7 ms·

Why The Student Loan Market Is Insane

50 points by tokenadult 12y ago

ChuckMcM 12y ago
Is this surprising to anyone, structurally it is exactly the same as the mortgage issue in 2009 with Freddie and Fannie. The government finances the lending of money (by absorbing the risk) and gives banks money at a few percent which they loan out at 5 - 6% or more. You combine that with for profit universities which have discovered that the bank and their interests are aligned, they charge what ever they want for tuition, the banks make sure the students can get that in the form of guaranteed loans and non-dismissable loans, and the students play their part by putting themselves into indentured servitude. There is no other way for this to play out. I've written my congress critters and suggested they notify the banks that they are going to make loans dischargable in bankruptcy in 4 years, they are going to change the guarantee to be 60 cents to the dollar. Its going to get very very painful.
- bradleyjg 12y ago
  That's not how the system works anymore. FFEL which was the government guaranteed but bank issued student loans was ended in 2010. Now almost all student loans are made directly by the government (Stafford, PLUS, & Perkins), with a small rump private student loan industry. Those loans are non-dischargeable but not government guaranteed. If this had been an actual article rather than a puff piece for SoFi, presumably that would have been made that a lot clearer.
  - waps 12y ago
    Translation: they're government guaranteed by making the students seel themselves into loan slavery instead of by taxpayer money. Note the evolution of public finances since this started : expenses increased. Same thing will happen : government will bow to public pressure to make these things dischargeable, and suddenly the loans aren't worth their interest rate anymore. The government's companies panic and try to get back their principal. Why ? Because these companies weren't financed by the government, in true American style they loan on the public market, then reloan to the students. Right now they're rated AAA of course, and loan at very low interest to people who probably aren't even worth BBB rating. And they roll over debt. As soon as anyone finds a way to discharge large amounts of student loan debts, there's more than a trillion dollar of loans that go from AAA to < BBB. Then at the end of the month, these loans need to be rolled over ...
    - bradleyjg 12y ago
      There are no seperate bond issues that back federal lending to students. They are funded out of general obligation debt (i.e. treasuries). Despite being warned over and over again that bond vigilantes are just around the corner, for the better part of a decade now investors have been willing to take near zero interest on them. There's no reason to believe that a few hundred billion in lost repayment over 10-30 years, would move the needle at all.
      - waps 12y ago
        That's actually true. Greece demonstrated what happens after a default, and then Cyprus did. In both cases it didn't prevent them from reissuing bonds and selling out.
beloch 12y ago
Parts of this article bother me. Let's say that banks could set rates based on risk and this did force lower quality colleges to reduce their tuition. Those colleges would bring in less revenue and program quality would likely suffer, possibly resulting in a feedback loop. Meanwhile, ivy league universities that are funded primarily by endowments would be able to raise their tuition without burdening their students, who would be able to afford larger loans given that they would be paying lower interest rates. In short, rich schools get negligibly richer while poor schools get significantly poorer. More importantly, Ivy league program quality would not improve significantly while lower tier college programs would spiral downwards. If the goal is to promote quality education, the current system lets ivy league students subsidy lower tier college students to some extent. It makes more tuition dollars available to institutions that depend entirely on tuition at the price of restricting tuition dollars available to institutions that are less reliant on them. The status quo has significant advantages over what this article proposes. Higher default-rates are a problem, but the lesser of several evils (unless you happen to be a banker). North of the border, university tuition is subsidied by provincial governments and regulated by them as well. It varies from province to province, but average tuition in Canada is far lower than it is in the U.S.. In most provinces, tuition is still expensive enough to be considered an investment, but cheap enough that thrifty living, summer jobs, and a minor scholarship or two can see you through undergrad without debt. It's a different approach that's worth considering.
- ploxiln 12y ago
  College tuition has been rising much faster than inflation for probably 20 years now. That together with your example of Canada shows that it's still quite possible to offer a good education at a lower price. If you want to help the poorer schools out, it's probably better to just give them money. It seems probable to me that the political desire to give every student a full loan to any college (for equality!) is one of two or three primary causes of tuition (and university spending and such) going crazy.
  - icebraining 12y ago
    College tuition has been rising much faster than inflation for probably 20 years now. Actually, not really. The average price students actually pay has only increased $320 in the last 12 years (from $12650 to $12970). That probably doesn't even cover inflation. What has been rising much faster is the sticker price, but few students actually pay that. http://www.npr.org/blogs/money/2012/05/11/152499671/figuring-out-the-real-price-of-college http://www.npr.org/blogs/money/2012/05/11/152499671/figuring... http://www.npr.org/blogs/money/2012/05/22/153316565/the-price-of-college-tuition-in-1-graphic http://www.npr.org/blogs/money/2012/05/22/153316565/the-pric...
rbobby 12y ago
So kids that can't afford/qualify for a top school would also face much higher student loan interest rates. Humm... that doesn't seem that much different from "tax the poor" style of economics. Perhaps schools with a lower default rate should get a higher interest rate... the banks are leaving money on the table. Students attending schools with a higher default rate should get the lowest rate and more government support (grants/bursaries/scholarships). Or perhaps the student loan "industry" should not be focused on how to make the most money from students. It should be focused on higher graduation rates, higher paying employment for graduates, and perhaps even employment in strategic fields (i.e. increase the amount of loans available for engineering, compsci, whatever fields will be important in 10 to 20 years). And private industry (aka the banks) should not be in the business of student loans at all. It should be 100% government funded and run, with the goal of being a non-profit. It's hard for me to see any added value that private industry brings to the table for it's "share of the profits" (do they help sell a student on getting a loan? is servicing/tracking a loan so complex that the gov't couldn't easily run a loan servicing application?). Profit is the incorrect incentive for student loans (again it should be graduation rates, higher paying employment, perhaps even employment in strategic fields).
- mgkimsal 12y ago
  "(i.e. increase the amount of loans available for engineering, compsci, whatever fields will be important in 10 to 20 years)." If fed govt tries to do this, it's "meddling in the market" (or "distorting the market"). If a private co does this, it's smart/fwd thinking. ?
tn13 12y ago
Only if Mr. Obama would stay out of education market half the problems would get solved automatically. Few NBA players make million dollars a year. But that does not mean if government provides cheaper loans for basketball training it would produce more millionaires or even increase overall quality living. If government meddles in education, forces banks to give cheaper loans it only means one thing. A big "Student Loan Bubble".
- ceejayoz 12y ago
  Half the problems would get solved by the President staying out of it? Why were they problems at all before he started pushing for the reforms, then?
  - tn13 12y ago
    So the world has not solved any problems unless government wastes taxpayers money on solving them ?
    - ceejayoz 12y ago
      The President was staying out of it. There are now reform proposals to fix issues. You argue that if he'd stay out of it - as he was - that the issues would go away, so why were they there in the first place prior to him getting involved?
      - tn13 12y ago
        He was not. He says everyone should afford a college degree. Nothing wrong with that. He wants to spend someone else's money to make it affordable which only means worthless degrees will be dozen a penny.
aluhut 12y ago
I would love to know when this "why"-titles fashion finaly ends.
- netcan 12y ago
  I like it. It sets out a format that I think works well. 'Why' means 'This article is going to argue that xyz' Much better than the 'is' titles which usually mean 'This article is going to ramble vaguely about xyz and avoid even attempting to answer the question in the title (even though the answer is obviously no)'
  - aluhut 12y ago
    To me it seems most of the times like the author had no idea how to make up a title that would describe the text in one sentence. It becomes even worse if the answer to the question is not really there in the end.
- TheOtherHobbes 12y ago
  Better than Gawker style: "The finance industry decided to screw over the nation's university students. You won't believe what happened next!"
  - aluhut 12y ago
    Hehe yes there are ways to make it worse ;)
pm24601 12y ago
Gee cry me a river: 'As a result, “the government has made it difficult for banks to price to default rates,” says Mike Cagney, founder of Social Finance, a socially based student lending operation known informally as SoFi. “By accepting FDIC insurance, banks lose pricing flexibility and can’t charge interest rates commensurate with the quality of schools—and default rates vary widely by schools.”' How about the banks just get out of the student loan business? Banks are make shitloads on the student loan program: all loans that default are insured.
- netcan 12y ago
  The meat of the article is about the follow on effects from that. Higher default should mean higher interest rates is a higher cost which would push down enrollment in those underperforming schools (which also underperform for students) and/or push the the school's price down. To the extent that loans are insured, the banks profits aren't really affected by incorrectly priced risk. I'm very skeptical of free market solutions to higher education affordability issues. I think it's nonsense. But, screaming your slogan (fuck banks!) at a sentence from an article making a point about a different point of view is basically youtube comments.
  - rlucas 12y ago
    The "meat" of the article is PR hamburger for SoFi. (Not that SoFi aren't doing something genuinely interesting. But this is a straight-up advertisement. I'd bet a nickel that SoFi's agency even made the graphs for it.)
jlcummings 12y ago
The missing link is insurance or a hedge with buyers/students opting for protection from the schools product or service if not delivered in spirit or letter of its premised promise (aka marriage of warranty/collision-comprehensive). Secondly insurance or hedge against themselves as students/buyers for when life happens or they otherwise screw up delaying, discontinuing, rerouting their pursuit (liability). The fix for one sided finance is to add a second dimension in an equal and opposite direction.
alkonaut 12y ago
It should be in the public (government) interest to have Young adults date start and thus complete their degrees as early as possible in life. It's also presumably in the public interest that as many as possible are included in the pool eligible for qualified jobs (you want the top students to be doctors, not the children of rich parents). Social mobility is also a factor, if university studies are expensive that will severely limit social mobility. The conclusion is this: higher education should be free, and governments should not only ensure that it is, but that the free education holds at least the same quality as non-free (perhaps surprisingly this is already the case in many countries with free higher education). Even without tuition fees, housing, food and books are expensive, so grants or cheap loans are still necessary. The solution in Sweden and many similar countries is to have state guaranteed (I.e subsidized) loans where there is no private entity wanting a premium for the risk of lending money. The result is that anyone can afford taking loans to study, and it usually pays off very quickly.
logicchains 12y ago
I think an important step to take would be allowing lenders to discriminate based on students' course of study, considering the massive effect it has on students' ability to pay back their debt. Such a change would, all other things being equal, reduce interest rates for STEM degrees and increase those for arts, thus potentially increasing the number of STEM students to the benefit of the wider economy.
bayesianhorse 12y ago
Tuition rates don't reflect the cost or even the value of the education, in many senses of the word "value", but rather they have a strategic aspect to them which justifies the high rates. Tuition rates are essentially "costly signals". Those who have a degree are so sure of themselves, and had other people believing in them so strongly, that they were able to finance even the highest cost. This system both guarantees the elite students go to elite schools and that employers can sort applicants by school and degree. Problem is, this kind of equilibrium in the modern economical world tends to blow up in the faces of the "players" at some point.

50 points by tokenadult 12y ago

Is this surprising to anyone, structurally it is exactly the same as the mortgage issue in 2009 with Freddie and Fannie. The government finances the lending of money (by absorbing the risk) and gives banks money at a few percent which they loan out at 5 - 6% or more. You combine that with for profit universities which have discovered that the bank and their interests are aligned, they charge what ever they want for tuition, the banks make sure the students can get that in the form of guaranteed loans and non-dismissable loans, and the students play their part by putting themselves into indentured servitude. There is no other way for this to play out. I've written my congress critters and suggested they notify the banks that they are going to make loans dischargable in bankruptcy in 4 years, they are going to change the guarantee to be 60 cents to the dollar. Its going to get very very painful.

bradleyjg 12y ago
That's not how the system works anymore. FFEL which was the government guaranteed but bank issued student loans was ended in 2010. Now almost all student loans are made directly by the government (Stafford, PLUS, & Perkins), with a small rump private student loan industry. Those loans are non-dischargeable but not government guaranteed. If this had been an actual article rather than a puff piece for SoFi, presumably that would have been made that a lot clearer.
- waps 12y ago
  Translation: they're government guaranteed by making the students seel themselves into loan slavery instead of by taxpayer money. Note the evolution of public finances since this started : expenses increased. Same thing will happen : government will bow to public pressure to make these things dischargeable, and suddenly the loans aren't worth their interest rate anymore. The government's companies panic and try to get back their principal. Why ? Because these companies weren't financed by the government, in true American style they loan on the public market, then reloan to the students. Right now they're rated AAA of course, and loan at very low interest to people who probably aren't even worth BBB rating. And they roll over debt. As soon as anyone finds a way to discharge large amounts of student loan debts, there's more than a trillion dollar of loans that go from AAA to < BBB. Then at the end of the month, these loans need to be rolled over ...
  - bradleyjg 12y ago
    There are no seperate bond issues that back federal lending to students. They are funded out of general obligation debt (i.e. treasuries). Despite being warned over and over again that bond vigilantes are just around the corner, for the better part of a decade now investors have been willing to take near zero interest on them. There's no reason to believe that a few hundred billion in lost repayment over 10-30 years, would move the needle at all.
    - waps 12y ago
      That's actually true. Greece demonstrated what happens after a default, and then Cyprus did. In both cases it didn't prevent them from reissuing bonds and selling out.

beloch 12y ago

Parts of this article bother me. Let's say that banks could set rates based on risk and this did force lower quality colleges to reduce their tuition. Those colleges would bring in less revenue and program quality would likely suffer, possibly resulting in a feedback loop. Meanwhile, ivy league universities that are funded primarily by endowments would be able to raise their tuition without burdening their students, who would be able to afford larger loans given that they would be paying lower interest rates. In short, rich schools get negligibly richer while poor schools get significantly poorer. More importantly, Ivy league program quality would not improve significantly while lower tier college programs would spiral downwards. If the goal is to promote quality education, the current system lets ivy league students subsidy lower tier college students to some extent. It makes more tuition dollars available to institutions that depend entirely on tuition at the price of restricting tuition dollars available to institutions that are less reliant on them. The status quo has significant advantages over what this article proposes. Higher default-rates are a problem, but the lesser of several evils (unless you happen to be a banker). North of the border, university tuition is subsidied by provincial governments and regulated by them as well. It varies from province to province, but average tuition in Canada is far lower than it is in the U.S.. In most provinces, tuition is still expensive enough to be considered an investment, but cheap enough that thrifty living, summer jobs, and a minor scholarship or two can see you through undergrad without debt. It's a different approach that's worth considering.

ploxiln 12y ago
College tuition has been rising much faster than inflation for probably 20 years now. That together with your example of Canada shows that it's still quite possible to offer a good education at a lower price. If you want to help the poorer schools out, it's probably better to just give them money. It seems probable to me that the political desire to give every student a full loan to any college (for equality!) is one of two or three primary causes of tuition (and university spending and such) going crazy.
- icebraining 12y ago
  College tuition has been rising much faster than inflation for probably 20 years now. Actually, not really. The average price students actually pay has only increased $320 in the last 12 years (from $12650 to $12970). That probably doesn't even cover inflation. What has been rising much faster is the sticker price, but few students actually pay that. http://www.npr.org/blogs/money/2012/05/11/152499671/figuring-out-the-real-price-of-college http://www.npr.org/blogs/money/2012/05/11/152499671/figuring... http://www.npr.org/blogs/money/2012/05/22/153316565/the-price-of-college-tuition-in-1-graphic http://www.npr.org/blogs/money/2012/05/22/153316565/the-pric...

rbobby 12y ago

So kids that can't afford/qualify for a top school would also face much higher student loan interest rates. Humm... that doesn't seem that much different from "tax the poor" style of economics. Perhaps schools with a lower default rate should get a higher interest rate... the banks are leaving money on the table. Students attending schools with a higher default rate should get the lowest rate and more government support (grants/bursaries/scholarships). Or perhaps the student loan "industry" should not be focused on how to make the most money from students. It should be focused on higher graduation rates, higher paying employment for graduates, and perhaps even employment in strategic fields (i.e. increase the amount of loans available for engineering, compsci, whatever fields will be important in 10 to 20 years). And private industry (aka the banks) should not be in the business of student loans at all. It should be 100% government funded and run, with the goal of being a non-profit. It's hard for me to see any added value that private industry brings to the table for it's "share of the profits" (do they help sell a student on getting a loan? is servicing/tracking a loan so complex that the gov't couldn't easily run a loan servicing application?). Profit is the incorrect incentive for student loans (again it should be graduation rates, higher paying employment, perhaps even employment in strategic fields).

mgkimsal 12y ago
"(i.e. increase the amount of loans available for engineering, compsci, whatever fields will be important in 10 to 20 years)." If fed govt tries to do this, it's "meddling in the market" (or "distorting the market"). If a private co does this, it's smart/fwd thinking. ?

tn13 12y ago

Only if Mr. Obama would stay out of education market half the problems would get solved automatically. Few NBA players make million dollars a year. But that does not mean if government provides cheaper loans for basketball training it would produce more millionaires or even increase overall quality living. If government meddles in education, forces banks to give cheaper loans it only means one thing. A big "Student Loan Bubble".

ceejayoz 12y ago
Half the problems would get solved by the President staying out of it? Why were they problems at all before he started pushing for the reforms, then?
- tn13 12y ago
  So the world has not solved any problems unless government wastes taxpayers money on solving them ?
  - ceejayoz 12y ago
    The President was staying out of it. There are now reform proposals to fix issues. You argue that if he'd stay out of it - as he was - that the issues would go away, so why were they there in the first place prior to him getting involved?
    - tn13 12y ago
      He was not. He says everyone should afford a college degree. Nothing wrong with that. He wants to spend someone else's money to make it affordable which only means worthless degrees will be dozen a penny.

aluhut 12y ago

I would love to know when this "why"-titles fashion finaly ends.

netcan 12y ago
I like it. It sets out a format that I think works well. 'Why' means 'This article is going to argue that xyz' Much better than the 'is' titles which usually mean 'This article is going to ramble vaguely about xyz and avoid even attempting to answer the question in the title (even though the answer is obviously no)'
- aluhut 12y ago
  To me it seems most of the times like the author had no idea how to make up a title that would describe the text in one sentence. It becomes even worse if the answer to the question is not really there in the end.
TheOtherHobbes 12y ago
Better than Gawker style: "The finance industry decided to screw over the nation's university students. You won't believe what happened next!"
- aluhut 12y ago
  Hehe yes there are ways to make it worse ;)

pm24601 12y ago

Gee cry me a river: 'As a result, “the government has made it difficult for banks to price to default rates,” says Mike Cagney, founder of Social Finance, a socially based student lending operation known informally as SoFi. “By accepting FDIC insurance, banks lose pricing flexibility and can’t charge interest rates commensurate with the quality of schools—and default rates vary widely by schools.”' How about the banks just get out of the student loan business? Banks are make shitloads on the student loan program: all loans that default are insured.

netcan 12y ago
The meat of the article is about the follow on effects from that. Higher default should mean higher interest rates is a higher cost which would push down enrollment in those underperforming schools (which also underperform for students) and/or push the the school's price down. To the extent that loans are insured, the banks profits aren't really affected by incorrectly priced risk. I'm very skeptical of free market solutions to higher education affordability issues. I think it's nonsense. But, screaming your slogan (fuck banks!) at a sentence from an article making a point about a different point of view is basically youtube comments.
- rlucas 12y ago
  The "meat" of the article is PR hamburger for SoFi. (Not that SoFi aren't doing something genuinely interesting. But this is a straight-up advertisement. I'd bet a nickel that SoFi's agency even made the graphs for it.)

jlcummings 12y ago

The missing link is insurance or a hedge with buyers/students opting for protection from the schools product or service if not delivered in spirit or letter of its premised promise (aka marriage of warranty/collision-comprehensive). Secondly insurance or hedge against themselves as students/buyers for when life happens or they otherwise screw up delaying, discontinuing, rerouting their pursuit (liability). The fix for one sided finance is to add a second dimension in an equal and opposite direction.

alkonaut 12y ago

It should be in the public (government) interest to have Young adults date start and thus complete their degrees as early as possible in life. It's also presumably in the public interest that as many as possible are included in the pool eligible for qualified jobs (you want the top students to be doctors, not the children of rich parents). Social mobility is also a factor, if university studies are expensive that will severely limit social mobility. The conclusion is this: higher education should be free, and governments should not only ensure that it is, but that the free education holds at least the same quality as non-free (perhaps surprisingly this is already the case in many countries with free higher education). Even without tuition fees, housing, food and books are expensive, so grants or cheap loans are still necessary. The solution in Sweden and many similar countries is to have state guaranteed (I.e subsidized) loans where there is no private entity wanting a premium for the risk of lending money. The result is that anyone can afford taking loans to study, and it usually pays off very quickly.

logicchains 12y ago

I think an important step to take would be allowing lenders to discriminate based on students' course of study, considering the massive effect it has on students' ability to pay back their debt. Such a change would, all other things being equal, reduce interest rates for STEM degrees and increase those for arts, thus potentially increasing the number of STEM students to the benefit of the wider economy.

bayesianhorse 12y ago

Tuition rates don't reflect the cost or even the value of the education, in many senses of the word "value", but rather they have a strategic aspect to them which justifies the high rates. Tuition rates are essentially "costly signals". Those who have a degree are so sure of themselves, and had other people believing in them so strongly, that they were able to finance even the highest cost. This system both guarantees the elite students go to elite schools and that employers can sort applicants by school and degree. Problem is, this kind of equilibrium in the modern economical world tends to blow up in the faces of the "players" at some point.