4 ms·

That is the next debt crisis coming up. Only difference... normal people don't get bailouts.

by wjnc 14y ago

petercooper 14y ago
As a non American, is US student debt repayment linked to income? Or is it a more typical type of debt that could swallow up incomes in the event of deflation? Here in the UK, you have to earn over the equivalent of $26k per year to start paying it back and then it's 9% of your income over that. I believe it is then written off after 30 years. So the risk of a crisis in this version of the system is low since the terms are so generous.
- doktrin 14y ago
  Excellent question. I hope someone with more knowledge vis a vis the US student loan system chimes in, but I'll add where I can. To begin with, in the US, it's important to distinguish federal loans from those issued by the private sector. The former are issued by the government, the latter by private institutions (banks, et al). Federal loans : The IBR (income based repayment) plan was recently introduced [1]. It appears similar to the UK plan, except the implementation details are different (15% of income over 25 years). There are of course eligibility requirements that (shock of shocks) are not always crystal clear [4] Private loans : nothing whatsoever AFAIK, nor much planned future legislation Lastly, it's important to note that both public and private US student loans are notoriously difficult to have discharged, including in the event of bankruptcy. The bar is set high enough to almost be considered de-facto impossible [5] (opinion). This, IMO, makes the astronomically high figure presented here all the more alarming. An affordable education is possible in this country, but we haven't been good at educating the public in this regard (ironically, I guess). For a general breakdown on the differences between federal & private loans, see the linked chart [6]. While I guess I should have known this already, I was surprised to note that some privately issued loans come bundled with pre-payment penalties. [1] http://studentaid.ed.gov/repay-loans/understand/plans/income-based http://studentaid.ed.gov/repay-loans/understand/plans/income... [2] http://en.wikipedia.org/wiki/Income-Based_Repayment http://en.wikipedia.org/wiki/Income-Based_Repayment [3] http://articles.chicagotribune.com/2013-02-12/business/sns-201302121830--tms--savingsgctnzy-a20130212-20130212_1_student-loans-private-lenders-sallie-mae http://articles.chicagotribune.com/2013-02-12/business/sns-2... [4] http://www.nytimes.com/2011/10/27/your-money/student-loans/explaining-new-federal-student-loan-rules.html?_r=0 http://www.nytimes.com/2011/10/27/your-money/student-loans/e... [5] http://www.nytimes.com/2012/09/01/business/shedding-student-loans-in-bankruptcy-is-an-uphill-battle.html?pagewanted=all http://www.nytimes.com/2012/09/01/business/shedding-student-... [6] http://studentaid.ed.gov/types/loans/federal-vs-private http://studentaid.ed.gov/types/loans/federal-vs-private
  - rdl 14y ago
    The easy fix would be to make non-governmental student loans the same as every other class of loan: able to be discharged in bankruptcy. This would really cut back on the market, but probably not eliminate it.
- zanny 14y ago
  As a recent CS grad who had around $20k of debt (and 16k of that is now paid off 9 months later) the terms are not generous. I had to take subsidized stafford loans each year just to qualify for my state grant, since it was supposed to be "needs based". My last loan is only 3.5% interest though, so I'm taking my time on it. The other poster covers it in greater detail, but after 6 months they expect payments, and deferring them only lasts so long (and I don't know how long). And you can't ever get rid of them. The answer still isn't to bail everyone out. It just perpetuates the problem. If higher education is to be a for profit business (at least in many cases) you can't create artificial lending markets like student loans, it just causes the absurd bubble that has popped up in the US. It should be flat "heres the cost, go try to get a loan for it" like you would a car or house. When the government starts handing out free money no questions asked with a repayment plan, schools just pile that on top of their tuition fees as profit. It doesn't hurt that we really should be looking to having online certifications for either free (MIT courses, etc) or extremely low cost. While the K-12 years also have a function as day care, hopefully adults don't require that cost, and stuffing them into giant brick buildings often thousands of miles away for months on end is really inefficient.
  - jelveh 14y ago
    I agree that bailouts are not the answer. The answer is to let these loans default. That's how the lending system should work. No bailouts, but simple defaults. You as a lender are responsible for factoring in the probability of a default. If you haven't - sucks to be you. Same goes for government loans, e.g. you create an institutionalized Banking system (like the Federal Direct Student loans). And if you survive the coming mass default (http://www.zerohedge.com/news/2013-02-28/delinquencies-student-loans-surpass-those-credit-card-debt http://www.zerohedge.com/news/2013-02-28/delinquencies-stude...) - without gov. bailouts - you'll have learned a valuable lesson on lending: Don't give out ridiculous loans on ridiculous terms to people who can't afford them. And rest assured that the education system will find a way to adapt - probably by making education a lot cheaper again.
    - B0Z 14y ago
      The problem with your solution is that the majority of student loans are government insured Stafford loans and a "defaulted" loan is still paid back to the lender for full principle by the American taxpayer. Support for this solution would be miniscule. In an aside, loans made to college kids to get a quality education is not a ridiculous loan on ridiculous terms to people who can't afford them.
- B0Z 14y ago
  There are very few legislation/regulation-based restrictions between the level of one's income and the repayment schedule/amount of one's student loans here in the US though it depends largely on how the education debt was financed. The vast majority of loans are made from a large commercial bank to a private citizen. The bank makes these high-risk loans because the US Federal Government "co-signs" on the loan for the student receiving the funds. In the event of an economic downturn or financial hardship, if the former student has limited income (underemployment) but can pay something, the student negotiates a payment amount with the bank. If the former-student is unemployed or has such severe economic hardship that they can pay nothing, the borrower's loan can go into what they call forbearance. Been a long time for me, but I believe you can have a total forbearance time of 36 months over the life of your loan. If, for a variety of reasons, you default on the loan, the lender can/will submit a claim to the Federal Department of Education and the lender will be compensated for the remaining amount of principle on the loan. At this point, your loan is now "owned" by the Department of Education who has substantially more latitude to get their money out of you than a commercial lender does (they can garnish your wages through your employer and keep annual income tax over-payments). But, getting back to your question, there are no established laws that dictate a lender can extract more from you than you can reasonably pay depending on your circumstances. Lender's are incentivized to work with you for 2 reasons, 1) the loan is guaranteed by the Federal Government so they will not lose a dime of principle 2) the longer you carry the debt, the more money the lender can make from interest. Note: Congress did pass a law that stipulates that student loan debt cannot ever be included in a personal bankruptcy. The loan, theoretically, can and will follow you for as long as you live until you pay it off.
timeimp 14y ago
Here in Australia, the Federal Government will cover the costs of your Tertiary Education (namely, Uni fees) under a scheme known as 'Commonwealth Supported Places' for most Tertiary Education places that have applied to be a part of it. Universities usually charge in the neighbourhood of $800-1900 per subject, however many students simply put on HELP/HECS debt (and will pay it back later. Much later.) You pay it back before when you start earning above a certain threshold, you must start paying it back, along with tax. Currently, that threshold is $44K per year and above. Similar to the UK, you pay a base rate + the consumer price index (read: inflation) for that financial year. There is NO interest rate (as such) whatsoever. As part of the tax system, you have to declare to your employer that you have CSP/HELP/HECS debt and they usually take this into account when its payday. You are then paid your gross amount -tax -CSP/HELP/HECS debt. There are plenty of people who can take north of 20-25 years to pay off a full, 3-year degree of their choice. If anyone is interested: http://studyassist.gov.au/sites/studyassist/helppayingmyfees/hecs-help/pages/hecs-help-welcome http://studyassist.gov.au/sites/studyassist/helppayingmyfees... http://en.wikipedia.org/wiki/Tertiary_education_fees_in_Australia http://en.wikipedia.org/wiki/Tertiary_education_fees_in_Aust...
adventured 14y ago
Normal people do get massive bailouts. Home owners got the largest bailout in world history. Trillions worth and counting. And when it comes time in the near future, with the Sallie Mae system collapsing, the Fed will write a big fat check to keep it all solvent. You can debate why they will of course (for the banks that have exposure, etc), but they absolutely will write that check.
- jswinghammer 14y ago
  If normal people were in fact getting bailouts they would be getting their mortgages paid off whereas the Fed is just making the paper value of the assets based of those mortgages higher than their probable market value.
- yesbabyyes 14y ago
  I'm afraid you are wrong. What you are talking about is doing anything to keep the debts on the book, passing the cost to the people -- the very people who are indebted. That's what the global crisis comes down to: a refusal to allow bankruptcy, on every level -- personal, corporational and national. Edit: Spelling.
- jbooth 14y ago
  Bullshit. You add up the value of every home default in America and it's way, way less than the trillion dollars that the banks were bailed out for. Homeowners weren't bailed out, the banks were bailed out.

That is the next debt crisis coming up. Only difference... normal people don't get bailouts.

by wjnc 14y ago

That is the next debt crisis coming up. Only difference... normal people don't get bailouts.

As a non American, is US student debt repayment linked to income? Or is it a more typical type of debt that could swallow up incomes in the event of deflation? Here in the UK, you have to earn over the equivalent of $26k per year to start paying it back and then it's 9% of your income over that. I believe it is then written off after 30 years. So the risk of a crisis in this version of the system is low since the terms are so generous.

doktrin 14y ago
Excellent question. I hope someone with more knowledge vis a vis the US student loan system chimes in, but I'll add where I can. To begin with, in the US, it's important to distinguish federal loans from those issued by the private sector. The former are issued by the government, the latter by private institutions (banks, et al). Federal loans : The IBR (income based repayment) plan was recently introduced [1]. It appears similar to the UK plan, except the implementation details are different (15% of income over 25 years). There are of course eligibility requirements that (shock of shocks) are not always crystal clear [4] Private loans : nothing whatsoever AFAIK, nor much planned future legislation Lastly, it's important to note that both public and private US student loans are notoriously difficult to have discharged, including in the event of bankruptcy. The bar is set high enough to almost be considered de-facto impossible [5] (opinion). This, IMO, makes the astronomically high figure presented here all the more alarming. An affordable education is possible in this country, but we haven't been good at educating the public in this regard (ironically, I guess). For a general breakdown on the differences between federal & private loans, see the linked chart [6]. While I guess I should have known this already, I was surprised to note that some privately issued loans come bundled with pre-payment penalties. [1] http://studentaid.ed.gov/repay-loans/understand/plans/income-based http://studentaid.ed.gov/repay-loans/understand/plans/income... [2] http://en.wikipedia.org/wiki/Income-Based_Repayment http://en.wikipedia.org/wiki/Income-Based_Repayment [3] http://articles.chicagotribune.com/2013-02-12/business/sns-201302121830--tms--savingsgctnzy-a20130212-20130212_1_student-loans-private-lenders-sallie-mae http://articles.chicagotribune.com/2013-02-12/business/sns-2... [4] http://www.nytimes.com/2011/10/27/your-money/student-loans/explaining-new-federal-student-loan-rules.html?_r=0 http://www.nytimes.com/2011/10/27/your-money/student-loans/e... [5] http://www.nytimes.com/2012/09/01/business/shedding-student-loans-in-bankruptcy-is-an-uphill-battle.html?pagewanted=all http://www.nytimes.com/2012/09/01/business/shedding-student-... [6] http://studentaid.ed.gov/types/loans/federal-vs-private http://studentaid.ed.gov/types/loans/federal-vs-private
- rdl 14y ago
  The easy fix would be to make non-governmental student loans the same as every other class of loan: able to be discharged in bankruptcy. This would really cut back on the market, but probably not eliminate it.
zanny 14y ago
As a recent CS grad who had around $20k of debt (and 16k of that is now paid off 9 months later) the terms are not generous. I had to take subsidized stafford loans each year just to qualify for my state grant, since it was supposed to be "needs based". My last loan is only 3.5% interest though, so I'm taking my time on it. The other poster covers it in greater detail, but after 6 months they expect payments, and deferring them only lasts so long (and I don't know how long). And you can't ever get rid of them. The answer still isn't to bail everyone out. It just perpetuates the problem. If higher education is to be a for profit business (at least in many cases) you can't create artificial lending markets like student loans, it just causes the absurd bubble that has popped up in the US. It should be flat "heres the cost, go try to get a loan for it" like you would a car or house. When the government starts handing out free money no questions asked with a repayment plan, schools just pile that on top of their tuition fees as profit. It doesn't hurt that we really should be looking to having online certifications for either free (MIT courses, etc) or extremely low cost. While the K-12 years also have a function as day care, hopefully adults don't require that cost, and stuffing them into giant brick buildings often thousands of miles away for months on end is really inefficient.
- jelveh 14y ago
  I agree that bailouts are not the answer. The answer is to let these loans default. That's how the lending system should work. No bailouts, but simple defaults. You as a lender are responsible for factoring in the probability of a default. If you haven't - sucks to be you. Same goes for government loans, e.g. you create an institutionalized Banking system (like the Federal Direct Student loans). And if you survive the coming mass default (http://www.zerohedge.com/news/2013-02-28/delinquencies-student-loans-surpass-those-credit-card-debt http://www.zerohedge.com/news/2013-02-28/delinquencies-stude...) - without gov. bailouts - you'll have learned a valuable lesson on lending: Don't give out ridiculous loans on ridiculous terms to people who can't afford them. And rest assured that the education system will find a way to adapt - probably by making education a lot cheaper again.
  - B0Z 14y ago
    The problem with your solution is that the majority of student loans are government insured Stafford loans and a "defaulted" loan is still paid back to the lender for full principle by the American taxpayer. Support for this solution would be miniscule. In an aside, loans made to college kids to get a quality education is not a ridiculous loan on ridiculous terms to people who can't afford them.
B0Z 14y ago
There are very few legislation/regulation-based restrictions between the level of one's income and the repayment schedule/amount of one's student loans here in the US though it depends largely on how the education debt was financed. The vast majority of loans are made from a large commercial bank to a private citizen. The bank makes these high-risk loans because the US Federal Government "co-signs" on the loan for the student receiving the funds. In the event of an economic downturn or financial hardship, if the former student has limited income (underemployment) but can pay something, the student negotiates a payment amount with the bank. If the former-student is unemployed or has such severe economic hardship that they can pay nothing, the borrower's loan can go into what they call forbearance. Been a long time for me, but I believe you can have a total forbearance time of 36 months over the life of your loan. If, for a variety of reasons, you default on the loan, the lender can/will submit a claim to the Federal Department of Education and the lender will be compensated for the remaining amount of principle on the loan. At this point, your loan is now "owned" by the Department of Education who has substantially more latitude to get their money out of you than a commercial lender does (they can garnish your wages through your employer and keep annual income tax over-payments). But, getting back to your question, there are no established laws that dictate a lender can extract more from you than you can reasonably pay depending on your circumstances. Lender's are incentivized to work with you for 2 reasons, 1) the loan is guaranteed by the Federal Government so they will not lose a dime of principle 2) the longer you carry the debt, the more money the lender can make from interest. Note: Congress did pass a law that stipulates that student loan debt cannot ever be included in a personal bankruptcy. The loan, theoretically, can and will follow you for as long as you live until you pay it off.

timeimp 14y ago

Here in Australia, the Federal Government will cover the costs of your Tertiary Education (namely, Uni fees) under a scheme known as 'Commonwealth Supported Places' for most Tertiary Education places that have applied to be a part of it. Universities usually charge in the neighbourhood of $800-1900 per subject, however many students simply put on HELP/HECS debt (and will pay it back later. Much later.) You pay it back before when you start earning above a certain threshold, you must start paying it back, along with tax. Currently, that threshold is $44K per year and above. Similar to the UK, you pay a base rate + the consumer price index (read: inflation) for that financial year. There is NO interest rate (as such) whatsoever. As part of the tax system, you have to declare to your employer that you have CSP/HELP/HECS debt and they usually take this into account when its payday. You are then paid your gross amount -tax -CSP/HELP/HECS debt. There are plenty of people who can take north of 20-25 years to pay off a full, 3-year degree of their choice. If anyone is interested: http://studyassist.gov.au/sites/studyassist/helppayingmyfees/hecs-help/pages/hecs-help-welcome http://studyassist.gov.au/sites/studyassist/helppayingmyfees... http://en.wikipedia.org/wiki/Tertiary_education_fees_in_Australia http://en.wikipedia.org/wiki/Tertiary_education_fees_in_Aust...

adventured 14y ago

Normal people do get massive bailouts. Home owners got the largest bailout in world history. Trillions worth and counting. And when it comes time in the near future, with the Sallie Mae system collapsing, the Fed will write a big fat check to keep it all solvent. You can debate why they will of course (for the banks that have exposure, etc), but they absolutely will write that check.

jswinghammer 14y ago
If normal people were in fact getting bailouts they would be getting their mortgages paid off whereas the Fed is just making the paper value of the assets based of those mortgages higher than their probable market value.
yesbabyyes 14y ago
I'm afraid you are wrong. What you are talking about is doing anything to keep the debts on the book, passing the cost to the people -- the very people who are indebted. That's what the global crisis comes down to: a refusal to allow bankruptcy, on every level -- personal, corporational and national. Edit: Spelling.
jbooth 14y ago
Bullshit. You add up the value of every home default in America and it's way, way less than the trillion dollars that the banks were bailed out for. Homeowners weren't bailed out, the banks were bailed out.