11 ms·

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 basica

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...
- jobu 13y ago
  Always ask if the school is Regionally Accredited in the degree you intend to take: http://en.wikipedia.org/wiki/Regional_accreditation#Regional_accreditation_vs._national_accreditation http://en.wikipedia.org/wiki/Regional_accreditation#Regional... If not, the credits are generally non-transferrable and many businesses will simply toss your resume.
  - masmullin 13y ago
    How do you know that 'Regionally Accredited' is meaningful until you are educated? My high school guidance councillor certainly never talked about this. My college actually shouted "we're accredited" at the top of their lungs, but I didn't give a fart until I was half way through the degree, and one of my profs talked to me about why they worked so hard ensuring accreditation (for the same reasons you state) - at which point I said, "pheww it's a good thing this place is accredited" I had no difficulty getting a job after grad. But I certainly didn't know that accredited was important before I entered the course.
    - saraid216 13y ago
      > My high school guidance councillor certainly never talked about this. They should have. :( It's sort of important.
    - johnward 13y ago
      This is a mistake I made. My dad didn't go to college and my mom got a 2 year degree from a community college. A shitty for profit school sold me on the idea that I could get an awesome job in 2 years and then continue on to a bachelors program. Except that the credits don't transfer and you can only get the BS from the same shitty school. I also didn't see anyway I could pay for schooling without working full time and I didn't see how I could make that work at a traditional school. Although I'm doing ok in my career I know many people who go to these types of schools do not. Now I don't know what to do. I would love to have gone or go to a 4 year state school. At this point in my life I make too much money and have too many responsibilities to be able to quit and go back to school. I also have 10 years in the field which I hope makes up for the education gap in some cases. Are there any actually decent (accredited) programs that have hours for working people? The only way I see myself getting a BS is if there is a full night program somewhere but at this point I'm not even sure that it's worth taking on more debt.
deleted 13y ago
[deleted]
alwaysdoit 13y ago
>This excess demand and fixed supply means that colleges can raise prices. If colleges raise prices, won't this make it more attractive/affordable for new colleges to open, thus increasing supply?
- alistairSH 13y ago
  Yes, which is why we have the large number of new for-profit institutions. Many of these new for-profits deliver degrees that aren't the paper used to print them because delivery a quality education isn't easy.
- msandford 13y ago
  Potentially yes. But those colleges won't have the prestige and long history that a college needs to serve as some kind of credential, neither will the inherent network-building happen there either. What I mean is that because Harvard is such an elite school, many of the people you meet there WILL be involved in society at the highest levels and you'll already know them. That gives you a powerful advantage. University of Phoenix doesn't have that yet and may not for several decades. And the University of Phoenix doesn't carry much prestige or brand recognition with it. Furthermore the job market doesn't necessarily support the need for additional college grads. In a "normally functioning" (total bullshit I know but go with it for a second) job market high wages and high employment does two things: 1. Increases people's ability to pay for loans post-graduation 2. Reduces the average default risk When that happens, interest rates for college loans go down and more people are able to go to college based on fundamentals: the job market will (with some lag factor) still be good when they graduate and thus loaning to them is a good idea. This is a "natural market function" which, though imperfect, tends to balance out the supply of college with ability to demand. I would estimate that college loans would tend to lag the job market by somewhere between 2 and 10 years depending on how agile a bank was to react to the job market. So you would have a period of heightened wages for at least 4 years as people worked their way through school and then potentially a period of lowered wages for a few years as people slowly figure out that the crazy high wages are gone. But with these subsidies you get all the downside of the glut with none of the upside of the scarcity. It's not awesome.
- RougeFemme 13y ago
slg 13y ago
Playing devil's advocate, isn't it fair to remove the ability to discharge student loan debt and in term the default risk due to the fact that there is no collateral? Unlike a car loan or a mortgage, a bank can't repossess your education.
- nether 13y ago
  Not really when other types of unsecured debt are wiped out by bankruptcy. Your credit card debt can be erased by chapter 7 bankruptcy even if you used it to fund an awesome vacation that no one can take back.
  - sliverstorm 13y ago
    Yes, but a credit card requires credit. Student loans are specifically crafted to be obtainable by people with no income and no credit.
    - RougeFemme 13y ago
      I know the credit cards companies have cut back on this, but. . .credit cards for students don't require credit. . .and are specifically crafted to be obtainable by students with no income or credit. Students with income and/or credit can get better deals with "non-student" credit cards.
      - jlgreco 13y ago
        I believe that the Credit CARD Act of 2009 changed much of that. IIRC if you are a student with no income then you need to give them a collateral the size of your credit limit.
      - sliverstorm 13y ago
        Indeed, and when I was a student I got my first credit card with a modest job (< $10k). What was my initial credit limit? $400.
    - fnordfnordfnord 13y ago
deleted 13y ago
[deleted]
ams6110 13y ago
Predictably, the easy availability of student loans has caused inflation in tuition.
nchaimov 13y ago
It isn't quite true that student loans can't be discharged through bankruptcy. Student loans are not excluded from discharge if excluding the debt would "impose an undue hardship on the debtor and the debtor's dependents": 11 USC 523(a) Exceptions to discharge ... (8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for -- an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or an obligation to repay funds received as an educational benefit, scholarship, or stipend; or any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual; Per http://www.moranlaw.net/student_loan_brunner.htm http://www.moranlaw.net/student_loan_brunner.htm, "undue hardship" means '(1) that the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.'
- waps 13y ago
  Why isn't this clause used, assuming people who go bankrupt actually tried to prevent that from happening ?
enraged_camel 13y ago
>>Student loans only price in 1 & 2 because of the near impossibility of not paying the loans back. That, and there is virtually no way to accurately measure the default risk of those taking the loans. It would be very interesting to live in a world where your choice of major affected your loan rate. For example, as a political science major you would not be nearly as employable as a computer science major, which would translate to more risk of default. This would ensure that only those who are serious about a political science degree would pursue it, and at a big picture level things would shift so that people would think about the real value of their education much more carefully. Imagine a situation where you are looking at a list of majors, and next to each item there is a percentage score, which is the loan rate. For electrical engineering it might be 2.5%, whereas for art it might be 9%. But then you would also have to consider the risk that someone who is not qualified for or interested in electrical engineering would most likely drop out of it. So the formula would also have to take into account the person's background. If they scored high on their SATs and Advanced Placement tests for math and engineering, the loan rate for EE might further go down to 2%. For those coming from a non-technical focus in high school, it might go up to 3.5%. Hmm...
- bobbydavid 13y ago
  It's no problem for the bank of they can't accurately measure your risk of defaulting, as long as they can assess a group risk. So, say 4% of students fail to repay, the bank would use that number. Just like car insurance when you first start driving. They don't know (or care) if you're a good driver so they just average beginner drivers and base the price around that average.
  - enraged_camel 13y ago
    Well, the average might be based on group risk. But car insurance companies still care about your individual situation as well as driving history.
avty 13y ago
The students can always leave the country to search for a better life.
JackFr 13y ago
"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." That doesn't make sense. In the short term, we can hold the housing stock and income as fixed, and as the interest rate varies, the amount of capital available to buy homes varies as does the price. That isn't to say it is the primary effect -- income, net household formation and the housing stock are the other main determinants -- but the level of interest rates is important.
mncolinlee 13y ago
Actually, the price increases are most likely not caused simply by the availability of loans. In the case of public schools, the evisceration of public subsidies has left them operating as public schools in name only. Even in my very liberal state, state support for colleges and universities was cut in half as a share of budgets over two decades. Most states fared worse. At the same time, medical insurance costs for faculty and staff have been increasing by ten percent per year on average, causing this expense to crowd out other necessary costs. In the case of private schools, the rising cost of public schools has contributed at least as much to their ability to charge more. For profit schools seem to be able to get away with ridiculous claims, leaving graduates jobless and defaulting on large loans. However, they would not be able to justify their prices if public schools were too much cheaper.

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...

jobu 13y ago
Always ask if the school is Regionally Accredited in the degree you intend to take: http://en.wikipedia.org/wiki/Regional_accreditation#Regional_accreditation_vs._national_accreditation http://en.wikipedia.org/wiki/Regional_accreditation#Regional... If not, the credits are generally non-transferrable and many businesses will simply toss your resume.
- masmullin 13y ago
  How do you know that 'Regionally Accredited' is meaningful until you are educated? My high school guidance councillor certainly never talked about this. My college actually shouted "we're accredited" at the top of their lungs, but I didn't give a fart until I was half way through the degree, and one of my profs talked to me about why they worked so hard ensuring accreditation (for the same reasons you state) - at which point I said, "pheww it's a good thing this place is accredited" I had no difficulty getting a job after grad. But I certainly didn't know that accredited was important before I entered the course.
  - saraid216 13y ago
    > My high school guidance councillor certainly never talked about this. They should have. :( It's sort of important.
  - johnward 13y ago
    This is a mistake I made. My dad didn't go to college and my mom got a 2 year degree from a community college. A shitty for profit school sold me on the idea that I could get an awesome job in 2 years and then continue on to a bachelors program. Except that the credits don't transfer and you can only get the BS from the same shitty school. I also didn't see anyway I could pay for schooling without working full time and I didn't see how I could make that work at a traditional school. Although I'm doing ok in my career I know many people who go to these types of schools do not. Now I don't know what to do. I would love to have gone or go to a 4 year state school. At this point in my life I make too much money and have too many responsibilities to be able to quit and go back to school. I also have 10 years in the field which I hope makes up for the education gap in some cases. Are there any actually decent (accredited) programs that have hours for working people? The only way I see myself getting a BS is if there is a full night program somewhere but at this point I'm not even sure that it's worth taking on more debt.

deleted 13y ago

[deleted]

alwaysdoit 13y ago

>This excess demand and fixed supply means that colleges can raise prices. If colleges raise prices, won't this make it more attractive/affordable for new colleges to open, thus increasing supply?

alistairSH 13y ago
Yes, which is why we have the large number of new for-profit institutions. Many of these new for-profits deliver degrees that aren't the paper used to print them because delivery a quality education isn't easy.
msandford 13y ago
Potentially yes. But those colleges won't have the prestige and long history that a college needs to serve as some kind of credential, neither will the inherent network-building happen there either. What I mean is that because Harvard is such an elite school, many of the people you meet there WILL be involved in society at the highest levels and you'll already know them. That gives you a powerful advantage. University of Phoenix doesn't have that yet and may not for several decades. And the University of Phoenix doesn't carry much prestige or brand recognition with it. Furthermore the job market doesn't necessarily support the need for additional college grads. In a "normally functioning" (total bullshit I know but go with it for a second) job market high wages and high employment does two things: 1. Increases people's ability to pay for loans post-graduation 2. Reduces the average default risk When that happens, interest rates for college loans go down and more people are able to go to college based on fundamentals: the job market will (with some lag factor) still be good when they graduate and thus loaning to them is a good idea. This is a "natural market function" which, though imperfect, tends to balance out the supply of college with ability to demand. I would estimate that college loans would tend to lag the job market by somewhere between 2 and 10 years depending on how agile a bank was to react to the job market. So you would have a period of heightened wages for at least 4 years as people worked their way through school and then potentially a period of lowered wages for a few years as people slowly figure out that the crazy high wages are gone. But with these subsidies you get all the downside of the glut with none of the upside of the scarcity. It's not awesome.
RougeFemme 13y ago

slg 13y ago

Playing devil's advocate, isn't it fair to remove the ability to discharge student loan debt and in term the default risk due to the fact that there is no collateral? Unlike a car loan or a mortgage, a bank can't repossess your education.

nether 13y ago
Not really when other types of unsecured debt are wiped out by bankruptcy. Your credit card debt can be erased by chapter 7 bankruptcy even if you used it to fund an awesome vacation that no one can take back.
- sliverstorm 13y ago
  Yes, but a credit card requires credit. Student loans are specifically crafted to be obtainable by people with no income and no credit.
  - RougeFemme 13y ago
    I know the credit cards companies have cut back on this, but. . .credit cards for students don't require credit. . .and are specifically crafted to be obtainable by students with no income or credit. Students with income and/or credit can get better deals with "non-student" credit cards.
    - jlgreco 13y ago
      I believe that the Credit CARD Act of 2009 changed much of that. IIRC if you are a student with no income then you need to give them a collateral the size of your credit limit.
    - sliverstorm 13y ago
      Indeed, and when I was a student I got my first credit card with a modest job (< $10k). What was my initial credit limit? $400.
  - fnordfnordfnord 13y ago

deleted 13y ago

[deleted]

ams6110 13y ago

Predictably, the easy availability of student loans has caused inflation in tuition.

nchaimov 13y ago

It isn't quite true that student loans can't be discharged through bankruptcy. Student loans are not excluded from discharge if excluding the debt would "impose an undue hardship on the debtor and the debtor's dependents": 11 USC 523(a) Exceptions to discharge ... (8) unless excepting such debt from discharge under this paragraph would impose an undue hardship on the debtor and the debtor's dependents, for -- an educational benefit overpayment or loan made, insured, or guaranteed by a governmental unit, or made under any program funded in whole or in part by a governmental unit or nonprofit institution; or an obligation to repay funds received as an educational benefit, scholarship, or stipend; or any other educational loan that is a qualified education loan, as defined in section 221(d)(1) of the Internal Revenue Code of 1986, incurred by a debtor who is an individual; Per http://www.moranlaw.net/student_loan_brunner.htm http://www.moranlaw.net/student_loan_brunner.htm, "undue hardship" means '(1) that the debtor cannot maintain, based on current income and expenses, a "minimal" standard of living for herself and her dependents if forced to repay the loans; (2) that additional circumstances exist indicating that this state of affairs is likely to persist for a significant portion of the repayment period of the student loans; and (3) that the debtor has made good faith efforts to repay the loans.'

waps 13y ago
Why isn't this clause used, assuming people who go bankrupt actually tried to prevent that from happening ?

enraged_camel 13y ago

>>Student loans only price in 1 & 2 because of the near impossibility of not paying the loans back. That, and there is virtually no way to accurately measure the default risk of those taking the loans. It would be very interesting to live in a world where your choice of major affected your loan rate. For example, as a political science major you would not be nearly as employable as a computer science major, which would translate to more risk of default. This would ensure that only those who are serious about a political science degree would pursue it, and at a big picture level things would shift so that people would think about the real value of their education much more carefully. Imagine a situation where you are looking at a list of majors, and next to each item there is a percentage score, which is the loan rate. For electrical engineering it might be 2.5%, whereas for art it might be 9%. But then you would also have to consider the risk that someone who is not qualified for or interested in electrical engineering would most likely drop out of it. So the formula would also have to take into account the person's background. If they scored high on their SATs and Advanced Placement tests for math and engineering, the loan rate for EE might further go down to 2%. For those coming from a non-technical focus in high school, it might go up to 3.5%. Hmm...

bobbydavid 13y ago
It's no problem for the bank of they can't accurately measure your risk of defaulting, as long as they can assess a group risk. So, say 4% of students fail to repay, the bank would use that number. Just like car insurance when you first start driving. They don't know (or care) if you're a good driver so they just average beginner drivers and base the price around that average.
- enraged_camel 13y ago
  Well, the average might be based on group risk. But car insurance companies still care about your individual situation as well as driving history.

avty 13y ago

The students can always leave the country to search for a better life.

JackFr 13y ago

"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." That doesn't make sense. In the short term, we can hold the housing stock and income as fixed, and as the interest rate varies, the amount of capital available to buy homes varies as does the price. That isn't to say it is the primary effect -- income, net household formation and the housing stock are the other main determinants -- but the level of interest rates is important.

mncolinlee 13y ago

Actually, the price increases are most likely not caused simply by the availability of loans. In the case of public schools, the evisceration of public subsidies has left them operating as public schools in name only. Even in my very liberal state, state support for colleges and universities was cut in half as a share of budgets over two decades. Most states fared worse. At the same time, medical insurance costs for faculty and staff have been increasing by ten percent per year on average, causing this expense to crowd out other necessary costs. In the case of private schools, the rising cost of public schools has contributed at least as much to their ability to charge more. For profit schools seem to be able to get away with ridiculous claims, leaving graduates jobless and defaulting on large loans. However, they would not be able to justify their prices if public schools were too much cheaper.