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Student Loans In America: the Next Big Credit Bubble
PolygamousRanchKid writes "In late 1965, President Lyndon Johnson stood in the modest gymnasium of what had once been the tiny teaching college he attended and announced a program to promote education. Almost a half-century later these modest steps have metastasized into a huge, federally guaranteed student-loan industry. On October 25th the Obama administration added indebted students to the list of banks, car companies, homeowners, solar manufacturers and others that have benefited from a federal handout. In response to students burying their obligations in court during the 1970s, anti-default provisions were imposed to make it almost impossible to shed student loans in bankruptcy. There are increasingly loud calls for reform of the system, with demands that range from a full-fledged bail-out of borrowers to a phased curtailment of government lending. The changes announced this week are designed to ease the pressure on struggling graduates. Borrowers who qualify will get payment relief, not debt relief. The administration says these changes will have no cost to taxpayers."
Nothing new here!
'College Education' is not a requirement, it is a filter. See, they don't care that you can do the job. So can a hundred other people. So how to cut down the number of applicants to a number worth going through? Stick on an education requirement. At the very least it makes sure that everyone has proven their ability to read boring material and then write the necessary boring reports if needed. A truly universal skill.
You have the knowledge to do the job but no degree? So what? Among the dozens of applicants that do have degrees there are at least a few that can also do everything you can do. Among those there will be at least one or two who will be a good fit for the workplace. Mission accomplished! Why is their incentive to give every special little snowflake a shot?
Social Security and socialized medicine are entitlements, it's something that people ought to be entitled for just for being born American citizens. It's a right that people in other parts of the developed world take for granted.
The point isn't that the GOP is trying to take those things away, it's _why_ they're trying to take them away. They're trying to take them away so that they can give to the wealthy, and cut taxes for corporations who in some cases don't pay any federal taxes. But, most importantly it's because if the average worker didn't have to work for a large company to have health insurance they'd be significantly more likely to do crazy things like start a business or work at something that they enjoy.
If you are dumb, go to a state school while working: ~15k in debt
If you are smart, go to a good private school with a huge endowment: ~10k in debt
If you are really dumb, go to a good private school without a scholarship: ~200k in debt
The problem here is that the costs continue to skyrocket. Any solution that doesn't address that is simply a band-aid.
Why do costs continue to skyrocket? Because the colleges know that effectively any student anywhere can get loans to pay for the cost of college. From the school's standpoint, they can just about charge whatever they want. There's no brake on the price increase.
This is of course compounded by cuts from government support to the colleges. But the bubble has been inflating since long before the current economic trouble. It is certainly making it worse right now, but it's not the root cause of the problem.
And you can definitely see where the money is spent on the campuses. I work with college researchers and had the opportunity to visit a couple of state schools recently. And compared to when I went to college just 15 years ago, these places are absolutely gorgeous. Until there is some means of implementing cost control at the schools - without affecting the ability of students to go to college - this won't change.
You agreed. You signed the papers. You gave them your word and honesty that you would do whatever it would take to pay them back. You took the money from hard working Americans' bank accounts for these financial institutions to invest you in the hopes for interest in return to fund their retirement.
Pay it.
Why should hard working successfull people who paid off their loans be punished by having to pay for your own foolishness? They were smart and worked harder and saved and now should have their reward.
One thing we found out is Americans HATE bailouts. They will not support it and will fight every stance to keep what htey earned. Yes costs are going up but you are an adult and need to take responsibility. I wish home owners couldn't default either to level the playing field. The problem is if you help students, help big banks, then everyone else will want a handout. Ultimately, the government goes broke and end up like Greece all poor and taxed to death with no end in sight. ... FYI this is coming from someone who owes $40,000 in student loans and is living with his parents to pay them off.
http://saveie6.com/
"The reality is, there are very, very few people who actually accrue student loans who can't pay them back over 20 years."
That was the reality; not anymore.
For-profit schools. Shut them down. Period.
The average annual tuition for for-profit schools this year is about $14,000. Public four-year colleges charge, on average, $7,605 per year in tuition and fees for in-state students. What's worse is this: The default rate on student loans from for-profit institutions is 15%, while the default rate at public universities is only 7.2 percent (same source).
For-profit schools are milking the American taxpayer for money. Just walk into any one of these schools, tell them you want to be a nurse / chef / accountant / whatever, and they'll lay down a student loan form for you to sign before you could even say "Herbie Hancock." Because, at least with the present law, once a for-profit school gets their money from Uncle Sam, it's theirs, no strings attached. I'd almost call it fraud, except those students who enroll in a for-profit school actually do get something in return, even if it is a sorry-excuse of a half-ass education. (PBS did an excellent documentary a year back on for-profit schools, particularly exposing the "value" of a diploma one gets from these crooks. You can watch it here.)
What's sad is that there's a really simple solution to all this: require a for-profit school to assume some of the risk. If we required a for-profit school to pay back even just 50% of the loan that was defaulted on, you'd see the default rate decrease overnight.
I come from a family of college teachers. High schools just aren't doing the job these days. Lots of students manage to graduate with no life skills and barely being able to read. They're not even remotely prepared for college, but there are colleges which will accept them.
When it comes time to pay, most get student loans. They abuse the loans. By federal law, they're allowed to take a given class up to three times (with federal money). My parents see the same students over and over again, sleeping through class, texting, etc. The school doesn't care--they get tons of money from it. The students don't care--they're getting paid to be there. The teachers don't care--they're still getting paid.
Our guess is that programs like NCLB are the cause. High schools are pressured to teach to the test (so they aren't teaching much useful) and pass students to the next grade/graduate. Their funding is directly tied to this. Some schools set a floor for grades. Some just hand out grades. They all focus on the weaker students in order to bring them up to a mediocre level rather than bringing up the ones who are inherently better able to cope with college.
It's all a mess, and I don't think legislation is going to fix it. The problem is that any legislation which would stand a chance at solving the problem would be extremely unpopular. No politician will put themselves in that position.
shrug shrug! !
I do love how Libertarians just sort of invoke these things out of thin air. They really do believe in some sort of natural law of sociopathy.
People have paid taxes since the beginning of civilization. Get over you selfish leacher.
The world's burning. Moped Jesus spotted on I50. Details at 11.
From what I've one of the major reasons prices have risen at public universities is because states contribute less to them. This has been the case for the last 10 years. There are many sources to cite but here is a good one: http://www.highereducation.org/reports/losing_ground/ar2.shtml . Inflation and stagnant wages make it even worse.
Reduced state aid, stagnant wages (for the last 30 years as compared to inflation), a more competitive job market, and stricter borrowing are all conspiring to make college much less affordable for the upcoming college-bound generation and the last one.
Chance favors the prepared mind.
Perfect is the enemy of good.
it is really hilarious to watch people bitching about everything from dorms that are too nice to too many mac's in the computer labs, but nobody wants to follow the money.
student loan debt is securitized and resold to various investors, just like housing debt was in the housing bubble. its the securitization chain, and the big banks are behind it, along with the corrupt government agencies that look the other way instead of doing their job (preventing fraud, preventing false advertising, preventing misdeeds by the credit ratings agencies, etc)
it is like this never ending pattern when people talk about financial matters. everyone goes off their own personal experience instead of approaching it like a hacker: : : how does the system work? what are it's major pieces? how do they fit together? what is the flow in between those pieces? if people would just ask those basic fucking questions we wouldnt be in this fucking recession.
instead its 'oh no, i graduated and i payed my debt off, these freeloaders / communists / blah blah blah' .. complete and utter red herring bullshit that is in no way helpful to solving the problems of the planet.
pension funds, city governments, people running 401 k plans, etc etc etc.
all you have to do is read some SEC reports really close to find out who has invested in student loan debt. its the same morons who invested in subprime mortgage debt. they are the people who run the pension systems, the 401k funds, the union funds, the funds of funds, etc etc etc. there are also a lot of stupid individual investors, corporate investors, and government investors, people who dont want to do due diligence and prefer to rely on the ratings agencies, even after the greatest financial crash in the history of the planet was directly caused by the ratings agencies (which, for some reason, have escaped any and all punishment, whatsoever, let alone meaningful scrutiny by the government).
and the same people are shorting it (Steve Eisman, of Michael Lewis' Big Short, is now shorting 'subprime education', he made millions shorting the housing bubble at Morgan Stanley).
Looking at your example, that should know what they're getting into when they make that decision. While I have sympathy for someone doing everything that can to follow their dreams and do what they love, that student had to know what was coming before taking on that monster debt. But that's their choice... I think they need to be responsible for what they just did.
I'd be more concerned with the people who go into a major that appears to be a money-maker. When I was in school, it seemed like everyone was trying to get into Computer Science... And I remember a LOT of people not making it through year 2. Some of them found other majors... Some didn't. It's that last group that now has debt, but doesn't have anything to show for it. Not only are they burdened by their debt, but they haven't actually put themselves in a position to pay it back.
Of course, let's be honest, most of them should've become plumbers, electricians, and other skilled tradespeople. And before someone flags me: Seriously, there's NOTHING wrong with that. Those people are needed (and they can make some excellent money).
On the one hand, this seems entirely fair, on the other, it sounds like a ticket to four cheap years at party U for people who intend to loaf and/or earn their income illegally / off grid for the next 20 years.
I think the number of people willing to live at poverty levels for 20 years so they can get 4 years of partying at a university, and that will actually follow through on it willfully, are very, very low. 150% of poverty level isn't a lot of money, you can't live high on the hog with that kind of income, not even single. And the type of people who'd actually consider living it up on borrowed money and then reneging just aren't the type to then go 20 years of scraping by so they can do so. Yes, there probably will be a few idiots out there who'll try it, but I think most will end up tempted by life itself to change in ways that bump them up past the 150% of poverty income. (Deciding they're sick of living on so little money, falling in love and getting married and/or deciding to start a family, etc.)
Making it impossible for those who end up in bad situations through no fault of their own to get out from under their student loan debt just to prevent a few idiots from doing something like you suggested isn't a good solution. That's part of the reason we're having this mess now, we overreacted to the people who intentionally declared bankruptcy to get rid of student loans they never intended to pay and made it so people who were legitimately struggling could no longer get out from under them short of dying. Instead of being at either extreme, we need some middle ground.
If you're doing bad what does it matter if you're in debt or not? Obviously you can't pay it back right then, but that doesn't mean you should be let off the hook.
At the very least it makes sure that everyone has proven their ability to waste their time and money instead of demonstrating independence and gaining life experience and then write the necessary boring reports if needed.
FTFY. If you require a degree for a job that doesn't really need one, you're likely going to hire someone that only went to school to get the degree, barely paid attention as they jumped through the hoops, and doesn't have a clue how to apply their academic experience. Who the hell wants a staff full of debt-burdened carrot-chasers who couldn't get the job they really wanted? That's the most depressing scenario I've contemplated in recent memory. I wouldn't last a week in an environment like that. I would much rather depend upon people who are committed and grateful to gainfully apply their real-world experiences, degree or not.
War as we knew it was obsolete
Nothing could beat complete denial
- Emily Haines
If you're doing bad what does it matter if you're in debt or not? Obviously you can't pay it back right then, but that doesn't mean you should be let off the hook.
So you would repeal all bankruptcy law?
Problem is that a company (or person) may be in hock for more money than they will make in the forseeable future. If you can't discharge that debt, it doesn't make sense to keep operating the company in a capitalist society because the income will be eaten away by the debt repayment until there is basically no profit, or at least until the profit is too small to justify choosing that investment over other investments. There are variations on it, but that's the basic problem.
But if the company can discharge or fundamentally alter its debt, then it may be possible to run it profitably, in which case creditors will lose out as compared to what they have been promised, but there may well be a net gain to society over the cost of the business shutting down (or the person never being able to get out of debt).
-- IANAL, this isn't legal advice, and definitely isn't legal advice for you. Also, Squee!
Interest is not purely profit. Interest is designed to offset inflation and the other ways you can spend your money. If I owed you $81,000 would you prefer that paid as a lump sum today or paid as a 0% interest loan over 25 years ($3,2400 /yr)?
So in order to make $100,000 today equal to $100,000 in 25 years, we need interest (at least to cover inflation). So for the purposes of this loan $100,000 (at time 0) == $181,000 (at time 25). In addition to the interest, you pay portions of the $100,000 you borrowed. Each payment of $687 is an uneven mix of Interest payments and Principal payments, the ratio changes as the loan approaches time 25.
So if you stop paying halfway through the loan, you may have paid in total $100,000 (combination of interest and principal). But $100,000 (at time 0) is less than $100,000 (at time 25), the lender loses money.
This is what happens when you spend 100k on a good college getting an english/art/history/worthless degree.
I think a good first step would be to require registration of your major when you apply for loans and then to be a little more selective on those degrees that wont really contribute to society as a hole.
Yes because turning our higher education system into job training is really going to be a boon to society.
On the Oregon Cost born and raised, On the beach is where I spent most of my days
Then don't pretend your experience is still relevant after school costs have doubled or tripped since you graduated, elitist.
Yes, nevermind that changes in bankruptcy laws have made it much harder to discharge debt. First with student loans, then with credit card debt.
Gee, you think that lenders might abuse those laws to offer loans to people they know can't afford them if people can't discharge their debts?
Wrong. They hate bailouts of criminal bankers that sank the worldwide economy only to have their asses (and bonuses) saved by the Fed, while the rest of us have to take our austerity for the team to pay for it.
If they've spent the last 20 years close to the poverty line, they're probably never going to make enough money to pay back the loan, so we might as well forget about it.
-- Support a free market in the field of government
Yes because turning our higher education system into job training is really going to be a boon to society.
Won't it? Don't most people go to college so they can get a good job? if someone wants to spend $80,000 on an education that will get them a job making $30,000 a year that's up to them, who am I to tell them "that's not how you should spend your money", but don't come back later and say "I wasted the money I was given, can I just not pay it back?" Every choice in life has consequences, and the consequences of choosing a career that does not pay well is having a difficult time paying back the loan used to get that degree and career. That makes sense.
my karma will be here long after I'm gone
Who's to say what's a useable skill? Go to the Nobel Prize web site and look at the biographies of the winners in biology and chemistry. Many of them were liberal arts majors, like Eric Kandel who studied history and literature http://en.wikipedia.org/wiki/Eric_Kandel#Early_years
The scientists and techies who made this country great in post-WWII America were often Europeans who had a strong tradition of a well-rounded education, including English/art/history, and taught it to their students. It basically teaches you how to think. Scientists have to know how to think. You want to prepare yourself for a world in which there is no security and people always have to find new careers? A liberal arts background is what you need to face that brave new world. Of course it also helps to know how to think when you have to decide who you and your fellow citizens should vote for in the next election.
OTOH there are engineers who can't get jobs when the industry of their engineering specialty goes into a down cycle. There are accountants who can't get jobs.
The solution isn't to make the higher educational system vocational, it's to understand that there is a place for both academic and vocational higher education, and that an academic qualification is not intrinsically more valuable than a vocational one.
I am TheRaven on Soylent News
Were Americans sold a bill of goods based on the premise that education = better life? You bet we were.
the only people who are selling it are people who went to school and are highly successful. it is rare that i see someone that doesn't have a college degree who is in a better situation than myself. granted, there are a few outliers, but not many. granted, college degrees aren't worth as much anymore, but many businesses have finally noticed that liberal arts degrees and MBAs aren't worth the paper they are printed on. i don't see many engineers struggling these days. the deflation of the value of the degree is due to the devaluation of it by the amount of idiots who have the degree, not by the number of degrees issued. if only bonafide geniuses had marketing degrees, a marketing degree would be worth a lot. but it turns out that the dipshit factor is pretty big, so they are devalued. quality over quantity.
the 10% is a very bad idea. now, universities will have unprecedented authority to raise tuition. universities can now market to their students that the students will no longer have to pay all of the tution; just a sum of 10% of their income over 20 years. so if you take out a loan for $200k or $500k, and you make $50k a year, your liability will be the same ($5k a year over 20 years). now, colleges can raise prices without any worry about the financial burden it will put on their students. student liability is capped, so why not charge more? incentive to bring in smarter students will go down; it will become a quantity over quality practice. some colleges have already confessed that they are now giving priority to out-of-state students who score the same or slightly worse than in-state students, because they can jack up the rate on out of state students. quanity over quality. this 10% cap is going to make things much, much worse.