first place prior to him getting involved?

He was not. He says everyone should afford a college degree. Nothing wrong with that. He wants to spend someone else's money to make it affordable which only means worthless degrees will be dozen a penny.

Reply on news.ycombinator.com