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."

Comments

What is really needed.

[VAElynx]

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.
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 ,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.

Re:What is really needed.

[dontmakemethink]

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.

Re:Forgiveness at no cost?

[chill]

This means that after 20 years of you making income-based payments, they forgive the remaining debt. In order to qualify for income-based payments, you can be making no more than 150% of the poverty line. In that case, you payments are no more than 10% of your income.

The reality is, there are very, very few people who actually accrue student loans who can't pay them back over 20 years. Not only that, but are living around the poverty line for 20 years.

There are other paths to loan forgiveness in exchange for service. Details are here.

Should Have Been a Property Developer

[rueger]

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.

Same broken solution to a cost problem

[Mr. Underbridge]

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.

Re:Same broken solution to a cost problem

[ras]

You know where else Government got involved in the 1960s. . Health care via medicare.

Yes, well there is one little problem with this "governments are the problem". And that is just about other place on the planet gets better bang for the buck in their heath care than the US, and they do it by using more government regulation, not less.

You are right though. The government is the problem. But it is not everybodies government. It's yours. Most governments on the planet seem to be able to design systems that aren't rorted by corporates. The US - you lot seem to specialise in corporate welfare. And its not small business corporate welfare either. It's always the big end of town. Your banks fuck up and send the economy to hell and what do you do - bail out the bloody banks. You establish a student loan system and rather than forcing them to provide more education for the extra dollars, what do you do - allow them to rake off the extra money by charging more. You design new public health insurance system and who do you let write the rules - the bloody health insurance industry. I wonder who they will favour? The way your industrial complex sucks off the teat of the government paid for military is so bad your politicians invented a new word for it.

Then the cretins among you then say "our government is too big, too strong, running too much of the country, we must chop it down to size." Well it may be too big. But it's not because it's too strong. It's because it's too weak, and continually allows itself to be bought with corporate money. It's called capitalistic cronyism - the person with the most money gets to buy the most government influence. If you want to see it in action now, just look at how the legal fraternity is manipulating patent law. When that happens what you end up with is what we see in the US today - the people with the most money ensuring the bulk of the taxes end up in their pockets. When there aren't enough taxes to satisfy your corporate overloads, what do they manipulate your government into doing - borrowing more. To bail them out of all things. It's beyond belief.

It's time you guys woke up to yourselves and go got yourselves a real democracy. You know, one where votes aren't bought by the person who can spend the most on advertising. They have to be earned, by putting money in the pockets of the voter.

One of many causes of problem

[Pollux]

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.

Re:Australia does a simple job here

[PopeRatzo]

We don't have any problems with student loans going out of control here that I am aware of? Seems a really simple idea to follow...

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.

Who's to blame?

[SJHillman]

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.

Re:Australia does a simple job here

[Anonymous Coward]

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.

Re:Australia does a simple job here

[unencode200x]

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.

the people who own the debt

[decora]

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.

Re:Forgiveness at no cost?

[Maestro4k]

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.

Re:Who says there is a loss?

[Yold]

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.

Reduced State Funding, Increased Administration

[dcollins]

Note: That report was from 2002, and things have gotten much worse since then. Here's a more current story from the last week: http://www.sacbee.com/2011/10/26/4008283/college-prices-up-again-as-states.html

Another major factor is that -- even though faculty and facilities costs have not appreciably gone up -- the number and cost of non-teaching administrators have dramatically bloated (as part of the corporate-management takeover of universities in the last few decades). Today there are more administrators than teachers in colleges, which was not the case in the past. Article on that in the last month: http://www.washingtonmonthly.com/magazine/septemberoctober_2011/features/administrators_ate_my_tuition031641.php

Re:Forgiveness at no cost?

[hairyfeet]

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".