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Part of the reason prices have gone up so much is that credit has become so easy. 50 years ago, if you wanted to go to college, you went, and the prices were r

Part of the reason prices have gone up so much is that credit has become so easy. 50 years ago, if you wanted to go to college, you went, and the prices were reasonable because people could not afford a lot of money for it, and no one would lend it to them. There is almost no downward price pressure on college costs, and there is upward price pressure: since the students don't care about the price, they always want the school with better and more modern facilities, which cost money.

nickff 13y ago
The institutions are the ones receiving the benefits of the subsidized loans; the students bear the long term costs of the 'student loans'. "Where the supply curve is more inelastic than the demand curve, producers bear more of the tax and receive more of the subsidy than consumers as the difference between the price producers receive and the initial market price is greater than the difference borne by consumers." [1] http://en.wikipedia.org/wiki/Effect_of_taxes_and_subsidies_on_price http://en.wikipedia.org/wiki/Effect_of_taxes_and_subsidies_o...
jseliger 13y ago
Part of the reason prices have gone up so much is that credit has become so easy. "Part of the reason," yes, but take a look at Why Does College Cost so Much? by Archibald and Feldman (http://www.amazon.com/Why-Does-College-Cost-Much/dp/0199744505 http://www.amazon.com/Why-Does-College-Cost-Much/dp/01997445...). Their short answer is "Baumol's cost disease. The long answer is the book.
lmg643 13y ago
the core problem with college loans is that they are non-dischargeable. this means that no matter what the student's ultimate financial situation (long term unemployed, finances wiped out, etc) they still have to pay down the debt, and it can't be wiped out in bankruptcy. This stands in contrast to virtually every kind of loan out there, which can be discharged (written off). As a result, there is less risk for the lender to give a loan to any old fool out there, regardless of the major they choose, regardless of the quality of school they go to, etc. anything that might correlate with the ability to pay it back. you might say, great, they don't discriminate against liberal arts students at no-name schools. and that might be something that suffers if reforms were made. but perhaps that student might be better served if funding were hard to come by. complain now versus complain more later, kind of thing. the great sin in the student loan market is the online degree mills, which target relatively vulnerable segments of the population, all funded by loans. for example: did you know that online universities cost almost the same as physical ones? that makes absolutely no sense when you think about it, but i don't think many of their students do. online only should be a fraction of the rate. Perhaps the online university is a market to be disrupted. not unstructured MOOCs, but credentialed degree schools that are a fraction of the cost of current ones. i can see the ycombinator startup already. and student loans should be dischargeable. it's the only fair thing to do.
- newbie12 13y ago
  Student loans are unsecured, so if they could be discharged, the market rate would be akin to a credit card with a huge balance-- 15% to 20% a year in the current interest rate environment. Plus if they could be discharged, such action would become commonplace, a rite of passage at graduation.
  - 7Figures2Commas 13y ago
    Exactly. It amazes me how many people seem to believe that the solution to the student loan debt problem is to allow for discharge in bankruptcy. Not only will this necessarily force lenders to increase the cost of these loans to borrowers, a lot of folks apparently don't understand that the biggest lender in this market is the federal government. Of the more than $1 trillion in student loans outstanding, about 85% have been provided by the federal government. Just over one in five federal student loans is already in default or delayed default. If the law is changed to permit discharge of these loans in bankruptcy, Student Loan Debt will become Mortgage Market 2.0.
    - avenger123 13y ago
      Why would this be a bad thing? if loans are able to be discharged the federal government wouldn't be handing them out like free candy to anyone that wants it. It's exactly that there is no downside for the government that the situation is the way it is.
      - 7Figures2Commas 13y ago
        The problem here is that we can't just use a magic wand to fix the situation. There is over $1 trillion in outstanding student debt that needs to be dealt with. Much of it is already going bad. But the problem is bigger than the trillion dollars in debt you and I are already on the hook for. A lot of people like free candy, and if you take it away here, we'll go from "Tuition costs are too high, and I have too much debt!" to "Washington politicians are denying me an education!" The education lobby is strong and too many people are dependent on federal student loans for this to be "fixed" in a logical fashion. Everybody has been sold the idea that a college degree is a prerequisite for access to the middle class, and government-subsidized student loans are practically seen as an entitlement. As much as one can hope for a better system, it isn't likely to come. We're well beyond the point of no return.
rhizome 13y ago
Part of the reason prices have gone up so much is that credit has become so easy. Think of it as a perverse incentive for collusion between the schools and finance providers to milk the students through the mechanism of easier credit.
ChuckMcM 13y ago
I think it is even worse than simply "easy credit", I think the rewards built in encourage exploitation. Allow me to explain. 1) You have capital seeking a return. 2) There exists a basic need that can be facilitated by the application of capital (a degree for a "good job"). 3) You remove all the risk out of providing capital for filling the need through government guarantees. 4) You provide a rate of return that is higher than the government guaranteed rate on their own capital instruments (treasury bills). #4 there, which gives you higher returns on low risk investments, creates a demand for those instruments. And that demand causes a supply of instruments to be created. And the regulation on that supply is minimal. The result is you get financial institutions giving loans to students for useless degrees at inflated cost institutions knowing that the government has made defaulting nearly impossible (hence the low risk) and they can offer better rates than t-bills. Students are being exploited exactly like unqualified home buyers were being exploited in the mortgage fiasco of 2008. What annoys me about the journalistic coverage is that the 'rage views' are "Students are graduating with few prospects from college and a mountain of debt" whereas the bigger story is that "Rich people demanding higher returns, enslave unsuspecting youth through their loan seller proxies."
- klenwell 13y ago
  #4 has also been abetted by the decline in state investment in higher education. A generation ago, I felt I got a great a deal paying $1000/quarter at a UC school. Registration for community college, where I started, was capped (capped!) at $50/semester and served a much more broader segment of society. What's UC tuition nowadays? $3700 for resident tuition. $4900 when you include all the fees (which my $1000 figure did). Push everything forward 20 years and my parents would have no expectation to be making much more money now than they did then. I would be carrying more debt. Pick your narrative for explaining what happened in the meantime. "Rich people demanding higher returns, enslave unsuspecting youth through their loan seller proxies" works for me.
- 001sky 13y ago
  This war was won when the special interests slipped in certain changes to the barkruptcy code circa 2005. Prior to that, student loans could (like any other) be discharged. The government (not wanting to fund poor students) basically created these "off balance sheet" funding mechanisms through their extensions of loan guarantees. Again, this is very much the same thing that was done with the credit g'tees for the Mortgage GSAs. What's even worse, is that the money just goes right to the colleges inflated overheads. No student ever "sees" the money from the loans. In this case, the cost of the schools just keeps going up so that the loans remain ~80pc of the cost of a degree. Now, how much money is in the Harvard Endowment? Stanford? Princeton? Massive amounts growing far in excess of inflation, and all Tax free. Why are these places even allowed to charge fees for tuition??
wayne_h 13y ago
This was caused by government unintended consequences.... Some doctors graduated from med school with $100ks in loans. So they immediately filed for bankruptcy and cleared the debt. After a few years of work they were back in the bucks and debt-free. The loan industry had congress write some new laws (was it 2008 ish?). The package clamped down on debt-collectors calling at all hours. It also eliminated clearing college loans with BK. The loan industry celebrated - nothing like sure bet! Indentured servitude - Yahoo! They started giving away loans like candy. Then the schools noticed all the free-flowing money and joined the party.
- dragonwriter 13y ago
  I don't see the unintended consequences: financial companies asked Congress to write a law for the express purpose of insulating those companies from risk and increasing their profits and the results were that (1) borrowers couldn't discharge debts in bankruptcy, making the financial services companies more money, and (2) increased profitability led to more loans, helping drive up tuition costs increasing the average loan amount and making the financial services companies even more money. Doesn't seem to be unintended consequences at all.
  - 7Figures2Commas 13y ago
    You do realize that ~85% of the student loan debt outstanding - which amounts to more than $800 million - belongs to the federal government, right?

nickff 13y ago

The institutions are the ones receiving the benefits of the subsidized loans; the students bear the long term costs of the 'student loans'. "Where the supply curve is more inelastic than the demand curve, producers bear more of the tax and receive more of the subsidy than consumers as the difference between the price producers receive and the initial market price is greater than the difference borne by consumers." [1] http://en.wikipedia.org/wiki/Effect_of_taxes_and_subsidies_on_price http://en.wikipedia.org/wiki/Effect_of_taxes_and_subsidies_o...

jseliger 13y ago

Part of the reason prices have gone up so much is that credit has become so easy. "Part of the reason," yes, but take a look at Why Does College Cost so Much? by Archibald and Feldman (http://www.amazon.com/Why-Does-College-Cost-Much/dp/0199744505 http://www.amazon.com/Why-Does-College-Cost-Much/dp/01997445...). Their short answer is "Baumol's cost disease. The long answer is the book.

lmg643 13y ago

the core problem with college loans is that they are non-dischargeable. this means that no matter what the student's ultimate financial situation (long term unemployed, finances wiped out, etc) they still have to pay down the debt, and it can't be wiped out in bankruptcy. This stands in contrast to virtually every kind of loan out there, which can be discharged (written off). As a result, there is less risk for the lender to give a loan to any old fool out there, regardless of the major they choose, regardless of the quality of school they go to, etc. anything that might correlate with the ability to pay it back. you might say, great, they don't discriminate against liberal arts students at no-name schools. and that might be something that suffers if reforms were made. but perhaps that student might be better served if funding were hard to come by. complain now versus complain more later, kind of thing. the great sin in the student loan market is the online degree mills, which target relatively vulnerable segments of the population, all funded by loans. for example: did you know that online universities cost almost the same as physical ones? that makes absolutely no sense when you think about it, but i don't think many of their students do. online only should be a fraction of the rate. Perhaps the online university is a market to be disrupted. not unstructured MOOCs, but credentialed degree schools that are a fraction of the cost of current ones. i can see the ycombinator startup already. and student loans should be dischargeable. it's the only fair thing to do.

newbie12 13y ago
Student loans are unsecured, so if they could be discharged, the market rate would be akin to a credit card with a huge balance-- 15% to 20% a year in the current interest rate environment. Plus if they could be discharged, such action would become commonplace, a rite of passage at graduation.
- 7Figures2Commas 13y ago
  Exactly. It amazes me how many people seem to believe that the solution to the student loan debt problem is to allow for discharge in bankruptcy. Not only will this necessarily force lenders to increase the cost of these loans to borrowers, a lot of folks apparently don't understand that the biggest lender in this market is the federal government. Of the more than $1 trillion in student loans outstanding, about 85% have been provided by the federal government. Just over one in five federal student loans is already in default or delayed default. If the law is changed to permit discharge of these loans in bankruptcy, Student Loan Debt will become Mortgage Market 2.0.
  - avenger123 13y ago
    Why would this be a bad thing? if loans are able to be discharged the federal government wouldn't be handing them out like free candy to anyone that wants it. It's exactly that there is no downside for the government that the situation is the way it is.
    - 7Figures2Commas 13y ago
      The problem here is that we can't just use a magic wand to fix the situation. There is over $1 trillion in outstanding student debt that needs to be dealt with. Much of it is already going bad. But the problem is bigger than the trillion dollars in debt you and I are already on the hook for. A lot of people like free candy, and if you take it away here, we'll go from "Tuition costs are too high, and I have too much debt!" to "Washington politicians are denying me an education!" The education lobby is strong and too many people are dependent on federal student loans for this to be "fixed" in a logical fashion. Everybody has been sold the idea that a college degree is a prerequisite for access to the middle class, and government-subsidized student loans are practically seen as an entitlement. As much as one can hope for a better system, it isn't likely to come. We're well beyond the point of no return.

rhizome 13y ago

Part of the reason prices have gone up so much is that credit has become so easy. Think of it as a perverse incentive for collusion between the schools and finance providers to milk the students through the mechanism of easier credit.

ChuckMcM 13y ago

I think it is even worse than simply "easy credit", I think the rewards built in encourage exploitation. Allow me to explain. 1) You have capital seeking a return. 2) There exists a basic need that can be facilitated by the application of capital (a degree for a "good job"). 3) You remove all the risk out of providing capital for filling the need through government guarantees. 4) You provide a rate of return that is higher than the government guaranteed rate on their own capital instruments (treasury bills). #4 there, which gives you higher returns on low risk investments, creates a demand for those instruments. And that demand causes a supply of instruments to be created. And the regulation on that supply is minimal. The result is you get financial institutions giving loans to students for useless degrees at inflated cost institutions knowing that the government has made defaulting nearly impossible (hence the low risk) and they can offer better rates than t-bills. Students are being exploited exactly like unqualified home buyers were being exploited in the mortgage fiasco of 2008. What annoys me about the journalistic coverage is that the 'rage views' are "Students are graduating with few prospects from college and a mountain of debt" whereas the bigger story is that "Rich people demanding higher returns, enslave unsuspecting youth through their loan seller proxies."

klenwell 13y ago
#4 has also been abetted by the decline in state investment in higher education. A generation ago, I felt I got a great a deal paying $1000/quarter at a UC school. Registration for community college, where I started, was capped (capped!) at $50/semester and served a much more broader segment of society. What's UC tuition nowadays? $3700 for resident tuition. $4900 when you include all the fees (which my $1000 figure did). Push everything forward 20 years and my parents would have no expectation to be making much more money now than they did then. I would be carrying more debt. Pick your narrative for explaining what happened in the meantime. "Rich people demanding higher returns, enslave unsuspecting youth through their loan seller proxies" works for me.
001sky 13y ago
This war was won when the special interests slipped in certain changes to the barkruptcy code circa 2005. Prior to that, student loans could (like any other) be discharged. The government (not wanting to fund poor students) basically created these "off balance sheet" funding mechanisms through their extensions of loan guarantees. Again, this is very much the same thing that was done with the credit g'tees for the Mortgage GSAs. What's even worse, is that the money just goes right to the colleges inflated overheads. No student ever "sees" the money from the loans. In this case, the cost of the schools just keeps going up so that the loans remain ~80pc of the cost of a degree. Now, how much money is in the Harvard Endowment? Stanford? Princeton? Massive amounts growing far in excess of inflation, and all Tax free. Why are these places even allowed to charge fees for tuition??

wayne_h 13y ago

This was caused by government unintended consequences.... Some doctors graduated from med school with $100ks in loans. So they immediately filed for bankruptcy and cleared the debt. After a few years of work they were back in the bucks and debt-free. The loan industry had congress write some new laws (was it 2008 ish?). The package clamped down on debt-collectors calling at all hours. It also eliminated clearing college loans with BK. The loan industry celebrated - nothing like sure bet! Indentured servitude - Yahoo! They started giving away loans like candy. Then the schools noticed all the free-flowing money and joined the party.

dragonwriter 13y ago
I don't see the unintended consequences: financial companies asked Congress to write a law for the express purpose of insulating those companies from risk and increasing their profits and the results were that (1) borrowers couldn't discharge debts in bankruptcy, making the financial services companies more money, and (2) increased profitability led to more loans, helping drive up tuition costs increasing the average loan amount and making the financial services companies even more money. Doesn't seem to be unintended consequences at all.
- 7Figures2Commas 13y ago
  You do realize that ~85% of the student loan debt outstanding - which amounts to more than $800 million - belongs to the federal government, right?