Opinion

Felix Salmon

Counterparties: America’s trillion-dollar student debt burden

By Ben Walsh
May 14, 2012

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Over the weekend, the NYT had a great, in-depth look at soaring student debt figures, and the picture is not pretty: over the last decade, tuition and fees at state schools have increased 72%, and public funding per pupil has dropped 24%.

Student loans are now a generational rite of passage – 94% of students borrow to earn a bachelor’s degree, up from 43% in 1993. The total value of student loan debt has passed $1 trillion, up from $852 billion halfway through 2011. As the Federal Reserve shows, it’s not just the young who bear the burden: a third of the value of outstanding student loans is owed by those older than 40.

Congress, for its part, is currently wrangling over a bill that would prevent federally subsidized student loan rates from doubling to 6.8% beginning July 1. Looking at that debate, Will Wilkinson makes the point that interest rate subsidies are just another form of spending that could be better directed at scholarships for students of modest means. And Conor Friedersdorf takes that argument one step further, calling indebted college graduates a “privileged class” on whom spending money “in a country with impoverished immigrants and struggling high school dropouts and hard-pressed single mothers” is pandering at its worst.

While lower interest rates would help, Mark Kantrowitz and Mark Schneider point to students’ bleak income prospects: “Debt is a problem only if students don’t graduate or if graduates can’t get jobs that pay enough to allow them to repay their loans. Taking on $25,000 in student loans to earn an additional $25,000 per year is a good investment; borrowing $100,000 to earn an additional $5,000 per year is not.” Josh Barro also notes that loans are just one way to fund higher education – direct state funding of public universities is the most obvious alternative.

Absent increased direct state funding, Mike Konzcal thinks that when the government acts as a lender to students, it should lend as cheaply as it can while still making  a profit – which it’s doing at the moment.

It’s also worth wondering if the flood of student loans has made a college education more expensive. Without allowing students to take on unrealistic loads of debt, it’s hard to imagine college presidents saying, as Ohio State’s did to the NYT: “I don’t think a lot about costs.” – Ben Walsh

And on to today’s links:

Details
The DOJ actually has no idea how many execs have been convicted over the financial crisis – WSJ

Yikes
How Pixar literally almost deleted Toy Story 2 – Kottke

JMorgan
JPMorgan, apparently not immune to irony, lobbied for the loophole that enabled its massive loss – NYT
Former JPM CFO: Controversial unit’s strategy was always “hedging for profits” – Bloomberg
Jamie Dimon reportedly berated Paul Volcker and a Fed official at a dinner party last month – NYT
JPMorgan unit’s entire London staff could be fired after surprise $2 billion loss – Bloomberg
JPMorgan is investigating whether London traders hid derivatives losses – FT
Why tri-party clearing services – like JPMorgan’s – should be regulated as utilities – Econobrowser
Five hours in the life of Dodd-Frank and JPMorgan – Rortybomb
Jamie Dimon’s failure - Felix

Wonks
Why we need targeted action to help the long-term unemployed – NYT

Reuters Opinion
Obama and the politics of party unity – Chrystia Freeland
Break up the big banks – David Rohde
How to protect the euro from a Greek exit – Hugo Dixon
The strange vogue in dumping U.S. citizenship – Atossa Abrahamian

EU Mess
EU officials now more or less openly discussing a Greek exit from the euro – Bloomberg
What history tells us about the increasingly likely Greek exit from the euro – Economic Musings
Greece could leave the euro “very possibly next month” – Krugman
Greece’s deputy PM: We’ll run out of money in 6 weeks if we reject bailout program – Telegraph
Greece Can No Longer Delay Euro Zone Exit - Der Spiegel

Housing
Ally Financial’s mortgage unit files for bankruptcy – DealBook

Comments
12 comments so far | RSS Comments RSS

Can somebody tell me why student loans need to cost 6.8%, when the cost of capital is close to zero?

Posted by KenG_CA | Report as abusive
 

KenG, what about the risk premium? These are unsecured loans, and while they can’t be discharged in bankruptcy that isn’t the same as assuring they will be paid back promptly.

In any case, the crux of the matter is this: “Josh Barro also notes that loans are just one way to fund higher education – direct state funding of public universities is the most obvious alternative.”

Subsidizing student loans and direct funding of public universities are two ways we can invest in education. But the two approaches have a VERY different impact on the cost of education.

If you subsidize student loans, then people borrow more and spend more. You end up with some of our graduate carrying $100k+ debts, because they fell in love with a private school (and somebody was willing to loan them a ridiculous amount of money to go). Besides, with the tuition hikes at the public universities it is “only” another $20k a year.

But suppose instead you invest in the PUBLIC universities? Drive down class sizes. Drive down tuition. Give students a top-notch education for $10k a year and some of the country-club private universities may have a hard time competing at a $50k price point.

The NYT cites a student who foolishly went $120k into debt to acquire a degree in marketing from Ohio Northern University. Given that I’ve never heard of the school, I suspect a degree from Ohio State would have served just as well at a fraction of the cost.

Let’s push that price competition until people stop making foolish choices. We can’t (or shouldn’t) directly dictate costs to private schools. We definitely shouldn’t subsidize tuitions at private schools any more than we already do (that just drives them higher, anyways). Let’s try a different approach!

Posted by TFF | Report as abusive
 

Join the ‘student loan debt’ advocates & champions in the fight towards changing American perceptions; there is a movement to reach and change societal norms in regards of how people think of ‘student loan debt’ and the serious repercussions in aggregate when the next financial crisis hits. When the student loan bubble bursts, and it will; the devastation will be long reaching into our financial institutions, and then society will finally understand the foreboding economic condition and the actors who were involved in allowing this student loan debt catastrophe to happen: the responsible persons for the Student Loan Debacle, is majority of Congress & the Senate.

Robert Applebaum http://forgivestudentloandebt.com/ OR https://www.facebook.com/groups/forgives tudentloandebt/

Denise Smith https://www.facebook.com/groups/aging.wi th.student.debt/ who is feverishly working for those older students who are over 50 & also those who under 50 that are saddled with student loan debt.

Natalie Abrams https://www.facebook.com/OccupyColleges

http://www.studentloanjustice.org

Loan Reform Now: https://www.facebook.com/pages/Loan-Refo rm-Now/186052074801911

“The mission of Loan Reform Now is to encourage the passage of laws that protect students from the negative impacts of the private student loan industry and their misleading practices.”

“Reporter looking to do a piece on parents who owe a lot for their children’s student loans.” Please E-mail raeann.roca@gmail.com

for more info: http://studentloandebacle.blogspot.com/

Posted by franksinwein | Report as abusive
 

TFF, if the loans are paid back promptly (it sounds like they aren’t, as a third of the debt is owed by people over 40), and the loans are not shielded by bankruptcy, then the lenders will make even more money. I don’t think the risk warrants a huge margin.

I’m guessing you knew I would support bigger investments in public universities, but that’s as likely as to happen as any of my tax plans. Our education system was a primary reason the U.S. developed into the dominant economy of the last half century, and its decline (the education system, that is) is paralleling the decline of the economy. However, with so many people viewing college graduates as elitists, and spewing hate on teachers for their unions, we’d be lucky just to maintain the current sorry state of public university funding, let alone increase it.

Posted by KenG_CA | Report as abusive
 

If the lending programs are hugely profitable, then where are those profits going? Ought to be a paper trail somewhere…

In any case, I’d rather have less debt than cheap debt. Debt is like McDonalds food. If it is too easy and cheap, you keep eating more and more until you weigh 800 lbs and can’t stand up without a crane.

Let’s forgive debt for public servants. Forgive debt for those who went to public schools, if they truly need the help. But forgive debt for PRIVATE individuals who went to PRIVATE schools to work in PRIVATE industry? Not on my life!

Posted by TFF | Report as abusive
 

While it is tempting to smoosh all the aspects of “student” loans together, let’s keep to this simple premise… CONGRESS created this assinine mess at the behest of lenders, not based in fact, for the purpose of increasing profits of the lenders, NOT to ‘help’ students.

If CONGRESS actually wanted to help students, they would have made up one set of simple rules… 3% above the federal rate, simple interest, payments applied 50/50 to the principal/interest, limits on fees and charges that do NOT get ‘capitalized’ to the principal, basic bankruptcy and consumer protections as on ALL OTHER consumer debt, statute of limitations AS ON ALL OTHER DEBT, limit the amount of guarantee to the original loan amount – NOT a ridiculously geometrically inflated balance – and forbid capitalization of interest.

But understand that the PURPOSE of student loans has changed – they are NOT designed to help anyone, they are designed to create perpetual debt that cannot be discharged, therefore perpetually inflate.

AND they did this RETROACTIVELY, so NO, a contract isn’t a contract when one side can change the terms at will RETROACTIVELY any time they are paid enough to do so.

Posted by Dorothy95 | Report as abusive
 

TFF, who is going to forgive those loans? They aren’t owed to the government. Or do you want the government to pay them off?

Posted by KenG_CA | Report as abusive
 

In my experience, the entire problem is driven by the fact that higher education as an entity doesn’t perceive any need to change how they do business in order to bring down their costs (my experiences as a former university professor is that academia is deeply offended by the very notion of being thought of as a business). Unless higher education comes to serious grips with the fact that tuition and costs simply can’t continue to outstrip both inflation and income, none of this is going to change.

Posted by Curmudgeon | Report as abusive
 

KenG, isn’t that what the clamor is for? Having Congress appropriate a trillion dollars to pay off student loan debt for everybody? Of course they would need to BORROW to do so. Debt doesn’t go away, it just gets passed around like a hot potato.

Curmudgeon, tuition will stop rising when people stop paying it. Whether or not colleges are businesses is irrelevant — they can’t fight the law of supply and demand.

Posted by TFF | Report as abusive
 

At least one plan is to enable student loans to be discharged in bankruptcy. For guaranteed loans, this means a government bailout. For other loans, it likely means higher interest rates (think credit cards) and other costs as lenders attempt to recoup losses.

TFF, higher education so obfuscates the costs that I doubt most students even know what they are paying. Until we have truth in pricing, they won’t stop paying. If this were any other industry (oops, there’s a nasty business word again), we would have successful lawsuits and government regulation by now.

Posted by Curmudgeon | Report as abusive
 

“At least one plan is to enable student loans to be discharged in bankruptcy.”

That is a sensible solution (and fair in that it provides relief to those who really need it rather than spreading the bailout scattershot). If it leads to higher loan rates, that is a GOOD thing. I want people thinking about the costs.

“higher education so obfuscates the costs that I doubt most students even know what they are paying”

The students are teenagers, in 11th and 12th grade as they are applying. Don’t know how much experience you have with that age group, but most of them have NO perspective on financial matters. Their parents ought to have a better idea, but perhaps are trying to be “hands off”?

But yes, the costs are obfuscated by the process. You are already deep into the application/selection process before you find out about any financial aid you might receive.

Truth in pricing, perhaps with a six-year lock on tuition and fees for admitted students? What a concept!

Posted by TFF | Report as abusive
 

Because of the 2005 (BAPCPA) it is not simply difficult to clear private student loans in Bankruptcy, it is essentially impossible. Student loan debt will follow the borrower beyond the grave. Two bills specifically address this terrible situation. House bill H.R. 2028: Private Student Loan Bankruptcy Fairness Act of 2011 (http://www.govtrack.us/congress/bills/1 12/hr2028) and Senate Bill S. 1102: Fairness for Struggling Students Act of 2011 (http://www.govtrack.us/congress/bills/1 12/s1102). Please go to the URLs to send email to your congressional delegation to support these bills.

Normally there is a balance in the risk associated with a loan. But BAPCPA removed the risk from the lender since the loan cannot be cleared in Bankruptcy. Lenders will loan any amount to anyone. Universities will raise tuition in turn since they know that lenders will loan any amount. and students will borrow whatever it takes. Restore the risk to the lender, and allow the free market back into play.

Posted by dfille | Report as abusive
 

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