Student Loans In America: the Next Big Credit Bubble 768
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."
Buying Votes with Handouts (Score:5, Insightful)
Nothing new here!
Re:What is really needed. (Score:5, Insightful)
'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?
Re:Another Government Program Gone Wild (Score:3, Insightful)
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.
Re:The biggest problem is tuition. (Score:3, Insightful)
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
Same broken solution to a cost problem (Score:5, Insightful)
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.
No WAY (Score:4, Insightful)
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.
Re:Forgiveness at no cost? (Score:5, Insightful)
"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.
One of many causes of problem (Score:5, Insightful)
For-profit schools. Shut them down. Period.
The average annual tuition for for-profit schools this year is about $14,000 [nytimes.com]. Public four-year colleges charge, on average, $7,605 per year [collegeboard.com] 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% [campusprogress.org], 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. [pbs.org])
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:What is really needed. (Score:5, Insightful)
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.
Re:Buying Votes with Handouts (Score:4, Insightful)
We the People know that govt is supposed to look out for us, so we vote in our best interests. Money is a psychological tool that serves us, we don't serve it. Economics is like a religion with the high priests (bankers, economists) preaching the need for human sacrifice to appease their great god Mammon. Their predictions don't come true, their axioms are flawed, their equations fail to take into account externalities such as innovation, which is where the real focus needs to be. Govt should provide a basic income, and encourage the native spirit of creativity and inventiveness in each of us with challenges.
Yeah, government should just take from the people who do that creativity and inventiveness and give it to those who don't bother to in the form of a "basic income". Meh.
Re:Same broken solution to a cost problem (Score:3, Insightful)
You know where else Government got involved in the 1960s. Health care via medicare. What happened to those costs? They skyrocketed. When I was born in the late 70s, my father wanted a private room for my mom. The nurse warned him that would be an extra $10 a day. Today, you couldn't even get an aspirin administered for that money. And it's not about inflation.
What happens in both is the provider does not lower costs because of Government input, it raised them to what the government pays and what the individual can bear. So we pay twice over. As individuals and as taxpayers. Same thing happens in education, where the avg $$$ per student at a public level is roughly twice as much as a charter school for worse results - although that is more of a local govt problem than a national govt problem - although the Dept of Education got started at roughly the same time as all these initiatives.
We also erred in several other ways. Not every job calls for a college degree, but that has become the mantra has the great majority of human resource departments, undoubtedly because they lack the competence or will or spine to assess a candidate on their own merits. Indeed, something like Germany's apprenticeship system would do us (the middle class) more justice than paying for college. There, you get lower (but at least some pay) for on the job training rather than endless theory for $X0,000 and still with no practical experience. (I know /. will feed me the old platitude that college isn't to teach you a trade but how to think, rounded person, blah blah blah - please shove it up your self-righteous behinds along with your student bills). Seriously, I see colleges for aspiring cooks, WTF!!! That's the shit the middle class bought into - paying to learn to work medium level jobs.
Second, we demand too much college for professions like doctors. Not that education is bad, but demanding they take Shakespeare and all the nonsense humanities just to get to medical school. Has nothing to do with anything, and it raises cost indirectly. Also, states are too inflexible about letting doctors of one state come in and be doctors in another area. And of foreign doctors. Movement is a good thing.
Third, doing nothing about medical malpractice. In some states, insurance starts with premiums at $1M a year. This raises costs and lowers quality (ever get the feeling your doctor is running out of the appointment before you got a word in edgewise?)
So, first, have the national govt do a strategic retreat from paying for these areas. And do malpractice reform. Have the state govts revise accreditation requirements and indicate they want to ease some standards.
ah the old "worked for me, therefore" (Score:2, Insightful)
shrug shrug! !
Re:Another Government Program Gone Wild (Score:2, Insightful)
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.
Re:Australia does a simple job here (Score:5, Insightful)
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 (Score:5, Insightful)
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:Buying Votes with Handouts (Score:2, Insightful)
You're so deadly afraid someone might take your shiny new penny that you would first turn society into a hellhole for your children to live in.
sorry.. who are the investors? (Score:4, Insightful)
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).
Re:Australia does a simple job here (Score:4, Insightful)
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).
Re:Forgiveness at no cost? (Score:5, Insightful)
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:Forgiveness at no cost? (Score:4, Insightful)
Re:What is really needed. (Score:5, Insightful)
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? (Score:4, Insightful)
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).
Re:Who says there is a loss? (Score:5, Insightful)
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.
Re:Forgiveness at no cost? (Score:4, Insightful)
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.
Re:Same broken solution to a cost problem (Score:5, Insightful)
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.
Re:Who's to blame? (Score:2, Insightful)
Then don't pretend your experience is still relevant after school costs have doubled or tripped since you graduated, elitist.
Get FUCKED (Score:2, Insightful)
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.
Re:No WAY (Score:2, Insightful)
Yep, our elementary and high schools pushing on kids the necessity of college for most of their lives and there thrown loans at an age when long term planning and critical thinking are still not fully in motion. Totally all on them. Bastards just stealing from hard working Americans. Lets not forget the countless times that both jobs and an increased wage would come from attending college. I guess that might have been a bit of a lie but I'm sure all these students knew what they were getting into.
Lets not even get into the fact that while all the same bs about the need for college is being said, that was said 10, 15, 20 years ago, we live in a world where college debt load as increased enormously while the economic stability has steeply fallen. Stupid kids actually believing they'll get the same results as the generations past and that may not be true for many years, if you don't know that after turning 18, well there's just no hope for you.
So yep, just a bunch of stupid lazy people. Fuck um, they don't deserve help.
Re:sorry.. who are the investors? (Score:3, Insightful)
Can you really blame pension funds, city governments, etc?
Look at the housing bubble. It was caused by a giant pool of money chasing returns. Well, those investments that were supposedly AAA+ rated turned out to be shit and now everyone took a bath. So now no one is touching housing and we're still working through a backlog of shadow inventory and 12.9 million people still live in houses that they're underwater on and probably won't ever be able to sell or move from (they should really walk away, but that is an entirely different story).
So if housing is too dangerous, stocks are too dangerous, where do you invest? CDs? HAH! 0.1-0.3% interest. Bonds? Even sovereign bonds are having problems due to the sovereign debt crisis in Europe (you better *believe* Greece is going to default on its debt; negotiations already have bond holders taking a 60% haircut on the existing bonds, and 60% ain't too far from 100%).
As I said when I started, you have this huge pool of capital in the world trying to chase investments with returns, and now they're chasing collateralized student loans (which, of course are going to pop, but its going to be way more painful than stocks and houses. You can at least walk away from a mortgage. A student loan? Not so much). So! If stocks suck, housing sucks, student loans suck, and growth in most of the world is coming to a halt, where do you put your money?
Trick question of course. There is nowhere to put your money that will earn any appreciable amount of interest (no, not even commodities like oil are safe, what with consumers having less and less income to buy it with). So what you're seeing is desperation in the market to chance anything that looks like a substantial return on investment.
Re:Forgiveness at no cost? (Score:4, Insightful)
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.
Re:Forgiveness at no cost? (Score:3, Insightful)
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.
Re:Forgiveness at no cost? (Score:5, Insightful)
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 [wikipedia.org]
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.
Re:the people who own the debt (Score:5, Insightful)
You described exactly the triumph of capitalism over communism: people no longer think as "we, the people", but as "me, myself and I".
The average Joe no longer cares about what happens to other Joes like him, he only cares about his affairs. The rest of society might as well go hung themselves, as long as mr Joe enjoys a nice and easy living.
It is a huge triumph for capitalism. People, by not caring about social matters, leave the field open for capitalists to run amok, as they have been doing after the fall of Communism.
Re:Forgiveness at no cost? (Score:4, Insightful)
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.
Re:Forgiveness at no cost? (Score:1, Insightful)
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.