Reforming Student Loans

[dancingalone]

http://finance.yahoo.com/college-ed...udents-are-buried-in-debt?mod=edu-collegeprep

This is a rather sad story. Short version: young lady borrows almost $100,000 to attend NYU to study a major of 'religious and women's studies'. Now she is working and having difficulty making ends meet even while her loan payments are on deferment.

There's a lot going on with this that might be interesting to discuss.

1) Should banks and lenders be more selective with their student loan underwriting to make sure the client has a good prospect of repayment, even if that means adding the studied major in as an underwriting metric? Should the federal government add tighter loan guidelines along the same vein.

2) What can be done to make the entire cost of education more transparent to naive people like this young lady and her mother? Would they have benefited from a spreadsheet comparing the costs between NYU and a more affordable alternative like one of the SUNY schools? We require food companies to print labels that indicate the nutritional content of their food. Maybe something similar for the higher education sector is called for?

3) Finally, should college be de-emphasized in the US? We have hundreds of colleges and universities all fighting hard for their tuition dollars, often with elaborate relationships with the federal financial aid system. Have we reached the breaking point where too many people who have no business attending college are? What is the answer if so?

 

[Blindside]

I'm sorry, but even I figured out when I was 18 that really expensive colleges weren't in the budget, and that my career would have to pay back my loans.

Its on the head of the borrower, we aren't talking about paying for a heart transplant here.

 

[dancingalone]

Its on the head of the borrower, we aren't talking about paying for a heart transplant here.

That's true enough, but the federal student loan programs creates a distortion in the market for education. When you can easily receive tens of thousands of dollars in loans to study something that appears on the face to be impractical and without income producing potential, there's something wrong with the system itself.

Loans are being made without considering the ability to repay at all. It's almost like the subprime mortgage crisis we just had.

 

[tellner]

The reforms currently making their way through Congress will help. The only reason private banks are involved in the process was hard-core arm-twisting lobbying by the banking industry a couple Administrations back. They insinuated themselves in as a very high-priced middleman continuing the pattern of wasting public money by shoveling it into private hands at an obscene markup. Cutting out a couple layers of middlemen with money wasted in profits at each stage will lower the cost of student loans.

The other part is harder. We have become a nation which exports its jobs and has explicit policies in place to suppress wages. Every time the economy starts generating jobs and worse, raising wages, Volcker or Greenspan has been there to "curb wage inflation" by creating a mini-recession.

 

[Big Don]

How about something really simple, automatic payments deducted each pay period from the graduate's bank account?

 

[dancingalone]

The reforms currently making their way through Congress will help. The only reason private banks are involved in the process was hard-core arm-twisting lobbying by the banking industry a couple Administrations back. They insinuated themselves in as a very high-priced middleman continuing the pattern of wasting public money by shoveling it into private hands at an obscene markup. Cutting out a couple layers of middlemen with money wasted in profits at each stage will lower the cost of student loans.

This might address some of the administrative cost of loans (but I have my doubts). I was really thinking more of the problems resulting from the student loans being so freely available however. My feeling is that some tightening of the standards for underwriting should be made to better reflect the credit risk. Since the federal government is the guarantor for many if not most student loans, there's little incentive for the lenders to take the loan process seriously - they just hand it out like candy.

The other part is harder. We have become a nation which exports its jobs and has explicit policies in place to suppress wages. Every time the economy starts generating jobs and worse, raising wages, Volcker or Greenspan has been there to "curb wage inflation" by creating a mini-recession.

A new thread might be better for this discussion if you're interested in expanding further on your idea.

 

[Empty Hands]

Since the federal government is the guarantor for many if not most student loans, there's little incentive for the lenders to take the loan process seriously - they just hand it out like candy.

That may be true generally, but in this specific case only a small portion of her loans were federal. The lion's share were private (unsubsidized). I don't think it has so much to do with federal guarantee as it has to do with the fact that it is nearly impossible to discharge student loan debt. It is one of the few debts that follow you through bankruptcy.

More generally, I think the financial industry has realized that they can make a lot of money by ignoring risks they used to take seriously. Even if the government doesn't bail them out when everything catches up to them, the individuals make a huge amount of money until that day. Plus when everyone else is taking huge risks and making a lot of money, the company will not look kindly on risk-averse, lower profit managers. We saw that just recently with the absurd leverage that financial companies were taking on with no thought to the future.

 

[tellner]

This might address some of the administrative cost of loans (but I have my doubts). I was really thinking more of the problems resulting from the student loans being so freely available however. My feeling is that some tightening of the standards for underwriting should be made to better reflect the credit risk. Since the federal government is the guarantor for many if not most student loans, there's little incentive for the lenders to take the loan process seriously - they just hand it out like candy.

An old economics professor of mine did a lot of research on the student loan business. From what I remember of his results - years and years of data - it mirrored private vs. public health insurance. Overhead was over 30% in the privately-run programs, less than 5% in the publicly-run ones. Advertising costs and profits were zero in the public programs, high in the private ones. The real problem is one which we've seen with mind-numbing regularity in the mania for privatization. The savings are generally illusory. The process privatizes benefits, socializes costs and encourages risk since the government is underwriting but not regulating.

A new thread might be better for this discussion if you're interested in expanding further on your idea.[/QUOTE]

Indeed. But it's the other half of the equation. From the 1940s to the late 1980s a college degree, let alone a graduate degree, gave people a very good shot at upwards economic mobility and entry into the middle class. That is no longer the case. Grants have disappeared to be replaced by ever higher interest-rate loans. Costs have risen far in excess of inflation. The chance of landing a job which will pay back the loan has dwindled.

It's easy and a damned lie to take the simple-minded, doctrinaire, movement-conservative Party Line and say it's the fault of the undeserving poor and capitalists who were just too damned nice to them. The real causes are structural and have been building for decades.

 

[Carol]

I have a B.Mus. from Berklee College of Music and am trying to finish my B.S.I.T. at UMass Lowell.

To date: no loans, no money from mommy and (sadly) no tuition reimbursement.

 

[Bruno@MT]

Apart from the cost of transportation (I commuted by train to and from college), food, writing materials, etc... my tuition cost my parents roughly 400 euros per year. That was for a Masters Degree in electronics at a good college.

Of course I live in an evil state where the cost for eduction is largely socialized. You should hang on to your 100K student loans until they can pry them from your cold, dead fingers

 

[dancingalone]

That may be true generally, but in this specific case only a small portion of her loans were federal. The lion's share were private (unsubsidized). I don't think it has so much to do with federal guarantee as it has to do with the fact that it is nearly impossible to discharge student loan debt. It is one of the few debts that follow you through bankruptcy.

I'm not necessarily advocating student loan debt dischargable through bankruptcy. Especially those guaranteed by the government.

More generally, I think the financial industry has realized that they can make a lot of money by ignoring risks they used to take seriously. Even if the government doesn't bail them out when everything catches up to them, the individuals make a huge amount of money until that day. Plus when everyone else is taking huge risks and making a lot of money, the company will not look kindly on risk-averse, lower profit managers. We saw that just recently with the absurd leverage that financial companies were taking on with no thought to the future.

This is the exact aspect of the student loan industry I am concerned with. I would like to see reform made so that they will consider risks appropriately.

 

[dancingalone]

Apart from the cost of transportation (I commuted by train to and from college), food, writing materials, etc... my tuition cost my parents roughly 400 euros per year. That was for a Masters Degree in electronics at a good college.

Of course I live in an evil state where the cost for eduction is largely socialized. You should hang on to your 100K student loans until they can pry them from your cold, dead fingers

You are paying for the full cost of the education, just not directly. How much of your yearly income is drained away by your government to pay for this and other social services?

 

[dancingalone]

I have a B.Mus. from Berklee College of Music and am trying to finish my B.S.I.T. at UMass Lowell.

To date: no loans, no money from mommy and (sadly) no tuition reimbursement.

After exhausting my trust fund from travelling around the world and studying martial arts for over 10 years, I used the last bit to attend university since it seemed that I needed to support myself. Guess what? I considered the cost of education since I was paying for it upfront with cash. I didn't attend an expensive private school enrolling at the good old University of Texas, whose tuition at the time was about $1200 a semester due to partial funding from the state and before tuition deregulation. I also studied a "practical" field, knowing I would need to start earning income right away after graduating.

It seems like you're much in the same book I was, Carol. When you can conveniently dump all the costs away on some nebulous student loan, the immediacy of the situation is lost and you don't think about the huge sums you have to repay some day.

 

[dancingalone]

An old economics professor of mine did a lot of research on the student loan business. From what I remember of his results - years and years of data - it mirrored private vs. public health insurance. Overhead was over 30% in the privately-run programs, less than 5% in the publicly-run ones. Advertising costs and profits were zero in the public programs, high in the private ones. The real problem is one which we've seen with mind-numbing regularity in the mania for privatization. The savings are generally illusory. The process privatizes benefits, socializes costs and encourages risk since the government is underwriting but not regulating.

But no one said anything privatization. Education is one of those cases where the government can and should be involved for a number of reasons, not the least of which is the societal desire to educate people. I think governmental sponsored student loans are a very good thing. It's the current execution of them that is faulty. Uncle Sam should take a stronger role in promoting certain types of education that is needed: perhaps capping the loans for relatively unneeded fields while subsidizing degrees in math, science, and engineering. Law school loans should come at loan shark rates.

Indeed. But it's the other half of the equation. From the 1940s to the late 1980s a college degree, let alone a graduate degree, gave people a very good shot at upwards economic mobility and entry into the middle class. That is no longer the case. Grants have disappeared to be replaced by ever higher interest-rate loans. Costs have risen far in excess of inflation. The chance of landing a job which will pay back the loan has dwindled.

Degrees used to mean something. Even if it was in a liberal art or a social science, you knew the graduate could read, write, and have a certain knowledge of the world and of society. Not so true today. Too many people who are not college material are attending the system, watering down schools and curricula. I believe more of an effort to divert money from colleges and universities to technical and vocational training should be made, if the plan to do so is a good one.

It's easy and a damned lie to take the simple-minded, doctrinaire, movement-conservative Party Line and say it's the fault of the undeserving poor and capitalists who were just too damned nice to them. The real causes are structural and have been building for decades.

The last sentence is true enough, but I really don't believe you have to frame this as a political argument. The problem exists and it is not constrained to Dems and Repubs, and neither should be the solution to it.

 

[Bruno@MT]

You are paying for the full cost of the education, just not directly. How much of your yearly income is drained away by your government to pay for this and other social services?

Yeah I did the math. Turns out that the entirety of my social contribution is lower than the price of just a decent US health insurance. On top of that I get free dental care, paid for education, almost zero medical co-payment and a temporary social safety net for if I ever get jobless. EDIT: I just checked, and it's about 13% of my gross income. That also includes pension plan payments.

Turns out that the above is fairly affordable once you cut out all the lawyers, the insurance company execs, stockholders and other people siphoning off the money that is supposed to work for your benefit. I am prepared to discuss the philosophical pros and cons of socialization as soon as the US manages to come up with a privatized system that enables all of the above at comparable prices. Until then: no contest.

 

[dancingalone]

Yeah I did the math. Turns out that the entirety of my social contribution is lower than the price of just a decent US health insurance. On top of that I get free dental care, paid for education, almost zero medical co-payment and a temporary social safety net for if I ever get jobless. EDIT: I just checked, and it's about 13% of my gross income. That also includes pension plan payments.

Turns out that the above is fairly affordable once you cut out all the lawyers, the insurance company execs, stockholders and other people siphoning off the money that is supposed to work for your benefit. I am prepared to discuss the philosophical pros and cons of socialization as soon as the US manages to come up with a privatized system that enables all of the above at comparable prices. Until then: no contest.

If you are really just paying 13% of your gross income for all those services, then it's readily apparent that you're being subsidized by the tax payments of others, Bruno. It's surely not worth bragging about, although certainly that's a good deal for you while you can get it.

The Greeks have their own setup with lots of goodies. That's not going so well for them right now and I'm already reading about similar strains in the PIGS countries.

 

[Bruno@MT]

If you are really just paying 13% of your gross income for all those services, then it's readily apparent that you're being subsidized by the tax payments of others, Bruno. It's surely not worth bragging about, although certainly that's a good deal for you while you can get it.

The Greeks have their own setup with lots of goodies. That's not going so well for them right now and I'm already reading about similar strains in the PIGS countries.

Those are bold words. I have a decent middle class income. I am above the median pay range. Ergo it is not me who is being supported. Middle class is supporting the others. But even that I don't mind. Because I support the others and still pay less than you. That is harnessing the economics of scale while preventing 3d parties from leeching money.

But do you have any idea how much of you money is siphoned off to pay for lawyers, administrative people, insurance company cost + profits? A doctors visit over here costs 22,7 euros for a consultation, and that is without the subsidizing. I get a refund for 18 euros or so. given the average length of a doctors visit + the administrative details, do you really think a doctors visit should cost much more? Do you really think getting a couple of stitches and an X ray should cost hundreds of dollars or even more?

Far from being supported by others, I simply benefit from the fact that no scumbags are getting rich off payments that I would have to pay in the US because the medical industry is colluding with the insurance providers.

And the benefit works the other way too: because health care is costs little, here, noone will sue another because of a sprained ankle or such things. Again -> less money to lawyers or expensive insurance. It is also very rare for doctors to be sued here -> doctor does not need expensive CYA insurance for which he has to amortize the cost over his patients.

 

[Grenadier]

Don't go to a school that you cannot reasonably afford. Furthermore, don't take out more loans than you can expect to pay back, plain and simple.

If you absolutely must go to an expensive school, then it's up to you to secure the money. There are ways, such as scholarships, ROTC, etc., that will allow you to pursue your degree.

While some folks throw barbs for suggesting such a thing, there is no reason why someone can't go to a reasonably priced state school for a degree that doesn't give you as good of a paying job, versus paying 30K+ / year to attend a private school.

I've seen some kids go to Ivy League schools for 4 years, get their degrees in ethnic studies, and come out owing 150K+ in loans, and find themselves facing a large debt, and poor job prospects. They could have gone to any number of inexpensive state schools nearby, and come out with just as good or poor, of a pool of potential jobs, as their Ivy League counterparts did.

In the end, employers look at your GPA, your test scores, your work experience, and your recommendations. As long as you come from an accredited place, the school prestige doesn't make that much of a difference.

How about something really simple, automatic payments deducted each pay period from the graduate's bank account?

Actually, there are incentives in place to allow the loan corp. to go through automated bank drafts. I have this on my loans, and as agreed to, the loan company that I use, dropped the interest rates by a quarter point.

This works fine for people who honestly intend to pay back the loan, but for those who don't, they would simply close the bank account.

 

[CoryKS]

She pursued a worthless degree with a steep price tag and racked up enormous amounts of debt to do it. I assume that with each loan the terms were discussed so I don't see why this is a cause that requires "reform", unless we are now viewing college-bound students as the intellectual peers of payday cash loan recipients. Maybe the real reform should be to encourage colleges to reduce the markup on the quilted two-ply they are selling.

 

[dancingalone]

Those are bold words. I have a decent middle class income. I am above the median pay range. Ergo it is not me who is being supported. Middle class is supporting the others. But even that I don't mind. Because I support the others and still pay less than you. That is harnessing the economics of scale while preventing 3d parties from leeching money.

I am merely going by your own words, Bruno. You say you pay 13% gross for education, health care, and your safety net which I imagine includes unemployment insurance and other welfare measures like food aid, rent assistance, etc.

Meanwhile Belgium (you're Belgian, right?) has some of the highest tax rates on average workers. http://www.justlanded.com/english/Belgium/Belgium-Guide/Money/Income-tax

Something doesn't add up and I find it hard to believe that such a huge discrepancy can be explained by a wasteful US system as you posit.