Right, and they will default. But the defaults won’t have the sharp and immediate impact that they did on housing prices, because of the two differences I listed.
This is part of my question, though.
I feel like eventually, the first break in the chaincycle is going to be default. So many kids taking out loans to the point where they just can’t pay them back (either because their profession doesn’t pay enough, or they can’t find a job altogether).
So, what happens when you get a lot of student loan defaults?
Yes, and that’s the problem.
This bubble can be traced primarily to two bankruptcy “reforms.” (Timeline here.) Before 1998, anyone who had been paying on a (government or non-profit issued) student loan for 7 years could discharge that loan in bankruptcy. In 1998, that rule was removed, making student loans very difficult to discharge in bankruptcy. But that only applied to government or non-profit issued loans. In 2005, the bankruptcy law was amended again to allow for-profit lenders to make loans which would also enjoy this near-immunity from discharge in bankruptcy. (Guess who lobbied for this?)
The lenders knew a cash cow when they saw one. Now they could saddle students with interest-bearing debt that would potentially stay with the students for the rest of their lives. The government had, in effect, made a generation of students serfs to these lenders.
The lenders began throwing money at naive students, and colleges took full advantage of all this easy money by radically increasing tuition.
We need to go back and erase the mistakes we made in 1998 and 2005. Fix the bankruptcy code. Make it so that anyone who has been paying on a loan for 7 years can discharge that loan in bankruptcy. Do that, and some large segment of debtors will default and file for bankruptcy, loan money from private lenders will dry up, and colleges will be unable to charge ridiculous tuitions, because no one will be able to pay them.
Unfortunately, I have a feeling that many colleges have become dependent on the easy money, and have done things like taking on debt themselves to expand their facilities, so that house of cards will come crashing down.
It could all be very ugly, I guess, and I don’t know how it would shake out. But we have to go back and undo what the lobbyists did to students.
I admit I need it spelled out for me – who lobbied for it? Lenders in general?
Anyways, I’m still curious about the actual after-effect. If prices get so high that people can’t pay back their loans and start defaulting, what happens?
Does this depend on whether or not the loans are dischargeable? Does it imply that we’d simply have a bunch of students with ruined credit/garnished wages/etc, leading to scenarios where kids deviate to cheaper schools?
Do you think this implies that employers will have to adjust their screening criteria, or does it mean that only the rich who can afford the hefty price tag will be able to meet that criteria with no shortage of applicants?
I am mainly trying to understand “what’s going to happen” if things continue as they are today. What would happen if loans were dischargeable?
Given that only 7% of new student loan origination is from private lenders (PDF cite, see page 9), I find it hard to believe that even the total evaporation of private loans would have any significant impact on tuition.
That is a snapshot of 2010-2011, and reflects a recent pullback (of which I was admittedly unaware):
Page 3 of your link. (“Investor appetite for asset-backed securities.” That sounds sickeningly familiar.)
Note the quadrupling of private loans after they were rendered virtually immune to bankruptcy discharge. (I wonder if the pullback reflects concern that the bankruptcy rules might be changed again in response to public outcry.)
Private loans represent a smaller part of the market than I thought (but until recently a rapidly-expanding part). The larger problem, to me, is that the option of discharging student debt in bankruptcy has been virtually removed. That inescapable debt represents not just a potentially lifelong burden for students, but also a continuing drag on the economy. (People who are having their assets attached to repay loans are not out there spending.) The bankruptcy law needs to change, regardless of how much that may or may not affect tuition rates.
I don’t know - I get that student loans are a drag, but I’d be plenty ticked off that you (general student “you”) got to go to college on what amounts to my dime, while I have been dying to go back to college but can’t afford it.
The reason student loans are not dischargeable is because they are backed by taxpayer funds, right? And the assumption is that you would borrow this money, then pay it back with minimal interest with the increased income you gain from holding a college degree. So the taxpayer would gain by being repaid, and by the assumed increase in social contribution you can now make with a degree. If they are discharged, wouldn’t that screw us all by pissing money away on useless degrees?
Sateryn76, two points. Your argument has some merit, but it doesn’t explain why we have extended non-dischargeability to private loans.
And as to public money, I think the old requirement that you make payments for seven years on a student loan before you can discharge it in bankruptcy is adequate taxpayer protection. It prevents assetless students from filing for bankruptcy to discharge student loans as soon as they get out of school. After 7 years you probably either have a career or you don’t. If you have a career, and have built up some assets, you likely can repay your loan and won’t need to avail yourself of bankruptcy protection.
But if, 7 years or more into your career, you are not making enough to get ahead, you should get the fresh start that bankruptcy law envisions.
Again, bankruptcy laws are often a benefit to the larger economy. Bankruptcy frees people to become consumers again, which is stimulative. If everyone is all bound up with debt, the economy suffers.
So if my portfolio doesn’t recover from the Enron and Facebook stock that I lost money on, can I get the government to pay me for that too??
So you’re saying that you are opposed to the very concept of bankruptcy? If you would like to start a thread on that thought, I would happily participate.
If you are not opposed to bankruptcy as a general concept, then explain why student loans, of all possible types of debt, should be exempted from discharge.
I view college (and college loans by extension) as an investment. Just like stocks, bonds, CD etc. And when one invests, he or she takes a chance that that investment will pan out.
I took out loans, worked my ass off at a lumber yard full time for most of the school year to get me though a state school (yeah I know we all have the “walked uphill both ways” stories). You took out the loan, you pay it pack. No one put a gun to your head to go to a high priced school.
I believe that at some point we have to put personal responsibly back in our culture. I’m willing for that to start with student loans.
But you’re still getting the benefit of that education, aren’t you? What if, at 7.5 years, you’ve gotten your discharge, and that job suddenly opens up? Now, you are making the $100K you thought you’d be making, and you have lots of extra money. But the taxpayers who funded your education - too bad.
And although we’re in a bad patch right now, even just having a degree generally makes you more employable that you would have otherwise been. So taxpayers pay to make you more employable - what’s their reward if you discharge the debt?
In addition, I don’t like the idea of making student loans dischargeable, because then (once again) no lesson will be learned. The other parents we talk to still tell their kids that college is The Only Answer to success, despite very real evidence that that is no longer true (if it in fact ever was). Colleges will not be forced to cut their expenditures if the money keeps flowing.
The fact that a “student loan bubble” is even being discussed is evidence that something has gone sideways in our approach to college-level education. If we make the loans dischargeable, then nothing will change, except maybe an increase in the amount of bad loans being made.
Again, it sounds like you are objecting to the very concept of bankruptcy. Is that the case? (If so, I suggest a separate thread, so we don’t hijack this one.) Because many types of debt reflect investments of one sort or another. Those debts are nonetheless dischargeable in bankruptcy. You have not explained why a student loan is different from, for example, an unsecured loan taken out for the purpose of purchasing real estate or stock.
[Quote=Sateryn]
The fact that a “student loan bubble” is even being discussed is evidence that something has gone sideways in our approach to college-level education. If we make the loans dischargeable, then nothing will change, except maybe an increase in the amount of bad loans being made.
[/quote]
That is not logical. Why would I be more likely to lend money to a student knowing that the debt might someday be discharged in bankruptcy? The opposite is the case. If I know that a student who gets a worthless degree is not going to be able to pay me back, and may file for bankruptcy, then maybe I will be more careful and loan money only to students who are getting degrees that will likely result in good jobs (and therefore repayment of the loan I am making).
I think the OP is right. There is definitely a classic bubble, and I think it has burst already or is about to. The bubble exists in both the overvaluing of the assets, i.e., the degrees, and the excess in the means of production of the assets, i.e., the colleges and universities.
Here’s a pretty amazing stat from a Huffpost article:
In 1970, the percentage of college-educated urban residents averaged 12 percent among U.S. cities, and the spread among cities was relatively small: nearly all cities were within 5 percentage points of this average. In 2011, though, the average percentage of urban residents with college degrees was much higher (32 percent); the spread among cities was also much greater: only half of the cities were within 5 percentage points of the average. While some cities and their economies enjoy a high percentage of college grads, the highest being 46.8 percent in the D.C. area, other cities suffer from a low percentage, like Bakersfield, CA, with only 15.0 percent.
Here are some stats about total US population graduating from college over the years. Just 11% in 1970 and 25% by 2000. Higher now, and quite high in urban areas per Huffpo, where the real competition is going to take place anyway.
Thus number of students investing in a degree has greatly increased in one generation, greatly diluting the value of the degree as a sign and symbol of worth to prospective employees. I.e., it’s gone from having a college degree means you’re “in” to not having one means you’re “out.” Even when I went to college (1989-1992), there was no expectation that fortune awaited after graduation. Rather, one would be punished in the marketplace if one didn’t get the degree. I was pretty damn unenthusiastic about going to school, and I’m glad I got out in three years (AP credit!).
So the positive value of the asset has gone down considerably. Nevertheless, the punishment for not having the asset has also gone up: i.e., worse employment prospects. Thus, it could still be worth it to invest in the asset. Yet tuition and other costs have skyrocketed. Thus, the cost of the asset has gone up. You can imagine the graph: value descending in one line, cost rising in another. At a certain point, the net present value of the investment–increased marginal earnings over the career of the graduate minus the money cost and opportunity cost in lost years of employment–will be negative. I propose that it has been negative for the majority of graduates for awhile now. A lot of people have held on because they have been (un)consciously factoring in the social prestige for earning the degree (or loss of same for not earning the degree) or have simply been ignorant of the math.
Back when I was in school, the idea that one should skip the degree and just begin working was quite a contrarian view. One started seeing more articles to this effect in the post-9/11 crapola job market. Today, there is a veritable flood of such articles online, and meme that one must go to college to “succeed” (whatever that means in 2012) is proceeding to collapse.
I will add to this another factor: aside from degree programs with specific, concrete, and necessary educational requirements, such as for doctors, accountants, actuaries, engineers, and so on*, the fundamental value of attending college is, in a word, total shyte. What do employers really require? They need people with basic language and mathematical literacy and socialization conducive to life in the cubicle farm. A good high school education is all someone needs for the math and English. In the past, with its requirements of attending class, completing assignments, and earning good grades, college was a decent stand-in for workplace socialization, albeit an extremely wasteful one. Four years down the tubes studying what, exactly? All just to gain a little more self-discipline to be used at work.
If what our society needs is a post-high school remedial math, English, and self-discipline educational system, then our society should create that and make it as efficient as possible. I don’t see why such a course should last more than a year. Then people go to work at age 19 and start earning money. Better yet, certify kids in these skills at whatever age they can attain them and let them start earning money at whatever age they become competent.
And so on. Let there be highly efficient programming schools for people who want to do computer programming, business schools for people who want to do business, and so on. Excise the fat, eliminate the false filters and shibboleths, and make the education about the actual goals that need to be fulfilled.
In any case, back to the reality of our current crap system. Building on what another poster wrote, this bubble can and will burst in the near future, if it hasn’t already. A lot of current and prospective students are going to say “eff it” and forgo getting the degrees. Universities, which are already in dire straits,** will start going under in those straits. As more and more students opt out of getting the degree, the “punishment” from prospective employers and social opprobrium of not having a degree will decrease, further accelerating the process.
Right now, universities are obese with faculty that add nothing to our economy. I’m all for scientific research and true academic achievement, but vast numbers of profs are doing research on esoteric topics for which there simply is no demand. Since the early 70s, Master of Fine Arts (MFA) programs have proliferated, establishing a legion of profs who publish poetry and fiction that no one wants to read, teaching students to write more of the same, who in turn have the sole hope of becoming profs in the same system, since their degrees are good for nothing else. This is one “module” that can and should be ripped out of the economy, and there are many many more in academia.
It is a house of cards that has deserved to come down for decades, and I for one won’t be ruing its demise.
*I don’t doubt that these programs are also rotten and in need of gross reform, but at least the concept that, say, a doctor requires a lot of education before s/he can practice medicine is a solid one.
**I read an article recently that blew my mind. As expensive as tuition is, private universities are almost all losing money on each student! It is only donations and their endowments that allow them to keep going. This is not a sustainable system, to say the least.
I agree with your very good post, but this vision reminds me of that first Apple computer commercial - the Orewellian one with the drones hopelessly chained at their desks. I fear a world that is only oriented around the practical. There is more to life than working. I am glad there are artistic and creative types around. If someone wants to study something less than practical, as Spoke mentions above, those making a student loan to this person should assess the risk of them defaulting on that loan. As long as there IS a risk, that is (which is currently not the case). If the risk is there, it will be more carefully mitigated, and someone seeking a creative degree can go ahead and pay for it themselves or via some other means. But do not rip stuff out of academia simply because they may appear unpractical to the industrial eye.
This is what they do in Australia, up to 8% of total income. Makes a lot of sense IMO.
I’m a creative person, and so I am in no way lacking in sympathy to others pursuing this path. The thing is, I work in advertising, providing a product to those who want it, and I likewise sell my creative products to those who want them. That’s how I think it should be: if you are involved in creative pursuits, find the demand, stimulate the demand, create the demand, but do please sell where there is the demand.
The problem I have with academia, including not only MFA programs but many other social sciences and “studies,” is that there fundamentally is no demand, or quite little demand, for the courses the profs teach or the papers they publish. It’s a bunch of crap. So what allows them to have fairly cushy jobs producing that which has no value? It’s the university system, which is based on forcing kids to get a degree that they don’t really want and only need because the job market will punish them–unfairly–if they don’t get it.
It really is an exploitative, parasitic system. It sucks on so many levels.
Let make one more point in my rant. Recently my gf and I have gone to Kings Island and Cedar Point, two word-class amusement parks in Ohio. Like basically all amusement parks in the US, who is running the rides? Doing the safety checks, greeting customers, and pushing the button to send them off? Teenagers! And you know what, they do a kickass job, too. They’re positive, they’re professional.
And here’s the dirty little secret: Teenagers and young adults could do a lot of the jobs that older adults do now just as well. And if we had people start working in their teens and we treated them with respect and mentored them and gave them training, we could have people in their mid to late 20s doing a hell of a lot more than we’re doing now. When there is a need, people rise to the occasion.
But we don’t give young people those kinds of challenges because we have a shyte economy that has no room for them. Instead, we stuff them in a university for four years to get them out of the labor pool. That’s what it really is all about. Aside from the aforementioned “real” programs, it’s not about educating young people. It’s about cooping them up so that they don’t compete with older workers. It sucks and it’s a crying shame.
Why in the world is keeping older workers employed a bad thing? It’s bad enough as it is for people over a certain age to get employment.
And there is demand for those courses, by the students who demand it. You’re just pissed that they want something that won’t help them financially.
Most of the students don’t want it. They’re just going through the motions because they think they need a degree to have a decent career. They’re not really getting educated; they’re just getting a degree so they can (hopefully) have a middle class standard of living.
In a monologue on Saturday Night Live, Father Guido Sarducci announced something called the Ten Minute University. He offered to teach you in ten minutes everything you will remember about your college major five years after graduation. That little bit of satire is even more relevant today.
Universities have a reputation as producing better candidates for all kinds of jobs precisely because they “force” their students to study “irrelevant” topics. A university is designed to show its students how to become creative and independent problem finders and problem solvers. A university education isn’t necessary for this, but historically it sure has helped.
The idea is well put here:
“In the real world, we roll along, healthy and strong, in the richest nation in the world because some very wise people decided decades ago to invest in institutions that serve no obvious short-term purpose. The results of the work we do can take decades to matter—if at all. Most of what we do fails. Some succeeds. The system is terribly inefficient. And it’s supposed to be that way.” - From a Slate article