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In principle I agree, but in practice, it seems like private lenders are empirically doing a bad job evaluating risk. Rates for private loans are so high they c
by maxkwallace 8y ago
In principle I agree, but in practice, it seems like private lenders are empirically doing a bad job evaluating risk. Rates for private loans are so high they can only be explained by a high default rate, even among "low-risk" demographics. These rates are very high even for students that we'd view as a low credit risk (e.g. studying CS and not music therapy). I think this shows the private market is doing a poor job evaluating risk.
That said, it's probably still a good thing long-term to end government subsidized loans. But that doesn't mean the private market is healthy. I'm not an expert on this area, and I don't know why there aren't "smart" lenders that do a better job arbitraging this. It could be possible that it's inherently difficult to predict whether someone will default or not.
As other people have pointed out, the real problem is the incentive structure for colleges and the increase in administrative staff (and thus tuition) who are enriching themselves at the expense of everyone else.
- nroets 8y agoIt's called adverse selection: A lot talented students happen to have one or more wealthy family member (s) who will either lend or donate the money to them. So commercial lenders receive a disproportionate number of applications from students who will have a difficult time finding a well paid job.
- dorchadas 8y ago> In principle I agree, but in practice, it seems like private lenders are empirically doing a bad job evaluating risk. Rates for private loans are so high they can only be explained by a high default rate, even among "low-risk" demographics. These rates are very high even for students that we'd view as a low credit risk (e.g. studying CS and not music therapy). I think this shows the private market is doing a poor job evaluating risk. Or that they know the risk, but also know people have to borrow so see a chance to profit more from it.
- deleted 8y ago[deleted]
- skizm 8y agoStudent loans don't go away in bankruptcy, even private ones. There is no risk even if you loan a poor student $150k to go to art school since you have the rest of their life to garnish wages from them.
- cameldrv 8y agoI think that the difficulty is future adverse selection. Four years after loan is made, we know whether or not the student graduated and got a good job. There is now a student loan refi market, and the risk of someone who now has a degree and a job is much lower. Almost everyone who graduates and finds a job will refi. The loan therefore has to be priced for college dropouts, because those are the only people who won't refi.
- exabrial 8y agoThat's because they're not allowed legally to take those things as risk factors... Which is also hilarious. No creditor world finance a 19 year old male for a $120,000 high horsepower sports car at 6% interest. Yet government regularly does equivalent amount of money.