5 ms·

The obvious point to make is that American student loans already suck so this may be an alternative. However, this makes me feel really uncomfortable. The first

The obvious point to make is that American student loans already suck so this may be an alternative. However, this makes me feel really uncomfortable. The first is the same reason as student loans: At the age you're agreeing this you are very unlikely to correctly judge your own value. It's the same reason why students take on ridiculously onerous student loans. The solution to that problem in my mind though is to regulate out of existence exploitative student loan conditions. Instead this mechanism creates a whole new way that lenders can rip students off. The Yale example is good but let me pick at this: >Purdue, for example, caps total payments at 2.5 times what a student borrowed, so the most successful don’t feel gouged. That would be a 15 year loan at 15% APR. That IS gouging. There is a good reason why super high APR loans are heavily regulated - because they're almost certain to cause debt spirals and are only entered into by those who are desparate. The nature of finance companies creating these schemes is that the schemes will be designed to favour the finance companies not the students. So in no way does this solve the problems that students face.

TadaScientist 8y ago
15% on student debt? Jesus christ - it's more expensive than unsecured lending / credit card debt
- cimmanom 8y ago
  Credit card interest rates can easily approach 25% for those who don't pay off their balance.
- barry-cotter 8y ago
  Good luck getting a credit card that’s caps repayment at 2.5 times the amount borrowed.
- leetcrew 8y ago
  first, student debt is unsecured lending. second, where are you getting a credit card with less than 15% APR. I want one too.
  - digitaltrees 8y ago
    Student loans can’t be discharged in bankruptcy and are often backed by the government so a default gets paid in full. Basically, effectively secured.
  - ac29 8y ago
    The credit card I have via my credit union has a 13.24% APR. I'm fairly sure that's pretty normal if you have good credit and pay on time - I certainly didn't go out of my way to look for a low interest card.
econ101fail 8y ago
>Purdue, for example, caps total payments at 2.5 times what a student borrowed, so the most successful don’t feel gouged. That would be a 15 year loan at 15% APR. That IS gouging. 15% APR isn't gouging. That's a typical APR for an unsecured personal loan, which this is. Well, it's actually worse than an unsecured loan for the lender since payment is tied to employment. So, not egregious. It's also not 15 years. The term maxes out at less than 10 years for English majors. The person being interviewed is on the hook for 8 and a half years. EDIT: Where did you even get the 15% APR from? 2.5 times what the student borrowed does not work out to 15%, unless the debt is paid off in under 7 years. A 15% APR over 15 years would be over 8 times the original loan amount.
- maccard 8y ago
  > 15% APR isn't gouging. That's a typical APR for an unsecured personal loan, which this is. My credit card is 15%. An unsecured personal loan is more like 4-9%.
  - econ101fail 8y ago
    Please show me where an unemployed person with uncertain future prospects and neither a work history nor any assets can get an unsecured personal loan for 4-9%? I'll even give you a pass on the requirements of the loan payback being subject to employment or a minimum income, a payment cap or a term limit. Adding to the above, as noted the edit to my previous comment, even the 15% APR number is wrong in general. An English major would have to earn over $500,000 in 7 years to hit that APR.
    - maccard 8y ago
      > Please show me where an unemployed person with uncertain future prospects and neither a work history nor any assets can get an unsecured personal loan for 4-9%? Every high street bank in the UK offers a student overdraft facility, e.g. HSBC[0] offers a guaranteed £1000 0% overdraft, with up to £3000 depending on how long you've had it. Other banks offer credit cards with 0% interest for students too. Finally, student's aren't the same category as > an unemployed person with uncertain future prospects and neither a work history nor any assets While that is a technically true statement, it's ignoring the fact that <4% of recent graduates are unemployed. While that makes them higher risk than an engineer in SV making 6 figures, it absolutely doesn't have students in the same risk category as an unemployed disabled veteran. [0] https://www.hsbc.co.uk/current-accounts/products/student/ https://www.hsbc.co.uk/current-accounts/products/student/
tenpies 8y ago
The other consideration is that it makes investors incentivized to get you to succeed (at least as far as salary is concerned). That could be a huge advantage if you manage to get the right investors. Of course I also wonder if it's only a matter of time before a short market emerges - which it will - if investors need to hedge against a recession or something that would not be covered by traditional insurance products.
- Traster 8y ago
  Well my background is engineering and they're are some nice quite schemes in the UK where they'll sponsor you during university. It works like this: They give you cash towards tuition fees and living expenses. In return you pick some pre-approved courses (relevant to their industry) do an internship over the summer each year, and then they have the option to employ you after you graduate (they can reject you, but if you reject them you repay something towards the scholarship). That sounds much more sensible - but it's not a private equity concept, it's a HR recruitment strategy.
rjf72 8y ago
When suggesting trying to solve the problem, I'd first consider what caused the problem. It obviously was not always this way. The stories of people in the 50s and 60s working their way through college with a part time job and then graduating not only not in debt but even with a little bit set aside for a down payment on their first home are not just stories. That was a real thing. So what happened? We decided that it would be a good thing if anybody could go to school without having to pay for it immediately. It's a pretty well intended motivation. And so how did we do this? We tried to solve it through regulations. The idea was pretty straight forward. To help ensure anybody could afford to go to college the government would give loans unconditionally, aside from financial need. To try to ensure people wouldn't just take the money and squander it, the law was adjusted to prevent these loans from being able to be dismissed in bankruptcy. And indeed college attendance shot up after these laws were passed. But this did two things. It sharply increased the demand for post-secondary education, and it also increased the supply of money available to pay for it. Predictably costs started to gradually rise. And so as this happened, it began to be that government loans alone were no longer sufficient to ensure everybody could go to college without having to immediately pay for it. And so we now did the exact same thing with private loans - they could no longer be dismissed, which meant that from a lender's perspective, giving a loan was practically free money. And we've seen what happened here already. Costs skyrocketed since there was now an effectively unlimited amount of money that students could borrow. The only reason costs stopped accelerating as fast is because we reached 'peak college' in 2010-2011 with enrollment figures with enrollment continuing to decline since then in spite of an increasing population. ---- The point I'm making with this is that the one and only reason we're in this situation is because of well intended regulations. It's easy to say just "regulate out of existence exploitative student loan conditions" but things like this are far easier to say than do. For instance, as you make loans less profitable for lenders, they end up becoming more selective on who they lend to. In turn we end up going back to where we started where college is no longer something for everybody. And in my opinion this is probably the right direction, but at the same time I think many people would disagree with this. If you happen to be one of these people then you end up in this tough situation of trying to create a system where lenders can/will lend to people who they probably should not be lending to. Getting a degree in underwater basket weaving isn't going to likely lead to a life such that one could repay years of debts taken on to obtain such a degree, even if the cost of education was relatively "affordable."
empath75 8y ago
Just make student loans dischargable in bankruptcy again, problem solved.
- ceejayoz 8y ago
  Well, one problem solved, but likely creating (or restoring) others. Their non-dischargable status helps keep rates low(er) and allow folks who'd never qualify for a $100k loan otherwise get a degree. If we're gonna require a bachelors degree to work at McDonalds, it's probably time to treat undergraduate education like K-12; as an entirely publicly funded endeavour.
  - peteradio 8y ago
    Perhaps 100k prices are propped up by low interest loans.
    - ceejayoz 8y ago
      Very possibly! Another reason to expand the public K-12 system to undergraduate level.
  - geebee 8y ago
    The problem is, it also allows folks who would never qualify for a 100k loan otherwise get 100K into debt. I read an article about how artists are struggling in the high cost San Francisco Bay Area (sorry no link, because it was really an eye-opening article). The article did mention student loans, but focused mainly on gentrification brought about by high tech. However, they did profiles of various struggling artists, and I was frankly stunned by the debt levels. People with fine and performing arts degrees frequently had student debt levels of $70,000-$90,000. Holy crap. Is it a good thing that we've created a non-dischargeable, federally guaranteed loan that allows people to go $90k in hock for a degree that they wouldn't otherwise be able to get? I was very intrigued when I learned that libertarians often look askance on weakening bankruptcy laws. I always figured they were a "that's the bargain you made" soft of crowd. What I learned is that libertarians aren't especially keen on lending (pun intended) the government's monopoly on physical force in service as a collection agency for people who make stupid loans. I'd say that making a $90,000 loan to someone so they can (channeling David Sedaris here) take photographs of rotting produce spilling out of garbage cans is the height of stupidity. Like, if you make that loan, don't come crying to me. We already have a fairly punitive bankruptcy system, but we are not interested in marshaling the power of government sponsored men with guns to pursue foolish borrowers who don't pay foolish debts to the ends of the earth so that foolish lenders can get their money back. That, to quote pornstache from orange is the new black, "sounds like a whole lot of your problem". If you don't think ordinary bankruptcy, along with credit and a history of repaying debts, is enough to incentivize repayment, seriously, don't make the loan.
rayiner 8y ago
> The solution to that problem in my mind though is to regulate out of existence exploitative student loan conditions. Instead this mechanism creates a whole new way that lenders can rip students off. The Yale example is good but let me pick at this: How is "regulation" the answer? Private student loans are effectively dead since Obama. Over 92% of student loan debt is owed to the federal government as the lender. > There is a good reason why super high APR loans are heavily regulated - because they're almost certain to cause debt spirals and are only entered into by those who are desparate. The crucial difference is that only borrowers who end up making a high income will pay that high APR. People who end up with lower incomes pay less. That's a perfectly reasonable arrangement.
esoterica 8y ago
15%? You might wanna do the math again dude. Also the entire point of an equity like arrangement is that the investor gets a larger fraction of the upside and in exchange for agreeing to eat the downside if the investment doesn’t work out. Comparing it to the APR of a normal student loan misses the point entirely. With a regular loan you have to pay the same amount whether you’re making minimum wage or 200k/year, whereas with an equity-like arrangement you only have to pay the max amount if you make a lot of money.
- colpabar 8y ago
  I think everyone would have appreciated a correction of his math instead of just pointing out how he was wrong.
  - benmanns 8y ago
    The math is excluding compounding. A simplified look (payment due at end of 15 years) is around 6.3% annually https://www.wolframalpha.com/input/?i=2.5%5E(1%2F15)&assumption=%22%5E%22+-%3E+%22Real%22 https://www.wolframalpha.com/input/?i=2.5%5E(1%2F15)&assumpt... The math including payments is a bit more complex and will depend on how much you are paying during the loan term. I.e. if you paid 2.4x on day one and 0.1x the final day looks a lot different from 0.1x on day one and 2.4x the last day due to the time value of money.
jlawson 8y ago
>At the age you're agreeing this you are very unlikely to correctly judge your own value. I think that's the point, isn't it? Even if the student overestimates his potential, investors with more neutral incentives and more broad experience in predicting such outcomes won't. Lots of startup founders overestimate themselves too; the social purpose of VCs is to make judgments on who can use capital the best. What we have now is like a government agency that gives capital to literally anyone who wants to start a company, promises them riches, and makes them pay half the tab anyway so they end up hugely in debt in addition to wasting the taxpayers' share.
tracker1 8y ago
Even then, there is a lot of risk... how many will fallout, not finish or otherwise live in their parent's basement for a portion of the time? In the end, you're agreeing to a sliding scale based on salary. Those financing are definitely having an interest in your field of study and the duration for completion.

TadaScientist 8y ago

15% on student debt? Jesus christ - it's more expensive than unsecured lending / credit card debt

cimmanom 8y ago
Credit card interest rates can easily approach 25% for those who don't pay off their balance.
barry-cotter 8y ago
Good luck getting a credit card that’s caps repayment at 2.5 times the amount borrowed.
leetcrew 8y ago
first, student debt is unsecured lending. second, where are you getting a credit card with less than 15% APR. I want one too.
- digitaltrees 8y ago
  Student loans can’t be discharged in bankruptcy and are often backed by the government so a default gets paid in full. Basically, effectively secured.
- ac29 8y ago
  The credit card I have via my credit union has a 13.24% APR. I'm fairly sure that's pretty normal if you have good credit and pay on time - I certainly didn't go out of my way to look for a low interest card.

econ101fail 8y ago

>Purdue, for example, caps total payments at 2.5 times what a student borrowed, so the most successful don’t feel gouged. That would be a 15 year loan at 15% APR. That IS gouging. 15% APR isn't gouging. That's a typical APR for an unsecured personal loan, which this is. Well, it's actually worse than an unsecured loan for the lender since payment is tied to employment. So, not egregious. It's also not 15 years. The term maxes out at less than 10 years for English majors. The person being interviewed is on the hook for 8 and a half years. EDIT: Where did you even get the 15% APR from? 2.5 times what the student borrowed does not work out to 15%, unless the debt is paid off in under 7 years. A 15% APR over 15 years would be over 8 times the original loan amount.

maccard 8y ago
> 15% APR isn't gouging. That's a typical APR for an unsecured personal loan, which this is. My credit card is 15%. An unsecured personal loan is more like 4-9%.
- econ101fail 8y ago
  Please show me where an unemployed person with uncertain future prospects and neither a work history nor any assets can get an unsecured personal loan for 4-9%? I'll even give you a pass on the requirements of the loan payback being subject to employment or a minimum income, a payment cap or a term limit. Adding to the above, as noted the edit to my previous comment, even the 15% APR number is wrong in general. An English major would have to earn over $500,000 in 7 years to hit that APR.
  - maccard 8y ago
    > Please show me where an unemployed person with uncertain future prospects and neither a work history nor any assets can get an unsecured personal loan for 4-9%? Every high street bank in the UK offers a student overdraft facility, e.g. HSBC[0] offers a guaranteed £1000 0% overdraft, with up to £3000 depending on how long you've had it. Other banks offer credit cards with 0% interest for students too. Finally, student's aren't the same category as > an unemployed person with uncertain future prospects and neither a work history nor any assets While that is a technically true statement, it's ignoring the fact that <4% of recent graduates are unemployed. While that makes them higher risk than an engineer in SV making 6 figures, it absolutely doesn't have students in the same risk category as an unemployed disabled veteran. [0] https://www.hsbc.co.uk/current-accounts/products/student/ https://www.hsbc.co.uk/current-accounts/products/student/

tenpies 8y ago

The other consideration is that it makes investors incentivized to get you to succeed (at least as far as salary is concerned). That could be a huge advantage if you manage to get the right investors. Of course I also wonder if it's only a matter of time before a short market emerges - which it will - if investors need to hedge against a recession or something that would not be covered by traditional insurance products.

Traster 8y ago
Well my background is engineering and they're are some nice quite schemes in the UK where they'll sponsor you during university. It works like this: They give you cash towards tuition fees and living expenses. In return you pick some pre-approved courses (relevant to their industry) do an internship over the summer each year, and then they have the option to employ you after you graduate (they can reject you, but if you reject them you repay something towards the scholarship). That sounds much more sensible - but it's not a private equity concept, it's a HR recruitment strategy.

rjf72 8y ago

When suggesting trying to solve the problem, I'd first consider what caused the problem. It obviously was not always this way. The stories of people in the 50s and 60s working their way through college with a part time job and then graduating not only not in debt but even with a little bit set aside for a down payment on their first home are not just stories. That was a real thing. So what happened? We decided that it would be a good thing if anybody could go to school without having to pay for it immediately. It's a pretty well intended motivation. And so how did we do this? We tried to solve it through regulations. The idea was pretty straight forward. To help ensure anybody could afford to go to college the government would give loans unconditionally, aside from financial need. To try to ensure people wouldn't just take the money and squander it, the law was adjusted to prevent these loans from being able to be dismissed in bankruptcy. And indeed college attendance shot up after these laws were passed. But this did two things. It sharply increased the demand for post-secondary education, and it also increased the supply of money available to pay for it. Predictably costs started to gradually rise. And so as this happened, it began to be that government loans alone were no longer sufficient to ensure everybody could go to college without having to immediately pay for it. And so we now did the exact same thing with private loans - they could no longer be dismissed, which meant that from a lender's perspective, giving a loan was practically free money. And we've seen what happened here already. Costs skyrocketed since there was now an effectively unlimited amount of money that students could borrow. The only reason costs stopped accelerating as fast is because we reached 'peak college' in 2010-2011 with enrollment figures with enrollment continuing to decline since then in spite of an increasing population. ---- The point I'm making with this is that the one and only reason we're in this situation is because of well intended regulations. It's easy to say just "regulate out of existence exploitative student loan conditions" but things like this are far easier to say than do. For instance, as you make loans less profitable for lenders, they end up becoming more selective on who they lend to. In turn we end up going back to where we started where college is no longer something for everybody. And in my opinion this is probably the right direction, but at the same time I think many people would disagree with this. If you happen to be one of these people then you end up in this tough situation of trying to create a system where lenders can/will lend to people who they probably should not be lending to. Getting a degree in underwater basket weaving isn't going to likely lead to a life such that one could repay years of debts taken on to obtain such a degree, even if the cost of education was relatively "affordable."

empath75 8y ago

Just make student loans dischargable in bankruptcy again, problem solved.

ceejayoz 8y ago
Well, one problem solved, but likely creating (or restoring) others. Their non-dischargable status helps keep rates low(er) and allow folks who'd never qualify for a $100k loan otherwise get a degree. If we're gonna require a bachelors degree to work at McDonalds, it's probably time to treat undergraduate education like K-12; as an entirely publicly funded endeavour.
- peteradio 8y ago
  Perhaps 100k prices are propped up by low interest loans.
  - ceejayoz 8y ago
    Very possibly! Another reason to expand the public K-12 system to undergraduate level.
- geebee 8y ago
  The problem is, it also allows folks who would never qualify for a 100k loan otherwise get 100K into debt. I read an article about how artists are struggling in the high cost San Francisco Bay Area (sorry no link, because it was really an eye-opening article). The article did mention student loans, but focused mainly on gentrification brought about by high tech. However, they did profiles of various struggling artists, and I was frankly stunned by the debt levels. People with fine and performing arts degrees frequently had student debt levels of $70,000-$90,000. Holy crap. Is it a good thing that we've created a non-dischargeable, federally guaranteed loan that allows people to go $90k in hock for a degree that they wouldn't otherwise be able to get? I was very intrigued when I learned that libertarians often look askance on weakening bankruptcy laws. I always figured they were a "that's the bargain you made" soft of crowd. What I learned is that libertarians aren't especially keen on lending (pun intended) the government's monopoly on physical force in service as a collection agency for people who make stupid loans. I'd say that making a $90,000 loan to someone so they can (channeling David Sedaris here) take photographs of rotting produce spilling out of garbage cans is the height of stupidity. Like, if you make that loan, don't come crying to me. We already have a fairly punitive bankruptcy system, but we are not interested in marshaling the power of government sponsored men with guns to pursue foolish borrowers who don't pay foolish debts to the ends of the earth so that foolish lenders can get their money back. That, to quote pornstache from orange is the new black, "sounds like a whole lot of your problem". If you don't think ordinary bankruptcy, along with credit and a history of repaying debts, is enough to incentivize repayment, seriously, don't make the loan.

rayiner 8y ago

> The solution to that problem in my mind though is to regulate out of existence exploitative student loan conditions. Instead this mechanism creates a whole new way that lenders can rip students off. The Yale example is good but let me pick at this: How is "regulation" the answer? Private student loans are effectively dead since Obama. Over 92% of student loan debt is owed to the federal government as the lender. > There is a good reason why super high APR loans are heavily regulated - because they're almost certain to cause debt spirals and are only entered into by those who are desparate. The crucial difference is that only borrowers who end up making a high income will pay that high APR. People who end up with lower incomes pay less. That's a perfectly reasonable arrangement.

esoterica 8y ago

15%? You might wanna do the math again dude. Also the entire point of an equity like arrangement is that the investor gets a larger fraction of the upside and in exchange for agreeing to eat the downside if the investment doesn’t work out. Comparing it to the APR of a normal student loan misses the point entirely. With a regular loan you have to pay the same amount whether you’re making minimum wage or 200k/year, whereas with an equity-like arrangement you only have to pay the max amount if you make a lot of money.

colpabar 8y ago
I think everyone would have appreciated a correction of his math instead of just pointing out how he was wrong.
- benmanns 8y ago
  The math is excluding compounding. A simplified look (payment due at end of 15 years) is around 6.3% annually https://www.wolframalpha.com/input/?i=2.5%5E(1%2F15)&assumption=%22%5E%22+-%3E+%22Real%22 https://www.wolframalpha.com/input/?i=2.5%5E(1%2F15)&assumpt... The math including payments is a bit more complex and will depend on how much you are paying during the loan term. I.e. if you paid 2.4x on day one and 0.1x the final day looks a lot different from 0.1x on day one and 2.4x the last day due to the time value of money.

jlawson 8y ago

>At the age you're agreeing this you are very unlikely to correctly judge your own value. I think that's the point, isn't it? Even if the student overestimates his potential, investors with more neutral incentives and more broad experience in predicting such outcomes won't. Lots of startup founders overestimate themselves too; the social purpose of VCs is to make judgments on who can use capital the best. What we have now is like a government agency that gives capital to literally anyone who wants to start a company, promises them riches, and makes them pay half the tab anyway so they end up hugely in debt in addition to wasting the taxpayers' share.

tracker1 8y ago

Even then, there is a lot of risk... how many will fallout, not finish or otherwise live in their parent's basement for a portion of the time? In the end, you're agreeing to a sliding scale based on salary. Those financing are definitely having an interest in your field of study and the duration for completion.