Comment by padobson | Hacker News Reader

Comment by padobson | Hacker News Reader

Parent Full thread

I thought the article did a good job:

Sofia is one of 7 million former students in default on a record $115 billion of federal loans

Education Management settled with the government in November for almost $100 million over alleged illegal student-recruitment practices without admitting wrongdoing.

Predatory lending. Sound familiar?

FMS Investment Corp., a unit of Ceannate Corp. that tried to collect from Sofia, was paid $227 million by the Education Department from October 2011 through September of this year, the most of any debt-collection company under contract in that period, according to the agency.

The biggest debt collector works for the Department of Education.

The government has disbursed about $100 billion in education loans annually since the 2009-2010 school year, according to data compiled by the College Board. Just six years before that, the amount was almost half. The total has doubled since 2007 and is expected to double again in the next decade, as students and their parents borrow for college and graduate school.

Despite the fact that defaults are on the rise, predatory lending is on the rise, lots of students who are unable to complete an education are taking out loans[1], AND a lot of people getting their degree aren't sure it's worth it[2], despite all of this, lending is going to double again.

Bubbles aren't always clear, but this one is as clear as it gets.

The only question is, who is the government going to bail out when the bubble bursts?

[1]http://fivethirtyeight.com/features/half-of-people-who-went-... [2]http://www.gallup.com/opinion/gallup/185942/gallup-purdue-in...

No, you haven't really shown me how it's predatory, although I do know that does happen (as it does in all large lending markets).

I'm not sure what your point is about the largest debt collector having contracts with the DOE. Of course they do, that's almost a definitional thing. Pretty much the largest of anything has some kind of government contract.

Defaults are on the rise from a low base, and the securitized portfolios of these loans haven't really taken much of a hit, so it doesn't "sound familiar" because I don't see the same balance sheet risk as 2008 subprime, even though there are undoubtedly subprime elements to this. (For the sake of clarity, I'm referring to the subprime credit ratings and category, not the 2008 era).

I guess what I'm asking is, from what base is all this happening? Predatory lending is on the rise... from .5% of loans to 1%? 1% to 5%? 5% to 10%? Same with the others.

I guess what I'm trying to get out of this thread, is:

1. What novel insight is being presented here that invalidates huge amounts of sophisticated due diligence by incentivized, professional firms?

2. If none, what channel or mechanism is perpetuating something that everybody knows is a bad deal?

3. If everybody knows it's a bad deal, but there is something simply keeping it prodding along, this would not pass even the first level of risk management at these institutions, which really stresses the idea of #2.

2. If none, what channel or mechanism is perpetuating something that everybody knows is a bad deal?

This. As I said in another reply to my OP, the government is backing these loans, which makes everyone think they're golden - and that might be true. Perhaps the government will allow the bubble to inflate forever, but the government stepped in in 2008, and there were still plenty of short opportunities available.

But it's unquestionably a bubble if hundreds of billions of dollars (and rising) of loans are being made to people to buy something that A) has no collateral (making it worse than the subprime crisis) and B) the value of the service they're purchasing is, by all perceptions, dropping over time.

The whole thing is predatory. It's the classic monopoly system where you loose out if you play and if you don't. Think degrees are overpriced? Go live life as a labourer with no access to the top paying jobs. Or suck it up and hand over a large part of your labour to the gate-keeper.

Available credit sets the price. Ramp it up and watch the tribute flow in.

Reply on news.ycombinator.com