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Why should the principle not be discharged? Why is lending a virtually risk free position (which induces a massive moral hazard)

by throwaway2048 7y ago

zaroth 7y ago
It’s non-dischargeable so that it can be offered to people with no collateral and who are otherwise entirely un-creditworthy. Not surprisingly, this results in high delinquency rates! The alternative is most people wouldn’t qualify for this level of debt, you would more highly subsidize cheaper public education, and private universities would have to rely entirely on endowments to provide financial aid to people who otherwise wouldn’t be able to afford to go. At some point a $50k private undergraduate education (forget about $100k+!) is not for everyone, even if there are banks willing to write the check and put you into that kind of debt. But think of the outcry if you were to limit the amount of educational debt someone could take on — for example by only making the first $20k non-dischargeable. It would fix the delinquency problem, drastically lower the total annual student loan rate, and cause private tuition prices overall to decline, but it would be called institutional racism. I think we already went through this cycle with housing, when ~15 years ago politicians started saying that owning a home was a right and everyone should own one, regardless of ability to pay. Zero down, no income verification, guaranteed issue mortgages caused the housing bubble, and we see something nearly the same in education today saddling kids with debt way over their heads, except this time you can’t even walk away from it in exchange for a 7 year credit score hit.
- yardie 7y ago
  > if you were to limit the amount of educational debt someone could take on — for example by only making the first $20k non-dischargeable. It would fix the delinquency problem, drastically lower the total annual student loan rate, and cause private tuition prices overall to decline, but it would be called institutional racism. The solution to structural racism is more scholarship money, not more debt. Pell and Social Security supplement grants have gotten really meager since when I went to school. > I think we already went through this cycle with housing, when ~15 years ago politicians started saying that owning a home was a right and everyone should own one, regardless of ability to pay. Ahh yes, this old card. Blame the poors for financial crisis. Buddy most of the defaults weren't from poor people buying homes. People with good credit scores leveraged that score to speculate, over 85% of the defaults were for investment properties. Most of the mortgage defaults were done by your doctors, lawyers, realtors, general contractors, and business owners who watched one too many episodes of home flipping shows and thought they could get in on a good deal.
  - itronitron 7y ago
    >> The solution to structural racism is more scholarship money, not more debt I completely agree, scholarships and grants should be greater than the loan debt that a student takes on, and the maximum financial aid for a student should be capped annually in some way. There are simply too many student loans being made available to students that don't need them. I have a colleague that got a full ride through undergrad but managed to graduate with over two hundred thousand dollars in student loan debt. It is predatory lending to loan students more money than they need to cover their cost of education and cost of living (for a student).
  - deleted 7y ago
    [deleted]
  - SantalBlush 7y ago
    That's not to mention the lenders who signed people, knowing that they were taking on low-grade debt, to have someone package those mortgages with the good ones to obscure their risk and sell them to speculators.
  - zaroth 7y ago
    Interesting point; “When the economy slowed, defaults went up across income spectrums. But while the chance of a low-income borrower defaulting increased from 6 percent pre-crisis to 12 percent post-crisis, the chance of a high-income borrower defaulting went from almost zero to around 5 or 6 percent. And the latter group was defaulting on bigger loans.” [1] I think the homeownership rate over time also tells a story, but perhaps this is dwarfed by the rate of sales and the collapse of prices causing ~25% of houses to actually be underwater. However if you look at Mortgage Origination by Risk Score over time [2] and Debt-to-Income ratio over time [3] there is truth to the claim that the overall portfolio of homeowners also changed in the lead up to the crisis. [1] - https://mitsloan.mit.edu/ideas-made-to-matter/rethinking-how-housing-crisis-happened https://mitsloan.mit.edu/ideas-made-to-matter/rethinking-how... [2] - https://infogram.com/1pwez02vj1mld0fvlzvmn3r1k9s9y7x5zgp https://infogram.com/1pwez02vj1mld0fvlzvmn3r1k9s9y7x5zgp [3] - https://infogram.com/1pk6ve560vyl93c97kvpwy5dymt3kz1rd5g https://infogram.com/1pk6ve560vyl93c97kvpwy5dymt3kz1rd5g

Why should the principle not be discharged? Why is lending a virtually risk free position (which induces a massive moral hazard)

zaroth 7y ago

It’s non-dischargeable so that it can be offered to people with no collateral and who are otherwise entirely un-creditworthy. Not surprisingly, this results in high delinquency rates! The alternative is most people wouldn’t qualify for this level of debt, you would more highly subsidize cheaper public education, and private universities would have to rely entirely on endowments to provide financial aid to people who otherwise wouldn’t be able to afford to go. At some point a $50k private undergraduate education (forget about $100k+!) is not for everyone, even if there are banks willing to write the check and put you into that kind of debt. But think of the outcry if you were to limit the amount of educational debt someone could take on — for example by only making the first $20k non-dischargeable. It would fix the delinquency problem, drastically lower the total annual student loan rate, and cause private tuition prices overall to decline, but it would be called institutional racism. I think we already went through this cycle with housing, when ~15 years ago politicians started saying that owning a home was a right and everyone should own one, regardless of ability to pay. Zero down, no income verification, guaranteed issue mortgages caused the housing bubble, and we see something nearly the same in education today saddling kids with debt way over their heads, except this time you can’t even walk away from it in exchange for a 7 year credit score hit.

yardie 7y ago
> if you were to limit the amount of educational debt someone could take on — for example by only making the first $20k non-dischargeable. It would fix the delinquency problem, drastically lower the total annual student loan rate, and cause private tuition prices overall to decline, but it would be called institutional racism. The solution to structural racism is more scholarship money, not more debt. Pell and Social Security supplement grants have gotten really meager since when I went to school. > I think we already went through this cycle with housing, when ~15 years ago politicians started saying that owning a home was a right and everyone should own one, regardless of ability to pay. Ahh yes, this old card. Blame the poors for financial crisis. Buddy most of the defaults weren't from poor people buying homes. People with good credit scores leveraged that score to speculate, over 85% of the defaults were for investment properties. Most of the mortgage defaults were done by your doctors, lawyers, realtors, general contractors, and business owners who watched one too many episodes of home flipping shows and thought they could get in on a good deal.
- itronitron 7y ago
  >> The solution to structural racism is more scholarship money, not more debt I completely agree, scholarships and grants should be greater than the loan debt that a student takes on, and the maximum financial aid for a student should be capped annually in some way. There are simply too many student loans being made available to students that don't need them. I have a colleague that got a full ride through undergrad but managed to graduate with over two hundred thousand dollars in student loan debt. It is predatory lending to loan students more money than they need to cover their cost of education and cost of living (for a student).
- deleted 7y ago
  [deleted]
- SantalBlush 7y ago
  That's not to mention the lenders who signed people, knowing that they were taking on low-grade debt, to have someone package those mortgages with the good ones to obscure their risk and sell them to speculators.
- zaroth 7y ago
  Interesting point; “When the economy slowed, defaults went up across income spectrums. But while the chance of a low-income borrower defaulting increased from 6 percent pre-crisis to 12 percent post-crisis, the chance of a high-income borrower defaulting went from almost zero to around 5 or 6 percent. And the latter group was defaulting on bigger loans.” [1] I think the homeownership rate over time also tells a story, but perhaps this is dwarfed by the rate of sales and the collapse of prices causing ~25% of houses to actually be underwater. However if you look at Mortgage Origination by Risk Score over time [2] and Debt-to-Income ratio over time [3] there is truth to the claim that the overall portfolio of homeowners also changed in the lead up to the crisis. [1] - https://mitsloan.mit.edu/ideas-made-to-matter/rethinking-how-housing-crisis-happened https://mitsloan.mit.edu/ideas-made-to-matter/rethinking-how... [2] - https://infogram.com/1pwez02vj1mld0fvlzvmn3r1k9s9y7x5zgp https://infogram.com/1pwez02vj1mld0fvlzvmn3r1k9s9y7x5zgp [3] - https://infogram.com/1pk6ve560vyl93c97kvpwy5dymt3kz1rd5g https://infogram.com/1pk6ve560vyl93c97kvpwy5dymt3kz1rd5g