21 ms·

The Student Loan Bubble is Starting To Burst

233 points by rnernento 13y ago

astrodust 13y ago
It's as if the value of a formal education has never been lower, the job market is swamped with people that would be more qualified and experienced than you, and the cost has never been higher.
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dmix 13y ago
Misplaced incentives all over the place. This one is going to be messy. But as many people have pointed out, much more slow moving than the previous financial bubble.
- abstractbill 13y ago
  This one is going to be messy. As someone who really hasn't thought about it very much, I'd love for someone to expand on this. What's the expected fallout? In the housing bubble, many people lost the places where they lived. But it's not like someone can "take back" your education if you default on the loan, so what happens instead?
  - oscilloscope 13y ago
    The development of adult life is stunted. It takes longer to afford to rent an apartment on your own, buy a house, buy a car, get married, start a family, start a business, etc. If you're college educated you probably have a broad support network. So instead of being homeless, you move back in with your parents. So instead of losing your home, you may never get it in the first place. The consequences of defaulting on a student loan are also quite severe. https://studentaid.ed.gov/repay-loans/default#what-are-the https://studentaid.ed.gov/repay-loans/default#what-are-the
    - speeder 13y ago
      You are correct. I am 25, and since my first serious job (I was 23) I've been in the government category for the most rich as possible in earning amount (the category is everyone in the top 5% of income... granted, there is still a GREAAAAT gap between the top and low of that... I reached the top 5% with 20k USD/year) I don't own a vehicle (not even a bicycle), much less a living place. I think if I sum all my possessions (literally, including my clothes, glasses, phone... without depreciation) and my debts, I am still negative. According to my calculations, I will be able to buy my first apartment when I am about 35 years old, unless I move back with my parents and stop paying rent. Also I won't bother in buying a vehicle, unless it become really, really necessary (and then, I will buy a chinese QQ or J2) When I think about that, it is really, really, really depressing and ridiculous.
    - greenyoda 13y ago
      And to connect the next couple of dots: - All these young people who can't afford homes, cars or kids will cause the economy to not grow as fast as it otherwise would. - And if the economy is slow, fewer jobs will be created, keeping these young people poor even longer. Of course, not everyone has parents that they can move in with, and those who don't have that safety net will suffer the most.
    - Zigurd 13y ago
      The draconian terms are going to push some people to emigrate if they are forced to default. There are a lot of Americans teaching English in China who are running from problems like these.
  - jmcmichael 13y ago
    It's not the impact on the individual who's defaulting that is the kicker, it's more the effect on the originating bank and the parts of the financial system that packaged up that loan with others of its type into financial products that are incorporated into the investment strategies of pension funds, mutual funds, municipalities, etc.
    - minimax 13y ago
      In the U.S. most of the outstanding student loan debt is held directly by the government. Pension funds and mutual funds don't really have exposure to student loans.
  - stonemetal 13y ago
    As far as I know it is impossible to default on a student loan. Even if you declare bankruptcy student loans have an exception so you can't get rid of them. If you stop paying them they can garnish your wages. The only way to end it is to pay it off or wait 25 years, after which they are forgiven.
  - johnrob 13y ago
    This article was from about 3 weeks ago: http://www.rollingstone.com/politics/news/ripping-off-young-america-the-college-loan-scandal-20130815?print=true http://www.rollingstone.com/politics/news/ripping-off-young-... Short version: The government makes money off student loans, and there is no defaulting on them (unless you die of course). There are no incentives to keep tuition costs in check because the lenders (government) are happy to put more money into the asset class. We're getting to the point where the price of education can't be made up with an eventual increased salary. The author considers this to be an unfair tax on the lower middle class and an eventual drain on the economy.
    - muzz 13y ago
      If the government is making money off student loans, then how are they a subsidy? If profitable, that would imply that commenters calling loans a subsidy are simply incorrect.
      - skylan_q 13y ago
        Students are getting loans from the government on terms that they wouldn't be getting from the bank. That creates more effective demand for schools which drives up the price of tuition. If the banks did this and the student/graduate had to default, the bank would have to take a loss. The government isn't allowing default on the loans they themselves give the students, so they'll make sure they get their money back.
        muzz 13y ago
        Private student loans are generally non-dischargeable in bankruptcy also, as they typically meet Section 221(d)(1) requirements.
  - btilly 13y ago
    The problem is that most money in circulation was manufactured by creating debt. When you destroy that debt through default, you destroy that money. The fiction of student loans is tricky because under Bush they changed bankruptcy rules to exclude student debt. But fundamentally when banks are forced to write down bad student debt, their rosy asset picture becomes non-rosy. When that happens they are required by regulators to not lend. And this is ugly for the whole economy. In 2008 we resolved the problem by having the US government find ways to lend tremendous amounts of money on very favorable terms, and then the Fed picked this up with a similar policy that they call quantitative easing. This creates lots of money in financial markets so that things like banks can continue to operate. The bigger long-term problem is how we'll ever exit the policy. To give an idea how sensitive this situation is, a while ago Bernanke announced that if things continued to improve faster than expected, in a year the Fed would evaluate whether to exit QE 2 faster than originally planned. You can't come up with a milder statement that the policy might end. The markets went crazy. A few days later, Bernanke came out and said we won't be doing that after all, then markets calmed down. There is no question, a student loan debt crisis will be responded to with more QE. The problem of exiting the mess will become bigger. Historically countries have exited this type of policy only after the crisis of a currency collapse. But so far the market players seem to be betting that they will get out of the USA before the other guy when the crisis hits, and in the meantime the USA looks safer than China and Europe. However the financial economy is always a mess. And they are always finding another way to kick the can down the road. That will certainly happen again. And again. And again. Until it doesn't. Every time the doomsayers say, "We don't see how we can kick the can down the road again!" But we do. The dot com bust was resolved with easy interest policies that resulted in a housing boom that resulted in the financial crisis. That was resolved with QE. Take your best guess as to whether we'll kick this can down the road as well...
    - woah 13y ago
      As to the last part of your comment- it's all imaginary anyway.
      - rhizome 13y ago
        The sharecropper economy that results from these profit guarantees to financial institutions won't be.
- drcode 13y ago
  The solution is simple and obvious: All of us who have already paid off our loans are going to fund government-arranged loan forgiveness/reduction programs to those who over-leveraged their education. (I wish I was joking...)
  - loganfrederick 13y ago
    As someone with student loans, I wish this wasn't the case for the previous generation. But at the same time, it's hard to blame current 23 year olds for decisions their parents and communities make about their kids' future finances when they're 16. The majority of fault lies in the previous generation of parents, who both failed to vote out politicians supporting these policies and who pushed their kids into enslaving parts of their lives to lenders.
    - drcode 13y ago
      Agree 100%. I didn't mean to say the blame rests fully with the current generation, I'm just saying government policies going forward are just going to increase the moral hazard even more.
      - muzz 13y ago
        What "government policies" are you talking about?
        deleted 13y ago
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        jessaustin 13y ago
        Off the top of my head, both the interest rate cap that passed this summer and the President's recent student loan proposals? What else would be under discussion here? EDIT: nevermind, apparently both you and drcode are discussing hypotheticals only.
        13y ago
bayesianhorse 13y ago
Just because people shout "bubble" at any exponential growth phenomenon doesn't really mean we can tell when "the bubble bursts". Crashes in growth curves are always unpredictable. You can predict that there will be a crash, but telling when it's going to happen, that's the hard part....
- zanny 13y ago
  Student loans look like they should be easier to predict than anything else. You can't see a bubble burst untill the inability to default is lifted. Until then, there is no defaulting, so there is no loss of confidence. The only metric to measure is how few payments people are making on their outstanding loans. For example, I only pay the minimum since I'm unemployed. I've drained around $300 of my savings just on minimum student loan payments.
  - bayesianhorse 13y ago
    At some point the banks will recognize that you won't ever pay all of the loan back, and then they have to write off a large portion of that debt. If that realization happens too quickly for too many student loans, then there might be a sudden crash. Doesn't look like it yet though.
abdophoto 13y ago
Every kid I come across that plans to go to college I tell them to find the cheapest route possible. Start at either a good community college or go to a public in-state school. You can still go to a good college for a reasonable price, but it seems more and more that kids are taking the more expensive route (dorms, out-of-state, etc).
- tzs 13y ago
  For kids from poor or middle class families, Princeton, Harvard, Yale and Caltech will usually cost less than an in-state public school when it comes to what the student and his family actually have to pay. In-state public school has a lower sticker price, but have less non-loan need-based aid so students have to come up with a high percentage of the sticker price. The top private non-profit schools have higher sticker price, but provide a lot more non-loan need-based aid, so students have to pay a much lower percentage of the cost. At Princeton, for example, the average debt at graduation is only $5k.
  - checker 13y ago
    I wish that I knew this when I was a senior. I saw the number with four zeros per semester and ran.
  - imissmyjuno 13y ago
    That last example is meaningless in isolation. What percentage of Princeton students take out student loans (and how much)? I'd guess it's much smaller than in public schools.
- danteembermage 13y ago
  Unfortunately you public in-state advice is almost now outdated; many privates are cost-competitive with public schools and it's not because the private schools are cheap. e.g.: http://www.nytimes.com/2011/09/29/nyregion/seton-hall-university-to-offer-steep-tuition-discounts.html?_r=0 http://www.nytimes.com/2011/09/29/nyregion/seton-hall-univer... This is definitely a trend in private education pricing as sticker shock is a real problem for students considering private schools and the privates compete for the same students the publics do.
prostoalex 13y ago
Pretty good overview and opinion of the status quo and historical retrospective here: http://online.wsj.com/article/SB10001424127887324165204579028771723069750.html http://online.wsj.com/article/SB1000142412788732416520457902...? "Politicians subsidize the purchase of a good or service, prices inevitably rise in response to this pumped-up demand, and then the pols blame the provider of the good or service for responding to the incentives the politicians created. Think housing finance and medical care." ... "We've got a crisis in terms of college affordability and student debt," said Mr. Obama, without a trace of irony at the State University of New York at Buffalo. The same man who three years ago forced through a plan to add $1 trillion in student loans to the federal balance sheet over a decade said on Thursday, "Our economy can't afford the trillion dollars in outstanding student loan debt."
- muzz 13y ago
  Adding "$1 trillion in student loans to the federal balance sheet over a decade" is a result of direct lending, ie cutting out the middleman. It is also saving the taxpayer money to the tune of $70B over ten years.
  - prostoalex 13y ago
    I think the headline here implies that the said middleman is unsure about the viability of the market, so any savings figure is dependent on low loan default figure.
    - muzz 13y ago
      No, JP Morgan is NOT a middleman. These were cut out in 2010, and JP Morgan is lending directly now. Their loans are not subsidized nor backed by taxpayer money, and they are free to decide to stop lending, which is what appears to be happening now.
      - waps 13y ago
        It also means that the government is now 1) the one making the laws 2) the organisation that would suffer if the assumptions ("guaranteed repayment") turn out less than perfect So now we have : debt slavery where your debtor is actually the one making laws. This could be really good or really bad. Really good if it is decided that transferring the education debt to all taxpayers is deemed acceptable, really bad if the government gets into the business of debt collection from people with no assets (ie. actual slavery).
msandford 13y ago
It's really too bad that the laws surrounding student loans make them artificially cheap. You can't get rid of college debt through bankruptcy so you're basically saddled for life. Normally the interest you pay is the combination of three things: 1. The (inherent) time value of money 2. Expenses the lender incurs to keep up with the debt 3. The average default risk of those taking the loans Student loans only price in 1 & 2 because of the near impossibility of not paying the loans back. Which is great in the short term as it means that more people are able to go to school because the interest rate is lower and thus they can afford more debt. But a college education is a lot like a house. The price of a house isn't how much it's "worth", it's an artifact of how much money you have to pay every month for the privilege of living there. A house of a certain niceness is (everything else equal) going to cost the same amount of money per month whether the interest rate is 1% or 15%. A $1500/mo mortgage buys you $250k of house at 4% but only $150k of house at 9% and only $95k of house at 15% like in the early 80s. (http://www.bankrate.com/finance/mortgages/history-of-mortgage-interest-rates.aspx http://www.bankrate.com/finance/mortgages/history-of-mortgag...) By removing all the default risk from the pricing of student loans, more students are able to afford college which is exactly the intended effect of the laws. But the size of most academic institutions doesn't grow; most colleges don't admit twice as many students just because more are clamoring to get in. This excess demand and fixed supply means that colleges can raise prices. And thanks to the lowered interest rates those who could have afforded college prior to the law (and lower interest rates) are still able to afford it because the lowered interest rate has increased their borrowing capacity. Those on the margin prior to the change in the law still aren't able to afford college once the price increases follow the increase in available money and additional demand for degrees. The law was changed in 1978 and it's taken quite a few years for this unintended consequence to play out. It's really sad to see it happen. http://www.finaid.org/questions/bankruptcyexception.phtml http://www.finaid.org/questions/bankruptcyexception.phtml
- kilroy123 13y ago
  A large part of the problem is all the shitty for profit schools. They get students to take out large government backed loans, then are defaulting, since they can't actually get a job. I knew several people I grew up with who went to these schools. They took out huge loans, 10k plus, and they never landed any kind of job with their "certificates" / degrees. [1] Half of all defaults are from these kind of schools. [1] http://www.businessinsider.com/career-education-corp-will-pay-9-million-to-students-after-allegedly-inflating-job-numbers-2013-8 http://www.businessinsider.com/career-education-corp-will-pa...
everettForth 13y ago
No, it's not. Not even close, and this is really terrible reporting. It's unfortunate that so many young people are carrying large amounts of student loan debt, but there is no sign of a "bubble" bursting any time soon. I don't even understand how the notion of a "student loan bubble" makes sense, since people don't "speculate" on college like they speculate on real estate. There are so many things wrong with the idea of a "bubble" popping. People can't walk away from student loan debt, like they can walk away from real estate debt. Interest rates are expected to rise, but only slightly with the 90-day T-bill yield. Not the insane rates 20% rates that banks were hitting people with in the subprime crisis. People may find diminishing returns for college vs the rising costs, but that isn't the same thing as banks suckering people in with ARMs and then using leverage to make huge speculations on CDO's that lost 90% of their value. Here's a madeup example from the subprime crisis. Someone puts $0 down and buys a $500k home with a loan from the bank. The bank expects to make $500k in interest over the lifetime of the loan due to ballooning interest. Now, let's say variable interest rates from the loan kicks in, and the person can no longer make his monthly payments. In the past, when the real estate market was good, he could just sell the house for $600k, and keep a profit. But, lets say now the price of the home dropped to $300k. There is no way you are going to expect someone who put $0 down on a home he bought 2 years ago to cover $200k in debt for a home he doesn't even own any more due to foreclosure. So, now, instead of having something worth $500k in profit, the bank owns something that is a $200k loss. Banks lost over a trillion dollars worth of assets in a matter of weeks. Look at what was happening for years before the crisis though. In those times, it was very likely that a home could increase in value from $500k to $600k in a few years. How was that happening? A lot of it was because people figured out that they could put $10k down, and do this to make $100k, or 10x their investment in a few years. The true speculators are the people who just bought real estate only because they thought the price would keep going up. This in turn drives up the price without being tied to any kind of intrinsic value. You simply don't have that kind of pure speculation in the college loan industry because you can't just buy and sell college degrees. Also, people aren't just going to declare bankruptcy from their student loans in the same way as the subprime crisis because they legally can't. Wages can be garnished from student loans, and it's extremely hard to have the debt erased due to bankruptcy. The "bubble" scenario is sensational, because everyone sees a trillion dollars evaporate in a few weeks. Instead, in the case of student loans, I think that we may see something just as bad for the economy, but it will happen over years, not weeks. In a lot of ways, I think that's why this problem may be worse, because it may be just as bad, but much harder to notice than the subprime crisis. Journalists think that the only sign of economic failure is when a "bubble" pops though, which just isn't true. Slowed growth over 20 years could be just as bad if not worse.
asmithmd1 13y ago
Huge difference between student loans and mortgages - the only pain felt will be by the students and taxpayers who will (again!) make the lenders whole on their bad bets: Student loans cannot be discharged even if you declare bankruptcy - while home owners could walk away and hand the keys to the bank. Student loans are guaranteed by the government - the issuers just file for compensation. The sickening part is that once the lender gets paid in full for a non-performing loan they buy loan back from the government for 10% or so and then file a lien on any future earnings.
- muzz 13y ago
  Taxpayers no longer subsidize private lenders. That ended in 2010.
  - twoodfin 13y ago
    Sure: Now they're funding the loan program directly. At the moment it's profitable, but if there are ever losses they'll come directly from the taxpayers' pockets. And there are indirect losses, too: Imagine the government started running a program to pay people $20K+/year (think grants + loans) not to work for four years, provided they paid some of it back at low, capped interest rates. Surely a lot of people would take the government up on that offer, and instead of being productive taxpayers, contributing to the economy and to the treasury, they'll sit around playing XBox. Maybe it turns out that the average college degree program is a better investment than this, even accounting for the lost GDP and tax revenue. But there's no way to be sure, since there's no market at work.
    - muzz 13y ago
      The government insured those loans before AND after the change. It was on the hook for loan losses before and after. The indirect effects are MASSIVE BENEFITS for taxpayers, not losses. College graduates have lifetime income of $1M+ more than non-graduates, and this income is of course taxed at each individual's highest marginal rate. They have half the unemployment rate of non-graduates so they consume less unemployment and incur fewer other costs to government.
deleted 13y ago
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PhasmaFelis 13y ago
I've got about $10,000 worth of student loans that I've been steadily paying off. What sort of effect might this have on me?
- everettForth 13y ago
  If your interest rates are not fixed, they are likely to go up next year. Sorry, if you were hoping for a handout.
  - slurry 13y ago
    The bums always lose, Lebowski.
  - PhasmaFelis 13y ago
    Hah, do I look stupid? I was just wondering how bad I'll get burned.
npguy 13y ago
Here is some perspective on the size of US student loans: http://statspotting.com/outstanding-student-loans-in-the-us-is-more-than-chinas-total-external-debt/ http://statspotting.com/outstanding-student-loans-in-the-us-...
unono 13y ago
Perfect opportunity for hackers. Employers pay big money to find employees. Students pay big money to get educated to get a job. Hackers roll in with apps that allow students to do courses for free on the smartphone/tablet, sell the info of the students to employers, who then hire the students. Everyone wins. Hackers are proclaimed heros.
- jlgreco 13y ago
  So... an online college with a placement department.
  - unono 13y ago
    No. A free app. The data points of the app users are sold to employers.
    - jlgreco 13y ago
      The only difference here is who is paying who. "Run an online university. Oh yeah, the university is an app, not a website, and therefore super trendy." is not a "perfect opportunity for hackers". The actual software involved with such a proposal is chump-work.
      - unono 13y ago
        Writing a really good app that is both enjoyable for students and a rigorous test of ability that employers are looking for is not chump work. If you can show employers that your app truly tests useful abilities they would be lining up. The current education system fails at producing workers with the right skills and employers are always complaining abou this.
        jlgreco 13y ago
        What you are looking for is Khan Academy. Khan Academy with enough content, with sufficiently rigorous content, with sufficiently rigorous evaluation, to become accredited so that employers will value their assessment of a students worth. Actually, they would need to be better than merely being accredited, since employers sure aren't bending over backwards to pay accredited universities serious cash for access to their students. See, what is Khan Academy really lacking at this point? Is the hard part their website with youtube hosted videos? Are they really just jonesing for some mobile developers? Or is producing quality content with broad coverage and depth their bottleneck? Making an app is the easy part. Education is not failing for want of an app. Certainly not for want of a gamified app. But hey, I can't stop you. Knock yourself out. Hell, pitch it to YC; I hear they are doing non-profits now.
druiid 13y ago
I really have to wonder if a lot of the changes made previously to the student loan system are at all linked to the huge campaign contributions made by the University of California system. Basically, any changes that have been made I think benefit greatly the schools (including the rising tuition/costs) to the great chagrin of students. You have a situation where the real people making out here are school administrative types and the students and teachers get the short end. I don't say this lightly, but I do wonder if the nearly $2 million donation each cycle [1] (making them the top contributor in both of the last two cycles) has something to do with how things have worked out. As a previous (sadly I had to withdraw due to time and work commitments) UCSD student I can tell you that student per-quarter costs went up about 25% over the time I started and the time I left. During that period as well there were certainly no administrators begging to have their pay brought down, only calls to cut teachers, teaching hours, maintenance staff, etc. During that same time period as well, there was a building boom on campus with no stopping in construction of many new campus housing projects (even some which have consistently NOT been anywhere near capacity), new administrative building and a few new campus buildings here and there (where they can fit them between all of the new administrative buildings and housing projects). Of course this was all going on during the period that UC regents were (and really continue to) say that the state was cutting far too much money and thus the reasoning for raising tuition year-over-year. So, really I guess my question is: How much did/has money 'talking' in an election cycle contribute to the situation the entire student loan system now finds itself? I'm by far no conservative, but I can't help but personally see this as the public being sold out. [1] http://www.opensecrets.org/pres08/contrib.php?cid=N00009638 http://www.opensecrets.org/pres08/contrib.php?cid=N00009638
- muzz 13y ago
  40% of UC Berkeley undergrads pay no tuition [1] These conspiracy theories are really interesting, especially in light of the facts. [1] http://newscenter.berkeley.edu/2013/04/18/campus-announces-2013-14-freshman-admissions-decisions/ http://newscenter.berkeley.edu/2013/04/18/campus-announces-2...
  - druiid 13y ago
    I'm not entirely certain how your link somehow conflicts with the points I raised. They're really entirely separate. The number of students paying no or reduced tuition really just affects that specific group. This exists across any university/institution and as far as I know has for quite some time...
jack-r-abbit 13y ago
This might be a foreign concept to some people, but banks are for-profit businesses. If one of their products is not making them (enough) money, they'll dump it... just like other businesses. The article describes JPMorgan's announcement as "spin". They aren't spinning anything. They are just end-of-lifing a poor performing product. Get over it.
pessimizer 13y ago
I'm going to leave this here: http://my.firedoglake.com/deanbaker/2012/03/11/student-loan-bubble-nonsense-peter-peterson-and-the-washington-post-mess-up-on-the-economy-yet-again/ http://my.firedoglake.com/deanbaker/2012/03/11/student-loan-... It's Dean Baker's critique on coverage of this type from the Post. The most important thing to take from it is that the housing bubble popping turned $22 trillion of household wealth into $14 trillion. The sum of all student loans add up to around $1 trillion. Banks getting out of an industry because they don't find it profitable anymore (since the government turned off the free guarantee taps) has nothing to do with cascading defaults due to excessive leverage and lack of regulation. If there's a bubble out there, it's in Asset Backed Securities (ABS) like auto loans and credit card debt. And housing is currently looking like the bubble that wouldn't die.
- hudibras 13y ago
  This is the key paragraph: The student loan market is now valued at $867 billion, less than 1/25th the size of the housing market at its bubble peak. Furthermore, all of it will not default and the defaults that do occur will be spread over many years. Also, just wanted to say that Dean Baker is great, that's all.
tokenadult 13y ago
The pervasive third-party payment in higher education results in many distortions in incentives. Consultants to colleges advise setting high list prices, and offering "merit scholarships" that simply roll back the apparent price of the college to near its actual value as a revenue-maximizing strategy.[1] Very few parents shop for colleges with the free online resource from Education Trust, the College Results website,[2] which allows comparison of what various colleges actually spend per student on instruction. On the whole, most people assume colleges are more similar than they actually are, and that list price is a reliable guide to which colleges are somewhat better (as a value proposition for the student). Neither assumption is correct. [1] http://www.maguireassoc.com/services-challenges/optimize-net-revenue/ http://www.maguireassoc.com/services-challenges/optimize-net... [2] http://collegeresults.org/search1b.aspx?institutionid=166027 http://collegeresults.org/search1b.aspx?institutionid=166027 (See the "Finance and Faculty" tab on the page comparing similar colleges for any college you are curious about.)
- acjohnson55 13y ago
  I'm going to push a little further. Maybe, just maybe, the root problem is our financial scheme for higher ed, in particular, the idea of foisting the cost on the student prior to enrollment (let alone graduation, or gainful employment). Say what you want about our K-12 system, but its costs haven't spiraled completely out of control. Nor have the costs of highly state-subsidized public universities in many other parts of the world. I don't think enough people are seriously considering the idea that we have shot ourselves in the feet by demanding that the government and private industry make a return on investment on a basic service that provided all sorts of positive externalities when people have access to it. We've encouraged colleges to compete with one another for market share. Maybe the incentives that aren't working for us are a result of our cultural infatuation with winner-take-all competition.
frozenport 13y ago
I am confused because you cant avoid atudent loans, theee is no bankruptcy - they will take your money before your employer pays you. How could it burst if studentsl will eventually pay all of it off?
ahsanhilal 13y ago
The worst part of this thing is that students loans do not need to be that high because college costs should not be that high. Student loans are artificially high because of two reasons: 1. Government subsidies 2. Increasing college costs Government subsidies are there because the government knows that a kid who goes to college will be able to give a better return on it 'public' investment, since lifetime earnings for a college educated individual are about 50-100% higher than a high school one. This will make them pay more taxes etc. The schools on the other hand are taking the subsidized college loans in the form of tuition and fees and using them not to increase educational standards, but rather, invest in extracurriculars, building etc. The government does not tie college loan financing to college performance at all, so effectively it just subsidizes the borrowing costs for school in the form of cheap college loans. (shameless plug) I wrote a blog post about this if anyone is interested to read more: https://medium.com/i-m-h-o/35d383a4fbad https://medium.com/i-m-h-o/35d383a4fbad
- muzz 13y ago
  1. Government profits from student loans. I.e., it does not subsidize them as a whole-- rather, it makes money off them. 2. In theory, colleges compete on cost as well as other factors. There exist private colleges and even for-profit private colleges (although the data shows us that for-profit private colleges often have the worst outcomes). It's easy to blame government for problems. Easy, but not always correct.
  - ahsanhilal 13y ago
    Government subsidies towards student loans is a well known fact. Just like government subsidized the cost of borrowing for mortgages, so has it inculcated a perverse system of college financing. Evidence of this can be seen in the largest increase in student defaults since 1990 at around 9.1%. whereas car, mortgage and credit card default rates are around 1-4%. That is called adverse selection run by a government system that is incentivized to give out bad loans due to the profit it sees in the long term. Colleges, in a theoretical free market might compete on cost, but in real-life they actually are competing on providing amenities and extra curriculars, not in any way associated with how well kids are educated. College prices, inflation adjusted, have gone up by 120-130% in real terms, while median family income is stagnant. Most of the increase in Net revenues in colleges is NOT spent on paying educators since their wages and teacher/student ratios have been increasing linearly. The rise is mostly attributed to budgetary items for Other Employees, coaches adminstrators etc and large infrastructure funding.
jack-r-abbit 13y ago
It is amazing the number of comments that talk about the problems of defaulting on loans and then place the blame in all sorts of places other than the people defaulting on loans. Unless you were forced at gun point to sign loan papers (or other scandalous things transpired), there isn't a lot that can convince me you are not solely responsible for your loan. I don't care if it is for an education, a house, a car or a new pair of sneakers... if you accepted money with the condition that you would pay it back, you are responsible for paying it back or suffer the consequences of not paying it back. In some cases, the consequences of not paying it back might be better than what would happen if you did pay it back (like starving to death because you can't afford to eat. or freezing to death because you can't pay for a place to live). I'm not saying that people don't find themselves in financial hard times and some times only have really horrible options to choose from. But some times I feel like people start out with default as an actual option in their minds. Like it is no big thing... just Plan B. It very much is a big thing and should be your Plan Z!
- acjohnson55 13y ago
  I've never heard of anyone who planned on defaulting on their student loans. Most people go to school hoping to end up upwardly bound in a fulfilling and financially rewarding career, drawn in by stories highly slanted with survivor bias. Many end up in dead-end jobs or underemployed. They don't know anything about who they're competing with in these fields or what these employers want. Kids sign these papers barely 18 years old that will quite likely set them in a gigantic financial hole for their foreseeable adult lives. Not to mention the fact that much of this debt is held by people who had no major reason to believe that the economy would drop from underneath their feet. And what's the viable alternative? Not going to college? The survivor's bias for people who that's worked out for is even worse! Sure, people willingly sign these loan papers, but we should also be honest about the level of agency and information the average aspiring adult has.
- kalleboo 13y ago
  Because simply blaming it on the people signing the loans isn't productive, it's just a statement of the status-quo with no solutions (shaming people isn't going to change anything).
rayiner 13y ago
I'm not sure JPM getting out of the student loan market means it's about to burst. The government's entering the market means that simply no one is interested in getting private student loans. Under the government's new program, PAY-E, your payment is capped at 10-15% of discretionary income and unpaid interest capitalization is capped at 10% above the original principal amount. Debt is forgiven after 20 years. Basically, there is no way for private lenders to compete with these generous terms. For the moment, at least, the government's program is running solidly in the black (indeed, with a big profit margin).
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beambot 13y ago
This link explains the "bubble" completely: The Most (And Least) Lucrative College Majors, In 1 Graph [1]. Make this a mandatory ACT / SAT question so that people quit making poor value decisions: STEM >> arts and humanities in terms of median earning power. [1] http://www.npr.org/blogs/money/2013/09/09/219372252/the-most-and-least-lucrative-college-majors-in-1-graph?utm_source=npr&utm_medium=facebook&utm_campaign=nprfacebook http://www.npr.org/blogs/money/2013/09/09/219372252/the-most...
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mboroi 13y ago
...and I was all like, http://i.imgur.com/fPcPbev.png http://i.imgur.com/fPcPbev.png
afterburner 13y ago
Hey, maybe tuition will go down if loans aren't as readily available...?
- muzz 13y ago
  Not sure why you'd think that at all
  - afterburner 13y ago
    Because if people can't afford to go (as in, can't get the money at all), demand goes down, universities lower tuition to attract more people? It's not perfect or necessarily what would happen, but it could happen.
zedai 13y ago
This is really BAD. First institutions ask for loads of money to provide education, then this kind of thing happens. Well we are just making this world worse. Human Knowledge belongs to the world. This makes difficult for students who come from backward societies.
teeja 13y ago
Health, housing, education. What's the next sector for the relentless blood funnel?
kenster07 13y ago
MOOC couldn't have come at a better time.
- lacero 13y ago
  There is a fixed number of existing jobs. Mooc, for-profit and state schools all produce people who have to compete for the same jobs. The only solution to debt and employment is to make certain processes/jobs more efficient so that the extra time can be used to create new and better products/services/companies.
- BrandonMarc 13y ago
  MOOC's are a response by the market to some of the problems of the current system. Time will tell just how well the MOOC phenomenon will turn out for us, but I suspect we're better off with them than we were before.
- smm2000 13y ago
  MOOCs are solution for highly motivated students who are generally able to get accepted by traditional universities, ace classes and graduate with little to no debt. They are not the solution for sub-par students who go to for-profit universities, could not get a job afterward and could not repay loans. I consider myself reasonably motivated, graduated with almost perfect GPA and I still struggle to complete MOOCs. It's just too difficult to force yourself to study without outside pressure and peer support.
sprash 13y ago
I still don't understand why people don't just go to Europe: http://www.studyineurope.eu/tuition-fees http://www.studyineurope.eu/tuition-fees I didn't pay a single cent for my education...
kalleboo 13y ago
Thank god my country has tax-funded tuition (upper education is provided free for all citizens), this sounds like a nightmare.
- VladRussian2 13y ago
  they even paid us a stipend - something at the level of a minimum wage - and we were such a lazy "lowest part of the back" students, it's a shame. In the community college here (i went for ESL) i saw a bunch of youngsters who go to the college and work simultaneously, and some workers at the local Starbucks go to the state school. My respect to them.
jalayir 13y ago
Just get an undergrad in India.
Tloewald 13y ago
The problem with student loans is that they drive up the cost of education by reducing the perception of up-front cost. The solution is to abolish them and let the market deal with it. Universities can switch over to being athletic clubs and government funded think-tanks or something. It boggles the imagination that NYU charges something like $60,000 tuition per student per year on top of all its other sources of revenue.
canvia 13y ago
Universities should issue the loans themselves so that they have an incentive to deliver a quality, useful education that has value in the marketplace to guarantee their repayment. Or make the education free and a % of each graduate's future earnings (up to some max $ amount or limit it to 20 years after graduation) are paid back into the endowment to fund future students.

233 points by rnernento 13y ago

It's as if the value of a formal education has never been lower, the job market is swamped with people that would be more qualified and experienced than you, and the cost has never been higher.

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dmix 13y ago

Misplaced incentives all over the place. This one is going to be messy. But as many people have pointed out, much more slow moving than the previous financial bubble.

abstractbill 13y ago
This one is going to be messy. As someone who really hasn't thought about it very much, I'd love for someone to expand on this. What's the expected fallout? In the housing bubble, many people lost the places where they lived. But it's not like someone can "take back" your education if you default on the loan, so what happens instead?
- oscilloscope 13y ago
  The development of adult life is stunted. It takes longer to afford to rent an apartment on your own, buy a house, buy a car, get married, start a family, start a business, etc. If you're college educated you probably have a broad support network. So instead of being homeless, you move back in with your parents. So instead of losing your home, you may never get it in the first place. The consequences of defaulting on a student loan are also quite severe. https://studentaid.ed.gov/repay-loans/default#what-are-the https://studentaid.ed.gov/repay-loans/default#what-are-the
  - speeder 13y ago
    You are correct. I am 25, and since my first serious job (I was 23) I've been in the government category for the most rich as possible in earning amount (the category is everyone in the top 5% of income... granted, there is still a GREAAAAT gap between the top and low of that... I reached the top 5% with 20k USD/year) I don't own a vehicle (not even a bicycle), much less a living place. I think if I sum all my possessions (literally, including my clothes, glasses, phone... without depreciation) and my debts, I am still negative. According to my calculations, I will be able to buy my first apartment when I am about 35 years old, unless I move back with my parents and stop paying rent. Also I won't bother in buying a vehicle, unless it become really, really necessary (and then, I will buy a chinese QQ or J2) When I think about that, it is really, really, really depressing and ridiculous.
  - greenyoda 13y ago
    And to connect the next couple of dots: - All these young people who can't afford homes, cars or kids will cause the economy to not grow as fast as it otherwise would. - And if the economy is slow, fewer jobs will be created, keeping these young people poor even longer. Of course, not everyone has parents that they can move in with, and those who don't have that safety net will suffer the most.
  - Zigurd 13y ago
    The draconian terms are going to push some people to emigrate if they are forced to default. There are a lot of Americans teaching English in China who are running from problems like these.
- jmcmichael 13y ago
  It's not the impact on the individual who's defaulting that is the kicker, it's more the effect on the originating bank and the parts of the financial system that packaged up that loan with others of its type into financial products that are incorporated into the investment strategies of pension funds, mutual funds, municipalities, etc.
  - minimax 13y ago
    In the U.S. most of the outstanding student loan debt is held directly by the government. Pension funds and mutual funds don't really have exposure to student loans.
- stonemetal 13y ago
  As far as I know it is impossible to default on a student loan. Even if you declare bankruptcy student loans have an exception so you can't get rid of them. If you stop paying them they can garnish your wages. The only way to end it is to pay it off or wait 25 years, after which they are forgiven.
- johnrob 13y ago
  This article was from about 3 weeks ago: http://www.rollingstone.com/politics/news/ripping-off-young-america-the-college-loan-scandal-20130815?print=true http://www.rollingstone.com/politics/news/ripping-off-young-... Short version: The government makes money off student loans, and there is no defaulting on them (unless you die of course). There are no incentives to keep tuition costs in check because the lenders (government) are happy to put more money into the asset class. We're getting to the point where the price of education can't be made up with an eventual increased salary. The author considers this to be an unfair tax on the lower middle class and an eventual drain on the economy.
  - muzz 13y ago
    If the government is making money off student loans, then how are they a subsidy? If profitable, that would imply that commenters calling loans a subsidy are simply incorrect.
    - skylan_q 13y ago
      Students are getting loans from the government on terms that they wouldn't be getting from the bank. That creates more effective demand for schools which drives up the price of tuition. If the banks did this and the student/graduate had to default, the bank would have to take a loss. The government isn't allowing default on the loans they themselves give the students, so they'll make sure they get their money back.
      - muzz 13y ago
        Private student loans are generally non-dischargeable in bankruptcy also, as they typically meet Section 221(d)(1) requirements.
- btilly 13y ago
  The problem is that most money in circulation was manufactured by creating debt. When you destroy that debt through default, you destroy that money. The fiction of student loans is tricky because under Bush they changed bankruptcy rules to exclude student debt. But fundamentally when banks are forced to write down bad student debt, their rosy asset picture becomes non-rosy. When that happens they are required by regulators to not lend. And this is ugly for the whole economy. In 2008 we resolved the problem by having the US government find ways to lend tremendous amounts of money on very favorable terms, and then the Fed picked this up with a similar policy that they call quantitative easing. This creates lots of money in financial markets so that things like banks can continue to operate. The bigger long-term problem is how we'll ever exit the policy. To give an idea how sensitive this situation is, a while ago Bernanke announced that if things continued to improve faster than expected, in a year the Fed would evaluate whether to exit QE 2 faster than originally planned. You can't come up with a milder statement that the policy might end. The markets went crazy. A few days later, Bernanke came out and said we won't be doing that after all, then markets calmed down. There is no question, a student loan debt crisis will be responded to with more QE. The problem of exiting the mess will become bigger. Historically countries have exited this type of policy only after the crisis of a currency collapse. But so far the market players seem to be betting that they will get out of the USA before the other guy when the crisis hits, and in the meantime the USA looks safer than China and Europe. However the financial economy is always a mess. And they are always finding another way to kick the can down the road. That will certainly happen again. And again. And again. Until it doesn't. Every time the doomsayers say, "We don't see how we can kick the can down the road again!" But we do. The dot com bust was resolved with easy interest policies that resulted in a housing boom that resulted in the financial crisis. That was resolved with QE. Take your best guess as to whether we'll kick this can down the road as well...
  - woah 13y ago
    As to the last part of your comment- it's all imaginary anyway.
    - rhizome 13y ago
      The sharecropper economy that results from these profit guarantees to financial institutions won't be.
drcode 13y ago
The solution is simple and obvious: All of us who have already paid off our loans are going to fund government-arranged loan forgiveness/reduction programs to those who over-leveraged their education. (I wish I was joking...)
- loganfrederick 13y ago
  As someone with student loans, I wish this wasn't the case for the previous generation. But at the same time, it's hard to blame current 23 year olds for decisions their parents and communities make about their kids' future finances when they're 16. The majority of fault lies in the previous generation of parents, who both failed to vote out politicians supporting these policies and who pushed their kids into enslaving parts of their lives to lenders.
  - drcode 13y ago
    Agree 100%. I didn't mean to say the blame rests fully with the current generation, I'm just saying government policies going forward are just going to increase the moral hazard even more.
    - muzz 13y ago
      What "government policies" are you talking about?
      - deleted 13y ago
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      - jessaustin 13y ago
        Off the top of my head, both the interest rate cap that passed this summer and the President's recent student loan proposals? What else would be under discussion here? EDIT: nevermind, apparently both you and drcode are discussing hypotheticals only.
        13y ago

bayesianhorse 13y ago

Just because people shout "bubble" at any exponential growth phenomenon doesn't really mean we can tell when "the bubble bursts". Crashes in growth curves are always unpredictable. You can predict that there will be a crash, but telling when it's going to happen, that's the hard part....

zanny 13y ago
Student loans look like they should be easier to predict than anything else. You can't see a bubble burst untill the inability to default is lifted. Until then, there is no defaulting, so there is no loss of confidence. The only metric to measure is how few payments people are making on their outstanding loans. For example, I only pay the minimum since I'm unemployed. I've drained around $300 of my savings just on minimum student loan payments.
- bayesianhorse 13y ago
  At some point the banks will recognize that you won't ever pay all of the loan back, and then they have to write off a large portion of that debt. If that realization happens too quickly for too many student loans, then there might be a sudden crash. Doesn't look like it yet though.

abdophoto 13y ago

Every kid I come across that plans to go to college I tell them to find the cheapest route possible. Start at either a good community college or go to a public in-state school. You can still go to a good college for a reasonable price, but it seems more and more that kids are taking the more expensive route (dorms, out-of-state, etc).

tzs 13y ago
For kids from poor or middle class families, Princeton, Harvard, Yale and Caltech will usually cost less than an in-state public school when it comes to what the student and his family actually have to pay. In-state public school has a lower sticker price, but have less non-loan need-based aid so students have to come up with a high percentage of the sticker price. The top private non-profit schools have higher sticker price, but provide a lot more non-loan need-based aid, so students have to pay a much lower percentage of the cost. At Princeton, for example, the average debt at graduation is only $5k.
- checker 13y ago
  I wish that I knew this when I was a senior. I saw the number with four zeros per semester and ran.
- imissmyjuno 13y ago
  That last example is meaningless in isolation. What percentage of Princeton students take out student loans (and how much)? I'd guess it's much smaller than in public schools.
danteembermage 13y ago
Unfortunately you public in-state advice is almost now outdated; many privates are cost-competitive with public schools and it's not because the private schools are cheap. e.g.: http://www.nytimes.com/2011/09/29/nyregion/seton-hall-university-to-offer-steep-tuition-discounts.html?_r=0 http://www.nytimes.com/2011/09/29/nyregion/seton-hall-univer... This is definitely a trend in private education pricing as sticker shock is a real problem for students considering private schools and the privates compete for the same students the publics do.

prostoalex 13y ago

Pretty good overview and opinion of the status quo and historical retrospective here: http://online.wsj.com/article/SB10001424127887324165204579028771723069750.html http://online.wsj.com/article/SB1000142412788732416520457902...? "Politicians subsidize the purchase of a good or service, prices inevitably rise in response to this pumped-up demand, and then the pols blame the provider of the good or service for responding to the incentives the politicians created. Think housing finance and medical care." ... "We've got a crisis in terms of college affordability and student debt," said Mr. Obama, without a trace of irony at the State University of New York at Buffalo. The same man who three years ago forced through a plan to add $1 trillion in student loans to the federal balance sheet over a decade said on Thursday, "Our economy can't afford the trillion dollars in outstanding student loan debt."

muzz 13y ago
Adding "$1 trillion in student loans to the federal balance sheet over a decade" is a result of direct lending, ie cutting out the middleman. It is also saving the taxpayer money to the tune of $70B over ten years.
- prostoalex 13y ago
  I think the headline here implies that the said middleman is unsure about the viability of the market, so any savings figure is dependent on low loan default figure.
  - muzz 13y ago
    No, JP Morgan is NOT a middleman. These were cut out in 2010, and JP Morgan is lending directly now. Their loans are not subsidized nor backed by taxpayer money, and they are free to decide to stop lending, which is what appears to be happening now.
    - waps 13y ago
      It also means that the government is now 1) the one making the laws 2) the organisation that would suffer if the assumptions ("guaranteed repayment") turn out less than perfect So now we have : debt slavery where your debtor is actually the one making laws. This could be really good or really bad. Really good if it is decided that transferring the education debt to all taxpayers is deemed acceptable, really bad if the government gets into the business of debt collection from people with no assets (ie. actual slavery).

msandford 13y ago

It's really too bad that the laws surrounding student loans make them artificially cheap. You can't get rid of college debt through bankruptcy so you're basically saddled for life. Normally the interest you pay is the combination of three things: 1. The (inherent) time value of money 2. Expenses the lender incurs to keep up with the debt 3. The average default risk of those taking the loans Student loans only price in 1 & 2 because of the near impossibility of not paying the loans back. Which is great in the short term as it means that more people are able to go to school because the interest rate is lower and thus they can afford more debt. But a college education is a lot like a house. The price of a house isn't how much it's "worth", it's an artifact of how much money you have to pay every month for the privilege of living there. A house of a certain niceness is (everything else equal) going to cost the same amount of money per month whether the interest rate is 1% or 15%. A $1500/mo mortgage buys you $250k of house at 4% but only $150k of house at 9% and only $95k of house at 15% like in the early 80s. (http://www.bankrate.com/finance/mortgages/history-of-mortgage-interest-rates.aspx http://www.bankrate.com/finance/mortgages/history-of-mortgag...) By removing all the default risk from the pricing of student loans, more students are able to afford college which is exactly the intended effect of the laws. But the size of most academic institutions doesn't grow; most colleges don't admit twice as many students just because more are clamoring to get in. This excess demand and fixed supply means that colleges can raise prices. And thanks to the lowered interest rates those who could have afforded college prior to the law (and lower interest rates) are still able to afford it because the lowered interest rate has increased their borrowing capacity. Those on the margin prior to the change in the law still aren't able to afford college once the price increases follow the increase in available money and additional demand for degrees. The law was changed in 1978 and it's taken quite a few years for this unintended consequence to play out. It's really sad to see it happen. http://www.finaid.org/questions/bankruptcyexception.phtml http://www.finaid.org/questions/bankruptcyexception.phtml

kilroy123 13y ago
A large part of the problem is all the shitty for profit schools. They get students to take out large government backed loans, then are defaulting, since they can't actually get a job. I knew several people I grew up with who went to these schools. They took out huge loans, 10k plus, and they never landed any kind of job with their "certificates" / degrees. [1] Half of all defaults are from these kind of schools. [1] http://www.businessinsider.com/career-education-corp-will-pay-9-million-to-students-after-allegedly-inflating-job-numbers-2013-8 http://www.businessinsider.com/career-education-corp-will-pa...

everettForth 13y ago

No, it's not. Not even close, and this is really terrible reporting. It's unfortunate that so many young people are carrying large amounts of student loan debt, but there is no sign of a "bubble" bursting any time soon. I don't even understand how the notion of a "student loan bubble" makes sense, since people don't "speculate" on college like they speculate on real estate. There are so many things wrong with the idea of a "bubble" popping. People can't walk away from student loan debt, like they can walk away from real estate debt. Interest rates are expected to rise, but only slightly with the 90-day T-bill yield. Not the insane rates 20% rates that banks were hitting people with in the subprime crisis. People may find diminishing returns for college vs the rising costs, but that isn't the same thing as banks suckering people in with ARMs and then using leverage to make huge speculations on CDO's that lost 90% of their value. Here's a madeup example from the subprime crisis. Someone puts $0 down and buys a $500k home with a loan from the bank. The bank expects to make $500k in interest over the lifetime of the loan due to ballooning interest. Now, let's say variable interest rates from the loan kicks in, and the person can no longer make his monthly payments. In the past, when the real estate market was good, he could just sell the house for $600k, and keep a profit. But, lets say now the price of the home dropped to $300k. There is no way you are going to expect someone who put $0 down on a home he bought 2 years ago to cover $200k in debt for a home he doesn't even own any more due to foreclosure. So, now, instead of having something worth $500k in profit, the bank owns something that is a $200k loss. Banks lost over a trillion dollars worth of assets in a matter of weeks. Look at what was happening for years before the crisis though. In those times, it was very likely that a home could increase in value from $500k to $600k in a few years. How was that happening? A lot of it was because people figured out that they could put $10k down, and do this to make $100k, or 10x their investment in a few years. The true speculators are the people who just bought real estate only because they thought the price would keep going up. This in turn drives up the price without being tied to any kind of intrinsic value. You simply don't have that kind of pure speculation in the college loan industry because you can't just buy and sell college degrees. Also, people aren't just going to declare bankruptcy from their student loans in the same way as the subprime crisis because they legally can't. Wages can be garnished from student loans, and it's extremely hard to have the debt erased due to bankruptcy. The "bubble" scenario is sensational, because everyone sees a trillion dollars evaporate in a few weeks. Instead, in the case of student loans, I think that we may see something just as bad for the economy, but it will happen over years, not weeks. In a lot of ways, I think that's why this problem may be worse, because it may be just as bad, but much harder to notice than the subprime crisis. Journalists think that the only sign of economic failure is when a "bubble" pops though, which just isn't true. Slowed growth over 20 years could be just as bad if not worse.

asmithmd1 13y ago

Huge difference between student loans and mortgages - the only pain felt will be by the students and taxpayers who will (again!) make the lenders whole on their bad bets: Student loans cannot be discharged even if you declare bankruptcy - while home owners could walk away and hand the keys to the bank. Student loans are guaranteed by the government - the issuers just file for compensation. The sickening part is that once the lender gets paid in full for a non-performing loan they buy loan back from the government for 10% or so and then file a lien on any future earnings.

muzz 13y ago
Taxpayers no longer subsidize private lenders. That ended in 2010.
- twoodfin 13y ago
  Sure: Now they're funding the loan program directly. At the moment it's profitable, but if there are ever losses they'll come directly from the taxpayers' pockets. And there are indirect losses, too: Imagine the government started running a program to pay people $20K+/year (think grants + loans) not to work for four years, provided they paid some of it back at low, capped interest rates. Surely a lot of people would take the government up on that offer, and instead of being productive taxpayers, contributing to the economy and to the treasury, they'll sit around playing XBox. Maybe it turns out that the average college degree program is a better investment than this, even accounting for the lost GDP and tax revenue. But there's no way to be sure, since there's no market at work.
  - muzz 13y ago
    The government insured those loans before AND after the change. It was on the hook for loan losses before and after. The indirect effects are MASSIVE BENEFITS for taxpayers, not losses. College graduates have lifetime income of $1M+ more than non-graduates, and this income is of course taxed at each individual's highest marginal rate. They have half the unemployment rate of non-graduates so they consume less unemployment and incur fewer other costs to government.

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PhasmaFelis 13y ago

I've got about $10,000 worth of student loans that I've been steadily paying off. What sort of effect might this have on me?

everettForth 13y ago
If your interest rates are not fixed, they are likely to go up next year. Sorry, if you were hoping for a handout.
- slurry 13y ago
  The bums always lose, Lebowski.
- PhasmaFelis 13y ago
  Hah, do I look stupid? I was just wondering how bad I'll get burned.

npguy 13y ago

Here is some perspective on the size of US student loans: http://statspotting.com/outstanding-student-loans-in-the-us-is-more-than-chinas-total-external-debt/ http://statspotting.com/outstanding-student-loans-in-the-us-...

unono 13y ago

Perfect opportunity for hackers. Employers pay big money to find employees. Students pay big money to get educated to get a job. Hackers roll in with apps that allow students to do courses for free on the smartphone/tablet, sell the info of the students to employers, who then hire the students. Everyone wins. Hackers are proclaimed heros.

jlgreco 13y ago
So... an online college with a placement department.
- unono 13y ago
  No. A free app. The data points of the app users are sold to employers.
  - jlgreco 13y ago
    The only difference here is who is paying who. "Run an online university. Oh yeah, the university is an app, not a website, and therefore super trendy." is not a "perfect opportunity for hackers". The actual software involved with such a proposal is chump-work.
    - unono 13y ago
      Writing a really good app that is both enjoyable for students and a rigorous test of ability that employers are looking for is not chump work. If you can show employers that your app truly tests useful abilities they would be lining up. The current education system fails at producing workers with the right skills and employers are always complaining abou this.
      - jlgreco 13y ago
        What you are looking for is Khan Academy. Khan Academy with enough content, with sufficiently rigorous content, with sufficiently rigorous evaluation, to become accredited so that employers will value their assessment of a students worth. Actually, they would need to be better than merely being accredited, since employers sure aren't bending over backwards to pay accredited universities serious cash for access to their students. See, what is Khan Academy really lacking at this point? Is the hard part their website with youtube hosted videos? Are they really just jonesing for some mobile developers? Or is producing quality content with broad coverage and depth their bottleneck? Making an app is the easy part. Education is not failing for want of an app. Certainly not for want of a gamified app. But hey, I can't stop you. Knock yourself out. Hell, pitch it to YC; I hear they are doing non-profits now.

druiid 13y ago

I really have to wonder if a lot of the changes made previously to the student loan system are at all linked to the huge campaign contributions made by the University of California system. Basically, any changes that have been made I think benefit greatly the schools (including the rising tuition/costs) to the great chagrin of students. You have a situation where the real people making out here are school administrative types and the students and teachers get the short end. I don't say this lightly, but I do wonder if the nearly $2 million donation each cycle [1] (making them the top contributor in both of the last two cycles) has something to do with how things have worked out. As a previous (sadly I had to withdraw due to time and work commitments) UCSD student I can tell you that student per-quarter costs went up about 25% over the time I started and the time I left. During that period as well there were certainly no administrators begging to have their pay brought down, only calls to cut teachers, teaching hours, maintenance staff, etc. During that same time period as well, there was a building boom on campus with no stopping in construction of many new campus housing projects (even some which have consistently NOT been anywhere near capacity), new administrative building and a few new campus buildings here and there (where they can fit them between all of the new administrative buildings and housing projects). Of course this was all going on during the period that UC regents were (and really continue to) say that the state was cutting far too much money and thus the reasoning for raising tuition year-over-year. So, really I guess my question is: How much did/has money 'talking' in an election cycle contribute to the situation the entire student loan system now finds itself? I'm by far no conservative, but I can't help but personally see this as the public being sold out. [1] http://www.opensecrets.org/pres08/contrib.php?cid=N00009638 http://www.opensecrets.org/pres08/contrib.php?cid=N00009638

muzz 13y ago
40% of UC Berkeley undergrads pay no tuition [1] These conspiracy theories are really interesting, especially in light of the facts. [1] http://newscenter.berkeley.edu/2013/04/18/campus-announces-2013-14-freshman-admissions-decisions/ http://newscenter.berkeley.edu/2013/04/18/campus-announces-2...
- druiid 13y ago
  I'm not entirely certain how your link somehow conflicts with the points I raised. They're really entirely separate. The number of students paying no or reduced tuition really just affects that specific group. This exists across any university/institution and as far as I know has for quite some time...

jack-r-abbit 13y ago

This might be a foreign concept to some people, but banks are for-profit businesses. If one of their products is not making them (enough) money, they'll dump it... just like other businesses. The article describes JPMorgan's announcement as "spin". They aren't spinning anything. They are just end-of-lifing a poor performing product. Get over it.

pessimizer 13y ago

I'm going to leave this here: http://my.firedoglake.com/deanbaker/2012/03/11/student-loan-bubble-nonsense-peter-peterson-and-the-washington-post-mess-up-on-the-economy-yet-again/ http://my.firedoglake.com/deanbaker/2012/03/11/student-loan-... It's Dean Baker's critique on coverage of this type from the Post. The most important thing to take from it is that the housing bubble popping turned $22 trillion of household wealth into $14 trillion. The sum of all student loans add up to around $1 trillion. Banks getting out of an industry because they don't find it profitable anymore (since the government turned off the free guarantee taps) has nothing to do with cascading defaults due to excessive leverage and lack of regulation. If there's a bubble out there, it's in Asset Backed Securities (ABS) like auto loans and credit card debt. And housing is currently looking like the bubble that wouldn't die.

hudibras 13y ago
This is the key paragraph: The student loan market is now valued at $867 billion, less than 1/25th the size of the housing market at its bubble peak. Furthermore, all of it will not default and the defaults that do occur will be spread over many years. Also, just wanted to say that Dean Baker is great, that's all.

tokenadult 13y ago

The pervasive third-party payment in higher education results in many distortions in incentives. Consultants to colleges advise setting high list prices, and offering "merit scholarships" that simply roll back the apparent price of the college to near its actual value as a revenue-maximizing strategy.[1] Very few parents shop for colleges with the free online resource from Education Trust, the College Results website,[2] which allows comparison of what various colleges actually spend per student on instruction. On the whole, most people assume colleges are more similar than they actually are, and that list price is a reliable guide to which colleges are somewhat better (as a value proposition for the student). Neither assumption is correct. [1] http://www.maguireassoc.com/services-challenges/optimize-net-revenue/ http://www.maguireassoc.com/services-challenges/optimize-net... [2] http://collegeresults.org/search1b.aspx?institutionid=166027 http://collegeresults.org/search1b.aspx?institutionid=166027 (See the "Finance and Faculty" tab on the page comparing similar colleges for any college you are curious about.)

acjohnson55 13y ago
I'm going to push a little further. Maybe, just maybe, the root problem is our financial scheme for higher ed, in particular, the idea of foisting the cost on the student prior to enrollment (let alone graduation, or gainful employment). Say what you want about our K-12 system, but its costs haven't spiraled completely out of control. Nor have the costs of highly state-subsidized public universities in many other parts of the world. I don't think enough people are seriously considering the idea that we have shot ourselves in the feet by demanding that the government and private industry make a return on investment on a basic service that provided all sorts of positive externalities when people have access to it. We've encouraged colleges to compete with one another for market share. Maybe the incentives that aren't working for us are a result of our cultural infatuation with winner-take-all competition.

frozenport 13y ago

I am confused because you cant avoid atudent loans, theee is no bankruptcy - they will take your money before your employer pays you. How could it burst if studentsl will eventually pay all of it off?

ahsanhilal 13y ago

The worst part of this thing is that students loans do not need to be that high because college costs should not be that high. Student loans are artificially high because of two reasons: 1. Government subsidies 2. Increasing college costs Government subsidies are there because the government knows that a kid who goes to college will be able to give a better return on it 'public' investment, since lifetime earnings for a college educated individual are about 50-100% higher than a high school one. This will make them pay more taxes etc. The schools on the other hand are taking the subsidized college loans in the form of tuition and fees and using them not to increase educational standards, but rather, invest in extracurriculars, building etc. The government does not tie college loan financing to college performance at all, so effectively it just subsidizes the borrowing costs for school in the form of cheap college loans. (shameless plug) I wrote a blog post about this if anyone is interested to read more: https://medium.com/i-m-h-o/35d383a4fbad https://medium.com/i-m-h-o/35d383a4fbad

muzz 13y ago
1. Government profits from student loans. I.e., it does not subsidize them as a whole-- rather, it makes money off them. 2. In theory, colleges compete on cost as well as other factors. There exist private colleges and even for-profit private colleges (although the data shows us that for-profit private colleges often have the worst outcomes). It's easy to blame government for problems. Easy, but not always correct.
- ahsanhilal 13y ago
  Government subsidies towards student loans is a well known fact. Just like government subsidized the cost of borrowing for mortgages, so has it inculcated a perverse system of college financing. Evidence of this can be seen in the largest increase in student defaults since 1990 at around 9.1%. whereas car, mortgage and credit card default rates are around 1-4%. That is called adverse selection run by a government system that is incentivized to give out bad loans due to the profit it sees in the long term. Colleges, in a theoretical free market might compete on cost, but in real-life they actually are competing on providing amenities and extra curriculars, not in any way associated with how well kids are educated. College prices, inflation adjusted, have gone up by 120-130% in real terms, while median family income is stagnant. Most of the increase in Net revenues in colleges is NOT spent on paying educators since their wages and teacher/student ratios have been increasing linearly. The rise is mostly attributed to budgetary items for Other Employees, coaches adminstrators etc and large infrastructure funding.

jack-r-abbit 13y ago

It is amazing the number of comments that talk about the problems of defaulting on loans and then place the blame in all sorts of places other than the people defaulting on loans. Unless you were forced at gun point to sign loan papers (or other scandalous things transpired), there isn't a lot that can convince me you are not solely responsible for your loan. I don't care if it is for an education, a house, a car or a new pair of sneakers... if you accepted money with the condition that you would pay it back, you are responsible for paying it back or suffer the consequences of not paying it back. In some cases, the consequences of not paying it back might be better than what would happen if you did pay it back (like starving to death because you can't afford to eat. or freezing to death because you can't pay for a place to live). I'm not saying that people don't find themselves in financial hard times and some times only have really horrible options to choose from. But some times I feel like people start out with default as an actual option in their minds. Like it is no big thing... just Plan B. It very much is a big thing and should be your Plan Z!

acjohnson55 13y ago
I've never heard of anyone who planned on defaulting on their student loans. Most people go to school hoping to end up upwardly bound in a fulfilling and financially rewarding career, drawn in by stories highly slanted with survivor bias. Many end up in dead-end jobs or underemployed. They don't know anything about who they're competing with in these fields or what these employers want. Kids sign these papers barely 18 years old that will quite likely set them in a gigantic financial hole for their foreseeable adult lives. Not to mention the fact that much of this debt is held by people who had no major reason to believe that the economy would drop from underneath their feet. And what's the viable alternative? Not going to college? The survivor's bias for people who that's worked out for is even worse! Sure, people willingly sign these loan papers, but we should also be honest about the level of agency and information the average aspiring adult has.
kalleboo 13y ago
Because simply blaming it on the people signing the loans isn't productive, it's just a statement of the status-quo with no solutions (shaming people isn't going to change anything).

rayiner 13y ago

I'm not sure JPM getting out of the student loan market means it's about to burst. The government's entering the market means that simply no one is interested in getting private student loans. Under the government's new program, PAY-E, your payment is capped at 10-15% of discretionary income and unpaid interest capitalization is capped at 10% above the original principal amount. Debt is forgiven after 20 years. Basically, there is no way for private lenders to compete with these generous terms. For the moment, at least, the government's program is running solidly in the black (indeed, with a big profit margin).

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beambot 13y ago

This link explains the "bubble" completely: The Most (And Least) Lucrative College Majors, In 1 Graph [1]. Make this a mandatory ACT / SAT question so that people quit making poor value decisions: STEM >> arts and humanities in terms of median earning power. [1] http://www.npr.org/blogs/money/2013/09/09/219372252/the-most-and-least-lucrative-college-majors-in-1-graph?utm_source=npr&utm_medium=facebook&utm_campaign=nprfacebook http://www.npr.org/blogs/money/2013/09/09/219372252/the-most...

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mboroi 13y ago

...and I was all like, http://i.imgur.com/fPcPbev.png http://i.imgur.com/fPcPbev.png

afterburner 13y ago

Hey, maybe tuition will go down if loans aren't as readily available...?

muzz 13y ago
Not sure why you'd think that at all
- afterburner 13y ago
  Because if people can't afford to go (as in, can't get the money at all), demand goes down, universities lower tuition to attract more people? It's not perfect or necessarily what would happen, but it could happen.

zedai 13y ago

This is really BAD. First institutions ask for loads of money to provide education, then this kind of thing happens. Well we are just making this world worse. Human Knowledge belongs to the world. This makes difficult for students who come from backward societies.

teeja 13y ago

Health, housing, education. What's the next sector for the relentless blood funnel?

kenster07 13y ago

MOOC couldn't have come at a better time.

lacero 13y ago
There is a fixed number of existing jobs. Mooc, for-profit and state schools all produce people who have to compete for the same jobs. The only solution to debt and employment is to make certain processes/jobs more efficient so that the extra time can be used to create new and better products/services/companies.
BrandonMarc 13y ago
MOOC's are a response by the market to some of the problems of the current system. Time will tell just how well the MOOC phenomenon will turn out for us, but I suspect we're better off with them than we were before.
smm2000 13y ago
MOOCs are solution for highly motivated students who are generally able to get accepted by traditional universities, ace classes and graduate with little to no debt. They are not the solution for sub-par students who go to for-profit universities, could not get a job afterward and could not repay loans. I consider myself reasonably motivated, graduated with almost perfect GPA and I still struggle to complete MOOCs. It's just too difficult to force yourself to study without outside pressure and peer support.

sprash 13y ago

I still don't understand why people don't just go to Europe: http://www.studyineurope.eu/tuition-fees http://www.studyineurope.eu/tuition-fees I didn't pay a single cent for my education...

kalleboo 13y ago

Thank god my country has tax-funded tuition (upper education is provided free for all citizens), this sounds like a nightmare.

VladRussian2 13y ago
they even paid us a stipend - something at the level of a minimum wage - and we were such a lazy "lowest part of the back" students, it's a shame. In the community college here (i went for ESL) i saw a bunch of youngsters who go to the college and work simultaneously, and some workers at the local Starbucks go to the state school. My respect to them.

jalayir 13y ago

Just get an undergrad in India.

Tloewald 13y ago

The problem with student loans is that they drive up the cost of education by reducing the perception of up-front cost. The solution is to abolish them and let the market deal with it. Universities can switch over to being athletic clubs and government funded think-tanks or something. It boggles the imagination that NYU charges something like $60,000 tuition per student per year on top of all its other sources of revenue.

canvia 13y ago

Universities should issue the loans themselves so that they have an incentive to deliver a quality, useful education that has value in the marketplace to guarantee their repayment. Or make the education free and a % of each graduate's future earnings (up to some max $ amount or limit it to 20 years after graduation) are paid back into the endowment to fund future students.