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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."
Is to outlaw unjust discrimination on basis of education. In other words, a job offer can't have education requirements that can't be justified (asking for just "college education" without specifying a degree is right out) , any more than one can hire personnel on the basis of what car they drive. ,and as such cause the obscene prices asked by the universities to drop. Here in England for example we pay far, far less for education than in USA and I don't see it being of worse quality, quite the opposite.
You know there's something wrong with the job market when almost any job higher than McD worker, cashier, or floor washer requires a degree.
Such breaking of "degree inflation" would reduce the demand on degrees
It's always seemed rather bizarre that you can be a deadbeat car dealer, subdivision developer, banker - hell just about any "profession" that you care to name --run up unsupportable debts, and then declare bankruptcy and have them disappear with no significant long term harm to you.
Student loans though - the one debt that actually might make you more likely to avoid repeating the boom/bust credit cycle - is somehow untouchable.
Three Squirrels
Do you have many people graduating with student loan debt that's the equivalent of $250,000 US?
The reason the loan problem is so bad is that higher education in the US is so ridiculously overpriced. A year of university used to be equal to much less than a graduate could expect as a starting salary on a first job after graduation. Today, they are much more.
There is a consumer price index that measures how much prices are rising or falling. Higher education has gone up in the area of 300-400% of the CPI for years now and it's accelerating.
As a retired academic, I really don't see why tuitions have skyrocketed. Faculty salaries have held close to CPI, the buildings are already built for the most part. I guess the energy to heat and light those buildings has gone up but not enough to explain the difference.
The really strange part is that those huge endowments that universities have are now topping out in the billions of dollars. Those endowments were supposed to be used to keep tuitions low. Plus, any of you alumni out there know how you're always being hit up for money. So where's the money going? The campus buildings are being built with donations for the most part and universities are tax exempt. And don't forget the huge money the big athletic schools are bringing in. Why isn't that being used to lower salaries? The tuition at the Universities of Texas and Florida and Notre Dame and other have all skyrocketed. Where's all that TV money going?
When I retired in '07 I was making more than the average tenured faculty is making today. It's not personnel costs, it's not building costs, it's not energy costs, it's not technology costs. So why is it so much more expensive? I know it's nice for universities to have overseas campuses, but I'm starting to wonder if that's part of the problem.
But no, I don't think you can compare your student loans with ours in size.
You are welcome on my lawn.
I don't think college grads are entirely without blame. I graduated less than years ago with a Bachelors degree and a relatively modest $22,000 in student loans. In under 18 months, I've managed to pay off $10,000 while making $30,000/yr (that's 45% of the principal in 15% of the 10 year loan period). How do I do it? For one thing, I don't have cable TV, a smartphone and my car has very little beyond the basic options. Not paying for cable TV and a smartphone with data plan every month is another $80 I can contribute to the student loan (that's nearly an extra $1000/yr off the principal and a savings of more than $3000 in interest over the course of the loan). Throw in the fact that I rarely eat out, buy foods in bulk ($100 chest freezer is a great investment when buying beef by the cow) have all used furniture, work extra odd jobs whenever possible and avoid shopping trips that zig zag around town to save gas and it adds up quickly. I'm finding many of my peers that complain about loans do none of those things... they want everything and they want it now. I realize this isn't an option for everybody... but students also shouldn't be off the hook if they get a crap degree in English or Underwater Basketweaving because it's easy and they have a passing interest in it.
Actually the costs of the degrees between the two countries are comparable. Whilst Australia does not have any $250,000 degrees the average degree costs are similar. The highest level of government support is around $100,000 for a degree in Australia. The Australian government currently regulates the prices the universities charge for most places, between about $5,000 to $10,000 a year depending of the type of degree.
The big difference between Australian and US student loans is that in Australia the loans are income contingent. I have never understood why more countries do not use income contingent student loans. As the OP said, the loans are managed through the taxation system. A person has to be making more then $47,000 a year before they have to make any payments. Above this threshold the amount paid is a fixed percentage of income on a graduating scale, for example if you earn above $47,000 but bellow $52,000 you will pay 4%. The maximum rate kicks in if you earn above $87,000 when it is 8%.
Another important difference is that in Australia the loans are provided effectively interest free. They are indexed to CPI each year which is well bellow the interest payments on a commercial loan.
It is possible to writeoff a debt and still have made a profit. Remember that interest and repayments have already been paid on the loan for 20 years. The final total repayment for a loan is always higher than the loaned amount, so the lender breaks even a lot earlier than the point at which the loan is fully paid off. After that it's all profit.
Example:
(Disclaimer: These figures are for a standard commercial loan. I have no idea whether repayments differ substantially for Stafford/Perkins/PLUS/whatever.)
Most of us understand why the government can't just print more money. The price of everything would just go up. College tuition is exactly the same scenario. The only difference is that in this case, the government is printing a special kind of money -- money that can only be used for one thing. It is no surprise when then price of that thing just goes up accordingly. Subsidies (i.e., cheap loans) increase demand. Increased demand causes the price to rise. Consider: * The US massively subsidizes education. The price of education rises far beyond the rate of inflation. * The US massively subsidizes housing. The price of housing rises far beyond the rate of inflation. * The US massively subsidizes health care. The price of health care rises far beyond the rate of inflation. (Except, of course, the kinds of health care -- like cosmetic surgery or lasik surgery -- that do not typically get subsidized. Costs in these areas have plummeted.) Pointing this out inevitably draws attacks, like by acknowledging this, you are part of a conspiracy to deny education to poor people. And I don't pretend to have an answer to this dilemma. The only really clear thing is that the laws of supply and demand aren't *statutory* laws, that can just be altered with a pen and a lot of hand-waving. They are fundamental natural laws, and well-intentioned attempts to manipulate markets (from student loans to price-control regimes) almost always trigger equal and opposite consequences. The real shame is that important issues like these are so easily demagogued. Even though the system is clearly broken, no politician in his right mind would ever propose changing it. "Look!" people would scream. "He hates poor people!" - AJ
But everyone seems to be missing the REALLY NASTY little problem nobody is talking about...the for profit 'colleges' like De Vry and Remington and ITT. I went to ITT, basically got it free through rehab grants and only went to give HR a piece of paper (since I already had the contacts) but I got to see first hand what they were doing to the poor kids and it wasn't even funny. Basically everything out of the recruiters mouth was a bold faced lie and these kids didn't have a clue they were being scammed until they were left with a piece of paper that was only good for making a airplane out of. I actually talked to a couple of the kids after graduation (tried to help the smart ones where I could, but there was only so much I could do) and the "job placement" basically just picked a couple of ads out of the paper to send them to as their "prospects" and one was even a pyramid scam!
So if you want to know what is gonna cause the bubble to burst its all these scam colleges that are feeding on the poor like check cashing services and all the other scum that prey on the weak and leech off the government. I'd love to see the placement rates of these places, i bet not a single one gets above 3% and I don't even want to know what they are charging the government for their "services".
ACs don't waste your time replying, your posts are never seen by me.