Student Loans a Lot Like the Subprime Mortgage Debacle, Watchdog Says
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If universities had to worry about students defaulting, they would get rid of bullshit degrees that don't result in an actual job and the prices would come done due to free market forces.
Purdue was in the news for being one of the first: https://www.purdue.edu/dfa/types-of-aid/income-share-agreeme...
Planet Money had a nice podcast about how they work: https://www.npr.org/sections/money/2019/03/29/708152566/epis...
Would these plans result in the proliferation of odd compensation schemes to get around these repayment plans?
The one program that I looked into had a relatively low cap on it, like $60,000, so they only take a cut of the first 60k. Plus the majority of people (i.e., outside of engineering) don't get equity anyway.
Lots of very, very wealthy people have no "income" at all, which means they don't pay taxes.
The problem is that "income" is narrowly defined (for a reason) so things like someone owning a large corporation which triples in value over a year making them a billionaire on paper don't even show up on taxes because officially that person hasn't "made" that money until they sell the corporation. Even when they do, it's taxed at a lower rate than "income" because it's a different "kind" of money.
"You’ll repay 9% of your income above the repayment threshold – earn less and you won’t repay. Once you leave your course, you’ll only repay when your income is above the repayment threshold. The current UK threshold is £25,725 a year, £2,143 a month, or £494 a week." [0]
[0]: https://www.ucas.com/student-finance-england/repaying-your-s...
https://studentaid.ed.gov/sa/repay-loans/understand/plans/in...
It’s not a cure-all: you can still default, and there are cases where you can end up repaying more than a traditional loan. Nevertheless, it should be the [/puts on sunglasses]...default option.
https://studentaid.ed.gov/sa/repay-loans/understand/plans/in...
If universities were getting paid directly based on income, that would create the right incentives.
Lenders are no longer on the hook defaulting student loans. These loans are not dischargeable in bankruptcy, and it reflects on the sheer amount of loans given to sub-prime borrowers.
Some countries do, some don't. I know several people with two free master's degrees, and some people basically collect them and PhDs as a hobby through their lifetimes -- a very small minority obviously, as most are quite done after the first.
This was already known, but since simply providing taxpayer funded education results in increases of government expenses and hence higher taxes, we of course went with the Byzantine route of indebting people who don’t even know what amortization is to the tune of tens and hundreds of thousands of dollars.
It really shouldn't be, but here we are. The proof is in the pudding. Their high school education has failed them, parental and job market pressures to have a degree has failed them.
Just standing around and going "well they should have known" isn't going to solve anything. Eventually they're going to be a big enough voting bloc to pass something like debt relief (example: old people and unsustainable pensions) and who's going to be stuck holding the bag? Better to solve the problem as early as possible instead of just standing around blaming them and not fixing anything.
> state schools start around 15k/year and provide bachelors degrees.
Problem 1: School is expensive
15k*4 = 60k (assuming you do 4 years and not the average time of 6 years). So we're pretty close to $100k of debt. That is just in-state tuition! But that's not the total cost of school. Berkeley[0] estimates about $30k/yr for a student. So that's 120k-180k of debt for a bachelors. Now double that if you're out of state.
Problem 2: School is getting more expensive
But there's another problem that's happening. Cost of tuition is skyrocketing. Let's look at Berkeley from 2003-2012[1]. In 2003 the cost was $4336 (adjusting for inflation today that's ~$6050). In 2012 the cost was $12,834 ($14,340 2019 dollars). Today it is $14,184. So in 20 years the price has about increased ~2.5x. This means that those cases of $100k+ debt are increasing not just in total number (because population increase) but as a percent of graduating students (we'll say Gaussian curve of debt distribution).
Problem 3: In-State isn't always the best option
Let's say we live in Washington (state) and want to go to school for computer science. The field is fairly competitive so the higher ranked school we go to yields likely a better education (one up to date with modern techniques, funding, and equipment) and more network connections. So we'll say that we want to get into a top 100 school. That actually only leaves us 2 schools: UW(#6) and WSU(#75). We graduated pretty well with a 3.9 and a 1400 on our SAT. That might not get us into UW ([3] says 33% chance we don't get in) because it is a (inter)nationally competitive school and we don't have really any extra curricular activities. So what do we do? Our scores are high enough to get into a top 20, worst case top 50. Do we go to WSU or go to a school with more resources and a higher chance of earning more in the future? And if you think this is a fictitious scenario, play around with the other school acceptances (website uses same naming pattern as usnews: e.g. University-Of-California--Berkeley), UW is one of the least competitive schools in the top 20. There's plenty of states with even larger gaps. There's plenty of states where we're more competitive than the top instate school. There's plenty of other reasons a student might want to go out of state, and plenty of reasons that might be the best option for them.
Problem 4: Age
We're also talking about 18 year olds, which aren't known for making the best decisions. I don't know about you, but when I was 18 I was an idiot. I'm still pretty dumb but I've learned a lot since then. And if you don't think you were an idiot at 18, I'm calling bs or that you're under 23 and just don't know it yet.
[0] https://admissions.berkeley.edu/cost
[1] https://4.bp.blogspot.com/-wswpT9L7QXs/UMjqxuIbttI/AAAAAAAAA...
[2] https://www.usnews.com/best-graduate-schools/top-science-sch...
[3] https://www.prepscholar.com/sat/s/colleges/University-of-Was...
Because education is not a luxury service that can be postponed or outright skipped, like lifestyle-tailored tourism, and education costs in the US have become a major societal and economical problem.
> In fact, with almost every purchase that involves a loan, the company offering the loan is different than the company offering the product / service.
That's a tautology, and entirely misses the point. The point is that student loans are a colossal problem for the US, not only economical but also societal, and the problem is caused by the disconnection between the vicious cycle that leads to hikes in cost and the consequences of complying with the requirements to have an education.
Complaining that universities should not feel any consequence for the need to take massive loans they force onto their student body is like complaining that petrochemical companies should not feel any consequence for the need to decontaminate the environment.
But to respond to your point directly, degrees such as gender studies, art history, and English literature are certainly a luxury service that can be postponed or outright skipped.
I'm asking out of curiosity and not trying to make a point or win any argument: Why do you draw your line there?
I wouldn't combine "free" and "partially required" though, as I don't see the need to conflate them. Where I live Masters and PhDs are free, but your required education is completed at age 15. Everything after that is completely optional, but free.
as in no tuition, but there are some administrative fees and books you need to buy, etc.
I guess I shouldn't have assumed that government would necessarily regulate college like they do high school. Some European countries are examples of that. However in those countries there are a lack of people who are qualified to work in highly educated fields and a surplus of blue collar workers. In the US the situation is reversed. There is not enough work for many liberal arts majors, but a lack of workers for blue collar jobs. Spending tax dollars educating people from jobs that lack workers to jobs that have a surplus is not good usage of the money. Furthermore, a person who is not fit for even free college (probably has a lower income) now has to pay taxes for college students (who probably will have a higher income [unless they can't find a job]) while not benefiting from it.
I'll also add that this: "However in those countries there are a lack of people who are qualified to work in highly educated fields and a surplus of blue collar workers." is absolutely not the case in the European country where I live. When you talk about the state of "those countries", what countries are you talking about and what are you basing that statement on?
Yes, I make assumptions based on what I hear and who I see. I don't have the time to make a doctorate thesis on of my assumptions. Had I spent years researching how to identify people who college would help, and people who it would not help then I would use a stronger word than "assumption". With regard to countries offering free college education there are countries such as Germany, France and Brazil that offer free college education. They also have very low rates of attendance. Image how much lower it would be if the students had to pay for it.
The real problem is voters want lower taxes, and some genius figured out a way to tout lower taxes and tax payer assistance to students, hence student loan debt.
And, inevitably, like all times that society is enabled to pass the buck onto future generations or ignore externalities, society will take and consume all it can until the breaking point. Same story with defined benefit pensions, student loans, environmental damage. We are simply starting to see the effects of pushing the costs into the future, now that the future is here.
The facts don't support this claim. U.S. government spending on tertiary education is 0.91% of GDP compared to Germany's 1.0% and Japan's 0.45% (source: https://data.oecd.org/eduresource/public-spending-on-educati...)
Rather, university education in the U.S., like healthcare, is insanely expensive compared to other countries. Why is that?
1. Non-selective. We admit 70% of high school graduates to University whereas in Germany they admit 1/3.
2. Too long/unfocused. University education can last 5-6 years in the US for a bachelors, whereas in Germany it is limited to 3 years. You don't get to drift around as "undecided" and change your major, you apply to the school with a specific major. You don't get a lot of choice as to your electives and follow a pre-planned course of study (for the most part).
3. Too many frills. European schools don't have massive sports stadiums, athletic departments, or other amenities similar to US universities.
4. Too much staff. Our universities are massively overstaffed with everything from diversity officers to football coaches to teams of counselors.
Put this all together, and you have a very expensive, inefficient, gold-plated system focused on catering to student whims rather than to taxpayer efficiency. Of course tax payers don't want to pay for it -- why should they? If you want European style funding of universities, you need European-style spending levels and rigor. If you want an experience that is half as selective, takes twice as long, and offers absurd amenities that have nothing to do with university education, then you are going to have to pay for that out of your own pocket rather than asking for taxpayers to provide this experience for you.
The good news is that you can find relatively inexpensive higher education in the U.S. if you are a good student and are willing to attend community college for the first two years and a local state school for the rest. If you are good enough to be admitted to University in Europe, then in the U.S. you should be able to get a scholarship. Of course most US university students would never be admitted to University in Europe in the first place -- so having an option to pay a lot to go might be better than not having an option at all. But I suspect that we would be better off adopting a German style trade school system to absorb 50% of high school graduates as well as a more rigorous high school system, but that would require adoption of tracking and letting most students know that they are not going to be on the university track. In that type of environment, sure, taxpayers would be willing to fund the enterprise since they would only be spending 10% more than they are spending now to match German-level of tertiary education spending.
US voters aren’t comparing taxes with Japan and Germany. They’re voting between politician A who says they will lower taxes, and does it by removing funding for higher education or politician B, who does provide higher education and hence has to collect higher taxes and politician A. Politician A can get away with this by claiming they still support students by providing government loans or government guaranteed private loans or whatever, but they don’t have to account for it in the same way politician B does.
I agree with all of your points, and I far prefer the German model too. But American voters seem to love debt, and low taxes, and rarely is a thought given to the future.
I think they are correct.
Reforming higher education means cutting spending first and foremost.
Shut down half the universities, lay off 1/3 of the staff in the rest, seize the endowments, close all the sports stadiums, fire most of the admins, force students to finish in 3 years, and then take the pile of money we are already spending on education and make that be the full tuition.
Voters concerned about high taxes would benefit from this, as would the top 50% of students. The bottom 50% of University students should be diverted to 2 year long trade schools, which can be built on the ruins of the shutdown universities, but staffed with craftsmen rather than professors. Industry can pay for 1/3 of it, students can pay for 1/3, and taxpayers can pay for the other third of the trade schools.
This has already occurred and continues to be cut further. What also happened however, is the legislature promised lenders that taxpayers would pay for all student loans. Of course this doesn’t get accounted in cash flow, because you can just assume more people will pay back their loans than actually will.
So now you have a situation where a lender can make a loan of unlimited amount of money with no risk to the lender, a borrower who knows nothing about money but has infinite ability to borrow, and a seller (schools) that get less money from taxpayers, but now can fight for the gobs of money that the students (who know nothing) have control of spending.
Hence unnecessary stadiums, recreational centers, buildings, admin, etc.
A student who is unable to repay their private loans before death leaves the lender without the money I think.
This may have changed in the past few years.
The tone is draconian because you have a whole class of people ripping students off, ripping taxpayers off, providing very little value, and yet being extremely sanctimonious about why more spending is needed. The hypocrisy and amorality of the higher education industry in the US is stunning, so a draconian approach is called for.
Any limit to university education in the US butts up with class (read: race) and inequality issues. I would love to close all of the over-priced and educationally dubious for-profit institutions. But any semblance that we are limiting educational attainment to the educational-haves is unacceptable.
The market for what HNers regard as an education (4-year degrees from established public or private universities) is really only like half of the post-secondary education market.
If you offer Johnny $20,000 to attend Purdue, you have to give everyone $20,000, regardless of their school-choice, aptitude, likelihood to graduate, or future income projections. To do so otherwise puts society in the unfortunate position of deciding who gets to pursue the American Dream.
In France 100% of high school graduates are (by definition) admitted to University, and more than half of them indeed decide to take that path.
"Typical" university education lasts 5 years. (Though I wouldn't be surprised if only a minority actually makes it.)
It's mostly free, students from poor families get grants, though there are limits on how many times you can retry university years while still getting a grant.
The result : in 2014, 45% of the 25-34 year old French had a university (or other superior education) degree, compared to 28% of the Germans. (OTOH I suspect that the quality of that education is not nearly as good ?)
So these are the kinds of trade offs to make -- e.g. what percent of your labor force do you need to have a college degree? This is going to be a characteristic of your economy and providing college degrees to more people than this is going to create a skills mismatch.
A lot of people think the reverse is true -- e.g. that if you train a lot of people to build bridges, then you will have a bridge building economy. But I am of the opinion that knowledge is activity specific, so if you want to have a lot of people who are bridge builders, then you need to actually build bridges, and the university diplomas you need will follow as people scramble to learn how to build bridges to get the good bridge building jobs they see in the economy.
So why does Germany have a more skilled economy even though fewer attend university? Because it's an export monster, that swells the number of high skilled jobs needed to much more than would be the case if they were producing only for their own market.
China is in a similar position -- they want a hundred million engineers, and if that means building a bridge across every river in Africa then that's what they will do. The Belt and Road Initiative is nothing more than an attempt to export infrastructure because they've already covered their own country with empty apartment buildings, unnecessary airports, and so they need to build infrastructure elsewhere. Curiously only 5% of the population attend university in China, and yet they are an economic powerhouse by doing -- and learning by doing -- rather than academic diplomas.
India is an example where they overtrain lots of people in IT relative to domestic demand, and of course what happens is that people emigrate to where the jobs are. Again, you don't transform your economy with university education, anymore than you can transform your car by washing it. You transform your economy by cultivating productive ecosystems and then making sure there is demand for their output.
Whereas we in the US think that we can shut down manufacturing, outsource jobs, and yet have a high skilled economy if everyone goes to university. It's not the case, we have a much lower skilled labor force than Europe and the university graduates have a hard time finding good jobs and repaying their student loans.
So bottom line, the goal should not be to send everyone to college, but to send those people who need to go to college, and if you want more people to need to go, than work on cultivating more high skilled employment in your economy rather than building more universities.
And in a lot of jobs, you don't need much more than some core knowledge, and being independent enough that you can learn on your own - you can't teach a specific job at the university, that's what internships are for. Teaching jobs, (outside of technical schools), is the responsibility of the companies.
Note that the overwhelming majority of engineers, especially bridge ones in France don't come from the University system - but rather the élite ingénieur schools - maybe a bit like the US Ivy League ? (There's the super-élite school literally called "Bridges and Roads") Those get a disproportionate amount of funding, but aren't that relevant to the discussion, since they only teach a tiny minority of students (~5%).
I recently came upon an interview with Oliver Faron, administrator of one of these élite schools, which has a specific focus on education of people returning to superior education. They also have an especially good record with 20 times better results with technical (="low-quality") high school graduates than universities.
(I guess that extra funding and the self-selection of the most motivated students might have something to do with that ?)
And his dream is to have a mandatory year of university to replace the long-gone mandatory military service, so that the different social classes get to "live together" again ! (More than one year would probably make for diminishing results?) : https://www.franceculture.fr/emissions/la-conversation-scien... (fr)
I sympathize with this view. When I was young (and foolish), I was really upset at how university education was being commoditized to teach job skills when really it should (in my opinion) follow the Classical Greek model of education designed to better a person -- the word for school also means "leisure". I also bemoaned the lack of intellectual curiosity and anti-intellectual atmosphere in universities, even elite universities.
But over time, I realized that this model of a university where you go and find yourself or discover the truth or become an enlightened person was fundamentally impossible as a method of national policy.
It is an indulgence for the elite which doesn't scale to 70% of the population, most of whom have zero desire to become intellectuals and are going to school so that they can have job skills. They need job skills. Why would we make them take out huge loans or waste a key portion of their lives role playing as intellectuals?
Moreover, it's really hard to teach young people insight about life because most of us are complete fools when we are young and all we get is the feeling of having deep insight into things, we don't really get that insight except by _doing_, whether that means engaging directly with the world via travel or talking to people outside our bubble, reading things that challenge us, experience life by having kids or watching a relative die, or whether that means doing on the job -- secluding yourself into a dream world on a walled off campus with a strictly controlled idealized environment is an indulgence that does not actually make you a more knowledgeable person.
In terms of an elite school offering superior results, that is always easy to do if you are selective. It's trivial to create a high school with much superior results than the average high school if you can pick out good students. The hard thing to do is to scale that to a national policy for everyone.
So if this secluded campus model of the university doesn't promote your intellectual life and it doesn't give you job skills, then why are we doing it?
There is a reason why the original schools were basically theological training institutions and later became finishing schools for the wealthy. That model of university education was always a type of bubble, but at least in the past, people were sent to the bubble because they were going to live in that bubble for the rest of their lives so the university was preparing them for their future life, either in a monastery or in elite circles where employment was considered a dirty word.
You wouldn't, like you weren't paying to do your military service.
> engaging directly with the world via travel or talking to people outside our bubble
A mandatory year mixing all social classes is, by definition, "bubble-popping". In fact this still happens today, when young people are forced to leave their home town they lived all their life in in order to go to the university.
Also, nothing is preventing a university from having some practical workshops... (I know a lot of people that got their truck-driving license during their military service) and a big university should be able to have some much more expensive training machinery than a small school.
P.S.: Oliv(i)er Faron is far from being young and foolish...
Who do you think pays for military service if not the people? Martians? What is the difference between generation X paying for generation X+1's education, spending g% more than what was paid for their own education, and generation X taking out a loan to pay for their education at a rate of r? The only thing that matters is whether r > g, the growth rate of the price of education. If r > g, then a direct transfer is slightly more efficient. If r < g, then a loan is more efficient. In this case, g is astronomically high. Yet you favor the more inefficient approach, because it hides the fact that most money spent on tertiary education is a waste, and you want this waste transferred to the old rather than kept by the young.
> engaging directly with the world via travel or talking to people outside our bubble A mandatory year mixing all social classes is, by definition, "bubble-popping".
Ahh, yes, those isolated campuses with safe spaces and psychological violence counselors -- a true bubble popping experience.
P.S.
You can also be old and foolish.
> Ahh, yes, those isolated campuses with safe spaces and psychological violence counselors -- a true bubble popping experience.
Again, this is very American-centric.
> You can also be old and foolish.
Considering his credentials, it seems unlikely.
We would also need to remove the social stigma that has plagued the trades for the last 30+ years.
Federal: $75.6 billion
State: $72.7 billion
Local: $9.2 billion
Although the funding between State and Federal are similar, the way those funds are spent may be different:
"The federal government mostly provides financial assistance to individual students and funds specific research projects, while states typically fund the general operations of public institutions, with smaller amounts appropriated for research and financial aid."
https://www.pewtrusts.org/~/media/assets/2015/06/federal_sta...
Aside from the other points, this isn't an honest of the overall situation of industries and credit. For example, The real estate industry and the car industry are highly focused on the buyer's ability to pay. The company might not be legally responsible for a buyer who defaults and it may a different company making the loan but the entire industry has to take a hit and they avoid taking those hits when they can (periodic easy-credit situations can distort this but still).
Which is to say that the government giving student guaranteed credit for school certainly distorts things relative to other industries (even compared to housing, where the government is also involved heavily).
Imagine if everyone in the United States who wanted to go on a cruise was guaranteed to be given a loan to go on a cruise, regardless of the cost of said cruise or their personal circumstances. In that scenario, obviously cruise companies would increase prices, since their clients will always get the money to pay for them, and like you yourself said - it's not their responsibility whether people can pay it back or not.
That's pretty much how higher education works.
I suspect this isn't true. Amazon puts up some pretty intrusive financing offers on all kinds of products. Jewelry is commonly purchased with vendor financing. Electronics are commonly purchased with vendor financing. Cars are usually purchased with vendor financing.
It's true that such vendor financing may be technically offered through a separate corporate form, but I don't think a company created by a retailer in order to offer financing specifically and exclusively on that retailer's products really counts as a "different company" in any real sense.
Ally came from GMAC, which GM created to finance automobiles.
Now California contributes roughly 30% to the cost of a student, and the costs themselves has risen (better accommodations, increased admin staff etc etc.)
I don't see any party here that needs rescuing by the government.
Tuition for ETH Zurich around 800 francs per semester.
Drug abuse is less long-term priced in and likely also has higher aggregate risk as well.
In a sense the things you list are kind of like the broken windows fallacy. The increase in healthcare spending shows up in our GDP, but isn't an efficient use of the resources.
I also imagine that student loan debt could reduce local growth. If you have a graduate using most of their income on repaying loans, that's money that may have been spent locally and is instead sent to the bank. Of course the opposite is true before graduation, where inflated costs of education result in more money in the local economy. However due to interest it may be the case that the former outweighs the latter.
Suppose that someone invents a better version of ELIZA, and everyone in the psychotherapy business is suddenly out of work.
Or slightly less absurdly, suppose that Intuit and H&R Block mess up their next round of lobbying, and the IRS implements that one-click tax payment we've all been asking for. And the accountant industry shrinks by a few percent and wages go down for the ones that are left.
Either of those would be a significant shift in the job prospects of a large group of people, which could affect how many student loans actually get repaid.
I think it might also count as a risk if it suddenly became fashionable to get degrees in, say, underwater basket weaving. As in, incoming students aren't perfectly rational with perfect information about what degrees have what job prospects, and I'm assuming the college loan system might not react quickly if something caused an overall shift towards less economically useful degrees.
It does lack one "feature" that helps the bad mortgages cause problems, in that I don't think it would be self-reinforcing. From what I understand, subprime defaults were contagious in a way that I don't think this would be.
There are obviously holes in this narrative, but we like telling ourselves this can happen.
While there's not enough value in 17th century art history for the US to graduate 200k scholars per year and expect in-field employment, there is value to society in general to not losing our history and learning more. Letting the banks decide who gets loans will instantly mean those who can't pay cash cannot pursue that education or need to go on cheaper routes for college. They may or may not be viewed as a comparable education and quality candidate.
I'm not a fan of our current system, but a purely utilitarian system I see proposed seems likely to continue the spreading the social divides between the rich, middle class, and poor.
I'm an advocate for cutting a lot of the unnecessary fluff and expenses from college. Administrative overhead is excessive. Dorms are way nicer than they need to be. Alas, other colleges have nice dorms, so a single college choosing to go cheap on the dorms will probably decrease admissions and thereby revenue.
Contrary to public perception, there's no robust investment market for student debt. US government ends up purchasing most of it through Treasury. In theory it's a great deal, as it gets to borrow at low Treasury rates and originate at higher rates.
I don't have a link to the original source, but "In September 2018, the U.S. Treasury Department revealed in its annual report that student loans account for 36.8% of all U.S. government assets." https://www.investopedia.com/articles/personal-finance/08121...
Edit: here's a more updated analysis of the Treasury disclosures, which puts the figure at 51.2% as of September 2019 https://www.advisorperspectives.com/dshort/commentaries/2019...
Devaluing those assets (which Treasury marks to market) would significantly dampen (if not destroy) US government's borrowing ability as well as make some government entitlement programs [at least temporarily] insolvent.
This is a hypothetical but classic example of how regulation is required to support a free market.
There is no free market here.
Even without novel approaches students already get non-subsidized lines of credit so I don’t think it’s unheard of
Sort of like those radio ads that say they'll help you "not pay the greedy credit card companies that trapped you".
https://en.m.wikipedia.org/wiki/Paradox_of_the_Court
On another note the idea rubs me as immoral in ways that loans don't for reasons I am not quite able to articulate. Like viscerally seeming too far too similar to indenteture.
I found a link but couldn't add it to my original comment. There is a 5% salary payment for 15 years once the student reaches $25k. Sandbagging is possible but it seems like students would start working against their own monetary self-interest pretty early (from a salary perspective at least; who knows, I'm sure there's other creative ways to game the system).
https://nationswell.com/venture-capital-college-student-debt...
So if you have a huge loan but a small income, it's more like a 30-year graduate tax than a loan you expect to fully repay.
In the situation above, it acts more like an investment rather than a loan. (i.e., there's no upper bound on the payment, outside of the 5%/15 year cap, so the student may pay back more than they receive)
That's entirely the point. Tuition would have to come down so it's actually affordable, or there would be less people attending. Businesses might actually foot the bill for tuition to train their people, because there would be a shortage of qualified applicants.
This comment is an example of how any amount of problems caused by government intervention can be framed as a need for more government intervention.
But, the cost of school has outpaced inflation for that period, making the situation worse. No question about that.
We'd probably all be better off if the government simply gave grants to students who meet some minimum threshold. Call it top 20% of class or thereabouts.
It's the cost of the administration. The cost of facilities. The extortion racket that are mandatory latest editions textbooks.
Universities are becoming less about teaching people and more about capturing grants and "selling the experience"
Some states are making efforts to curb the costs of textbooks and materials. I'm currently working on software to help CA schools roll out their ZTC programs.[1]
1 - https://www.insidehighered.com/digital-learning/article/2019...
I'm 100% in on getting the government out of the lending business and back into the "higher ed is a public good" business. I'd rather they just return the actual sticker price to what it was a generation ago, and make it realistic for people to work student jobs to earn the cost of their tuition.
We might not have the most tenured professors though, since those a drawn to centralize in institution with high prestige. But with the free flow of information today, this centralization of excellence becomes less important.
But anyway it probably isn't a problem with too much/too few government intervention and more of a problem of intervention being constructive or not. Bad intervention is probably worse than no intervention, I agree.
It's not surprising that by making a ton of student loan money available, that more students are more willing to spend more money, and thus prices rise.
And your comment is an example of assuming that government regulation is at best a necessary evil and something to be avoided if at all possible. Most of western Europe has has regulated university fees for decades, and by all accounts this works pretty well. Public opinion in the UK (even from a lot of the political right) is that the current 9k/year cap is too high if anything.
The role of government regulation is a separate question, but we're really jumping the shark when we can't even acknowledge basic cause and effect.
It's not surprising that government policy making tons of student loan money available led to more students being willing to take out bigger loans. This is like Markets 101.
It's tough to take opponents seriously when basic, predictable side effects of favored policies are ignored just to recommend heavier-handed policies of the same kind.
Totally agree with you on this.
> It's tough to take opponents seriously when basic, predictable side effects of favored policies are ignored just to recommend heavier-handed policies of the same kind.
It seems likely to me that the side effect wasn't ignored. Probably there was somebody proposing the "heavy handed" version of the legislation (which actually makes sense because it mitigates the side effect), but somebody else was opposing it because they don't like regulation. Thus, this problematic legislation emerged as a compromise.
Opposition to regulation often seems to be based on the idea that in practice regulation causes more problems than it solves. My observation is that regulation (esp. in the US) often does have this problem, but only because there is such opposition to regulation that it is almost impossible to enact the stronger and more sensible regulation that would actually work.
In short, it is often ideological opposition to regulation that causes it to fail, rather than the case that regulation in general doesn't work.
In what world do the regulated parties not oppose being regulated? If there’s no opposition to a regulation then it probably isn’t needed.
Perhaps it's just that corporate interests have captured governments. But that too seems like a symptom of distrust in government leading to it being hamstrung and underfunded. I guess it's circular.
Make no mistake, we regulated ourselves into this mess. Many people at the time predicted the current situation. More money chasing something drives up the price of that something. It's now pretty clear that we should have funded the schools instead of providing subsidized loans for the students.
Apparently the Department of Education chooses the loan service for borrowers, thus enabling a de-facto monopoly for Navient [0]. Now, if we had a functioning market people could choose better solutions, and better standards would prevail. Also data could be made public enabling students to choose a college that showed better performance for graduates careers [1].
[0]: https://www.youtube.com/watch?v=RjWWTTMj0xw [1]: https://www.theguardian.com/money/2017/sep/06/us-student-deb...
I suspect that Labours ideas of scraping it will just lead to higher taxes for all ie poorer non graduates subsidising middle calss kids, or they will ration degree places
An potential extra tax burden can be allocated from wherever the government sees fit. Like a digital services tax or closing loopholes that are conveniently left open for global corporations.
Do you worry that the healthy poor people are subsidising the middle class sick ones through the NHS? Or that poor careful drivers are subsidising the cost of accidents for the middle class careless ones via their insurance company?
The moral hazard is non graduates (including pensioners) subsiding graduates.
Educated people design infrastructure, products, services, (public and private) that affects every aspect of everyone's life.
[0]: https://www.ed.gov/news/press-releases/national-federal-stud...
1: https://studentaid.ed.gov/sa/repay-loans/understand/plans/in...
If a bank had a 30% default rate on mortgages they’d immediately cease to be a bank.
Not just that. You can imagine additional benefits if the incentives of the parties involved are realigned. It would be in the interest of lenders to evaluate the readiness of students to attend college. This would potentially lead to better, less gamable testing.
It might make less sense, from a lender's perspective, for a student to go straight from high school to college. Instead perhaps they would want to see evidence from a couple of years of life outside of school that their loan would be repaid. The potential student would need to make a case to the lender and herself.
It's our culture that has turned education into some kind of "investment" in future job prospects. To put it simply, education was never intended to be that way, nor should it. It's as if studying the arts is some kind of luxury for those who are already financially well-off.
Education is supposed to be about learning just for the sake of learning, which benefits all of us. If there is not a place for people from certain fields of study, that's a failure of our economy and priorities. Yet it seems that too many have just accepted the current reality as "just the way things are".
The reality now is that education is more or less for everyone and most people, even at elite institutions, don't have a clear path to being a member of the elite without working super hard for specific career goals. It would be odd, then, for some of those students to continue to pretend that they have a clear path to being a member of the elite and learn the kinds of things that are disproportionately important for the members of the elite, when they have to accomplish a lot to get there. The world is simply far more competitive.
Historically, you certainly had a division between apprenticeships for the poor, university for the rather-rich and for middle class and talented and finishing school, philosophical speculation, tutoring by artists, etc for the idle wealthy.
The world where "everyone" was somewhat entitled to the basics of a university education was a product of WWII and the GI bill. Not that this was a bad thing but it's worth saying it's a somewhat recent thing. Moreover, while university education references "learning for learning's sake", I think the fundamental thing is more "the basic skills a citizen needs."
And even here, our society hasn't really integrated the exact use of twenty years of bureaucratic lecture classes. Going back to pure skill-oriented education isn't appealing but a broadening of the learning process is important.
That said, university education is now kind of the worst many world - purely job oriented but sort-of fantasy mid-level bureaucracy jobs that most students won't actually get.
The "education is about education" sentiment you mention is quite literally the brain-child of the ultra privileged.
I don't think the situation you describe has _ever_ been what education is "supposed" to be about. It's an noble goal, but it doesn't reflect reality. And a degree which cost over $100,000 to acquire, but doesn't yield any job prospects... if that isn't a "bullshit degree" then I don't know what is.
But if you are going to look at history, then why not go all the way to the root of the modern Western academia - where the word itself originates?
https://en.wikipedia.org/wiki/Platonic_Academy
On one hand, it was indeed about learning just for the sake of learning. But on the other hand, it also didn't have degrees, positions, tenure, or any other attributes of a formal hierarchy.
And note that it was something that people did aside from gainful employment (or other source of income). Which means that it was closed to most, not even because they weren't welcome there, but because they didn't have the free time to devote to learning for the sake of learning.
Could we revive the Academy today, free for everybody? Sure, but I don't think this would solve any of the problems with "bullshit degrees".
Does it?
Human instructed education is a limited resource. Unlike self-directed or automated education, it doesn't scale without educators. And there aren't an infinite supply of those.
Ergo, a price must be paid to be educated.
What should that price be? How should it be set? Who should pay it?
I'm honestly asking, regarding your assertion (I believe) that education shouldn't be driven by utility and future-ability-to-repay.
A liberal arts degree should not cost that much compared to the current tuition in the hundreds of thousands of dollars for many of these degrees.
It's an 'investment' because otherwise, it is a luxury for people that have money and don't need to work to pay back their loans.
The argument needs to address why learning for the sake of learning at a specific physical location with the price ticket of $40k'ish a year is drastically better.
Education should be done for educations sake. Actual bullshit degrees come from universities seeking profit over education and even if you removed government loans from the equation they would still exist.
The idea that everything would somehow be fixed if loans were removed is a delusional one as long as there is a profit motivation for universities. Because it's easy to create McDegrees and sell them.
That's not really the focus of the article though, which is an introduction to a potentially calamitous systemic problem.
The 2008 crash happened because there were about $1.7T of mortgage-backed securities (MBS) floating around in the financial system. These were essentially sliced up pieces of numerous mortgages that had been made to credit-unworthy home buyers. When these buyers started defaulting due to a weak economy, the MBS became worthless and financial institutions started going belly up.
So with that said, here are a few facts:
- There's about $1.6T of outstanding student loan debt today, and it's growing.
- Many of the borrowers who took out these loans are demonstrably credit-unworthy, as the .gov link demonstrates, they are already defaulting in growing numbers.
- Sure enough there's a thing called SLABS out on the market (Student Loan Asset Backed Securities). Very similar to a MBS but the collateral is student loans.
I don't know how widely SLABS are spread throughout the financial system at this point.
There are also differences vs 2008, biggest one is that most of the student loan debt is government guaranteed.
That last point gets used to promote SLABS but it seems to me that it just makes their value leveraged to political winds. Here is an example scenario: economy softens, leading many holders of student loan debt to vote for Bernie Sanders because he promises to forgive their debt. He gets elected and follows through on his promise. SLABS all over the system become worthless, banks end up much poorer than they thought they were, and the death spiral begins again.
I don't know what will happen, you can't simplify the workings of the economy into tweets and soundbites. But there is certainly cause for attention and concern.
Further reading:
https://www.investopedia.com/articles/investing/081815/stude...
https://www.natlawreview.com/article/rmbs-to-slabs-history-r...
The size of the US economy in 2008 (US GDP) was around $20T. There were $1.7T of MBS. That's about 8.5% of the economy which mostly didn't exist, it was all debt for which the collateral was a fiction because the borrowers didn't have the money to pay off their mortgages.
The size of the US economy today is around $25T. So student loans are around 6.4% of the economy at present (and growing) and that money may mostly not exist either, because we know these borrowers are having real problems paying and the economy isn't even doing all that poorly at the moment.
Food for thought.
Total asset value of the US economy is about $270T with about $150T in outstanding debt. So the relative proportions are not as extreme as you’re representing.
Clearly it is not sensible to compare two quantities with different dimensions of $ and $/time. It is like comparing distance (miles) to speed (miles/hr). Changing units to (meters/sec) doesn't change the absurdity in any way.
Honestly, thank you so much for adding this bit to your post.
It's incredible how everything is just treated as if you could handle it in 140 characters or whatever the Twitter character increase has been.
But you can't get out of student loan debt via bankruptcy, nor lose the education. I figure the banks figure they're going to be fine, because rather than the SLABS market collapsing, it'll just suffer a correction: the enforced debt peonage of making payments all one's life will ensure those "securities" represent (forcibly and fraudulently extracted) income streams.
Remember Bernie is talking about straight up forgiveness: the debt just disappears. He probably won't be the next President but student loan reform (including existing loans) is a hot topic for many candidates.
The federal government is not going to use a pen to steal trillions of dollars from lenders holding contracts for repayment. That’s a banana republic action.
I don't think this would harm the financial system. Debt held by the govt disappears, privately held debt is purchased by the federal government and then disappears.
I don't know the structure of student loan backed debt but this sounds the opposite of the cataclysmic: the government is guaranteeing they will "print" all the money needed to cover debt owed to 3rd parties, which should mean banks will do better than ever.
I'd be more concerned of cataclysmic outcomes if we changed laws in a way that fundamentally shift the risk profile of student debt as held by 3rd parties
> He probably won't be the next President
He IS a top polling primary candidate, but more to the point I don't think even a democratic Congress would pass a lot of his policy
While the basis for regulation makes sense on paper anyone who's done anything with a low margin service industry knows that whether good practices are followed in a particular workplace has almost nothing to do with education (everyone knows how to keep things clean) and everything to do with management (does management actually want these things done or does it consider them a waste of time).
https://www.bls.gov/ooh/personal-care-and-service/mobile/bar...
FWIW all my peers that I went to high school with who got their cosmetology license 1) did so for free as our public education system offers cosmetology school for free and 2) no longer are practicing 20 years later
Also not all stylists work full time because it's a relatively well-paid job. One of the colleagues at the salon I was talking about has worked a 3 day week for years, and another works 2 days a week (but she does have another job).
On your other point about older hairstylists, it's a very physical job where you stand in an awkward pose for long hours. Many retire (or semi-retire into salon ownership and doing occasional special customers) by their 50s.
Problem is 18 year old that down know how to do a simple cash flow analysis being given tens of thousands of dollars as they see fit, as long as it’s at a “school”, however that’s defined. Obviously the “schools” have figured out how to best benefit from the hydrant of money available to them.
I'm sure there's some fancy for profit private schools that cost $30k though.
I would love to see how many of these loans go towards low wage jobs all because licensing issues force people into this racket
Average BA holders in the US graduate with $28,000 in debt, versus $21,000 in Sweden. The Swedish system is basically like our income-based-repayment, which we have had since the 1980s. Except, as you’d expect with Sweden, there is less paperwork and fewer gotchas. Simply tweaking the PAY-E system Obama created, to add automatic enrollment and automatic annual income verification based on tax returns, would get us a system that has proven workable in Europe. All without trillion dollar loan forgiveness or radical changes. (And with, in my opinion, a fairer system of redistribution, where those who needed loans and got high paying jobs subsidizing those who needed loans but didn’t get high paying jobs.)
(And simply tweaking ACA would get us pretty close to the Dutch model of health insurance. But that doesn’t get headlines.)
I believe it was something along the lines of people borrowing for law degrees then discharging the debt right after graduation with the knowledge gained from their new degree. I'm sure it was done in other degrees as well.
It was in 1976, not very recent.
The person to whom you are replying is referring to the poorly-named Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005. That law expanded the exemption from discharge in bankruptcy of student loans to be any student loan, including privately-issued student loans, not just ones issued by the government through a federal or state program.
This is why you see companies like SoFi running around offering screamingly low rates on student loans. Because they are private, those companies need not offer any of the protections a government loan offers (income-based repayment, forbearance options in the event of loss of income or disability, and so on) but retain the power to garnish tax refunds and the loans cannot be discharged in bankruptcy.
To keep interest rates on student loans low and to make sure the loans are available to 18 year olds with no credit history.
There was a real problem with medical students racking up huge sums, declaring bankruptcy when they were making low money during residency, but then making 6 figure salaries a few years later.
>It seems like student loans should be treated like any other unsecured loan.
Nobody loans 18-22 tens of thousands (and 22-26 years olds hundreds of thousands of dollars) in unsecured loans.
And look at the interest rates for other unsecured loans. My credit card rate is 19%. Earnest gave me LIBOR + 3% on 200,000 dollars of student loans.
My loan rates are 6.55%. After 10 years of continuous school, that really, really adds up. I even had scholarships but they wouldn't cover my dorm, the mandatory meal plan, or summer classes so that I could finish undergrad faster. I looked to refinance with 3-4 different companies, like SoFi, but the lowest they offered was around 7% despite my very good credit score.
and without an income
Not addressed to you, personally.
Lots of options here.
I would suggest the federal government get out of educational loans entirely. Let the private loan market evaluate and take the risks, probably with an income based repayment contract that favored degrees/programs that are likely to lead to reasonable incomes.
This article says 90% of student loans are from the gov't, so it appears it currently does exactly what you're suggesting. https://www.nationalreview.com/2017/02/student-loans-governm...
I'd rather have non of my tax dollars allocated that way, but if I don't have a choice then there should be some attempt to invest in people and skills that produce self-sufficient citizens.
Despite the fact that be more likely to help than hurt my family, I think it’s undesirable societal policy.
Or we could just socialize college and abolish the distinction between "elite" and "not elite".
Lenders have no reason not to give out these loans as they will be repaid even if it is sub-prime.
Schools have no reason not to jack up rates because students are given largely unlimited access to loans.
Both parties have been repeating this and raising their incomes for decades ever since student loans have become non-dischargeable.
Instead of ranking loans based on repayability, lenders have divorced themselves from financial reality because government intervention.
People have been saying this for many, many years! And using as an example of the Law of Unintended Consequences.
Set aside the education component entirely. It costs money to be housed, fed, entertained, and consume other things. That’s getting paid for somehow and that somehow is often borrowing for undergrads.
Edit: forgot to say non-dischargable goes back way before that switch. I have personal experience around 2001, but I'm pretty sure it goes back to the 80's.
There is also the fact that many students who start a four year degree end up never graduating. At the college I teach at it is clear that we are marketing to students who should not be going to college and shouldn't realistically expect to get a degree. But we need the money due to lack of state support and as a result standards for passing have gone down. What we have now is a system that has the incentives in the wrong place and this will have bad societal consequences years from now.
Like almost everyone else who comments on this topic I have ideas on how to make things better and like almost everyone else those ideas are largely naive.
Cars are required in most rural areas in the US because there is no other way around.
And european governments have plenty of bs job creation engines like roadwork, too.
Would be nice to have some data. One related observation, that seems less surprising the longer I live here, is that europe has no spacex, google, tesla, nasa, coherent mars rovers, the list goes on... if you give people stuff, they're mostly just afraid someone's going to take it away. But yeah, to echo someone else's comment, I'd rather be poor, or even average, in Europe. I guess being super wealthy here wouldn't be that bad either, since nobody's nipping at your heels.
Do you really think that there isn't economic value in roadworks?
The European Space Agency, Airbus, a huge number of car manufacturer, ... It's not surprising that the #1 economy in the world has more big company than the #3 one (when they decide to group). A lot can be said also about the American culture and politics when it comes to entrepreneurship. But presenting Europe like its devoid of any important industry is also outright false :) .
These lists are meaningless. I can do the same thing and get smug about Intel, TSMC and Samsung buying EUV equipment from Europe.
It could be that richer countries simply have more money to spend on health care, so why wouldn't they spend it.
On the other hand many health outcomes may also depend on wealth - for example over-consumption leading to obesity, which might affect health more than spending on health care can compensate.
In that example, a rich country could spend more money on health care and still have worse average health than poorer countries.
Not saying that is exactly what is going on, just that it makes sense to be careful with judging.
Many things can go wrong with interpreting such statistics, see also my comment here: https://news.ycombinator.com/item?id=21760725
Afaik, some of the best (and also most expensive) medical procedures are only available in the US.
These are both components to saying that the health care system is more expensive in the US.
> a rich country could spend more money on health care and still have worse average health than poorer countries
Yes. I think that multiple people on this thread would argue that this is the case with the US.
> many health outcomes may also depend on wealth - for example over-consumption leading to obesity, which might affect health more than spending on health care can compensate.
This implies that differences in social services and urban design have an impact on healthcare spending. This is relevant to /u/sykick's statements "the cost of healthcare, housing, food, and transportation should be taken into account." and "I'd rather be poor in Sweden than in the U.S."
These are both components to saying that the health care system is more expensive in the US."
Sorry, but that doesn't make sense. If the service is better, the higher price is justified. Presumably you can always choose to not use the better technology to save money.
"This implies that differences in social services and urban design have an impact on healthcare spending."
How does it imply that? More social services would stop people from overeating? Do you have a citation for that?
In the USA, you pay taxes for healthcare, but only the old and the poor receive that tax funded healthcare. So the average taxpayer has to buy their own health insurance in addition.
The linked chart also shows a clear correlation with Purchasing Power Parity, which also should be accounted for.
Also government employees, and those under the care of the VA.
> Purchasing Power Parity, which also should be accounted for.
Yes, I agree.
To illustrate with a simplified example:
Imagine nation A has median wage of $20k and nation B has median wage of $40k. Also imagine that their income distribution is the same. Then, if healthcare costs in nation B are twice as high, healthcare is equally as affordable.
How the money is collected is pretty irrelevant (indirectly via taxes or directly by the insurance company or physician). What matters is the overall cost.
Another question perhaps is who pays taxes - another source I found said 2/3rds of voters in Sweden get their money from the state, either because they are government employees or recipients of welfare.
So an average tax rate might also be misleading, if many don't pay taxes at all.
It seems like almost all 4yr colleges do this to some extent nowadays. Freshman lecture halls with 500+ students and one adjunct faculty ratio are a money maker. Capstone classes with 40 students and one tenured professor are a money loser. You'd have to hire really bad bean counters to miss the obvious way to exploit that situation for monetary gain.
Moreover, American cost of living is the same in Sweden as in the US (the GDP per capita in nominal dollars is identical to the figure in purchasing-power-adjusted dollars). You may need a car, but housing is cheaper in most of the country.
As to healthcare, making comparisons is difficult. 2/3 of college graduates have employer subsidized healthcare. For those people, you need to look at the median employee premium portion, which is $2,200/year. (There are also out-of-pocket costs, mostly for drugs, but the US figure of about $1,000 is not much different than the Swedish figure of $800 on that front).
The employee premium paid by the typical college graduate is much less than the extra taxes that same person would pay in Sweden. The median college graduate earns $51,000 in the US to start. The median employee premium of $2,200 is 4.4% of that. The tax differential is almost certainly higher than that. (In Sweden, all of that is taxed at 30% county tax, no federal. In the US, the first $12,000 is tax free, and the rest is taxed at 10-12% federal, plus maybe 4-5% state and local, plus 7.65% FICA).
The cost of living is important as this and income level determines the affordability of debt. Just comparing income level and debt level between the two countries is not a deep enough analysis in order to determine if your proposed fix would work.
You are also ignoring the fact that a large number of people who go to college never graduate. These people are completely absent from your analysis of the problem. You are focusing only on the set of college graduates of both countries. I suspect that the rate of college completion for those who enroll at least one semester is much higher in Sweden than in the U.S.
According to your post 1/3 of U.S. college graduates don't have employer subsidized healthcare. This is a huge percentage and you are ignoring them in your analysis of relative debt burden.
Taxes are higher as a percent in Sweden than in the U.S. but in the U.S. at a moment's notice you can get screwed financially really bad in ways that you can't in Sweden. An ambulance ride in the U.S. costs much more than in Sweden and yearly out of pocket expenses for healthcare is much higher. The necessity of a car causes most people in the U.S. to have auto loans and unplanned maintenance costs can send people over the financial precipice.
I suggest that merely looking at the numbers you have does not give a clear picture of the relative situation in both countries.
Apparently the people that started http://rollingjubilee.org/ were originally working on a student debt strike project. Not sure exactly why they switched to a medical debt project, but it's certainly a worthy one.
My assumption is that the government and lenders of government guaranteed loans aren't selling the delinquent accounts for pennies on the dollar.
The point of a strike is to build power for the striking class so that the creditor class is forced to make significant concessions up to and including relieving all of it. To be clear, this would mean huge numbers of people simply stop paying in a coordinated and public fashion.
However I still have a government guaranteed loan that was issued by a bank. If I default on it that bank isn't selling my account. They'll garnish my wages. Also I never plan on paying off my loan early! It's only 2.25% apr! I got lucky. Rates were really really low when I graduated and consolidated my loans.
"Student debt has surpassed $1 trillion partly because it is one of the most protected forms of debt by federal law. Student debtors can rarely discharge their loans in bankruptcy and lenders have rights to garnish wages and social security payments. The vast majority of student loans have these federal guarantees. We cannot buy these loans because there is no secondary market."
Is there any data on if folks with student loans are living above their means? I.e new TV’s, new car lease, vacations, ordering out.
I am serious when I ask, as I read a ton, and can’t get to the root. I hear many different anecdotes. This is a serious problem, and I am truly out of sync on the main causes of payback ailment.
I went to a college known for its recreation management program. Cool industry. Not a lot of good paying jobs. I know a few universities with amazing turf programs... Only so many golf courses and turf fields that need someone with that kind of knowledge and that pay well. Most jobs in turf are mowing and applying chemicals that only one person on staff needs a big degree to ensure proper maintenance.
Do poets and artists need four+ year degrees, or degrees at all? Everything I've heard from friends who have gone to various programs have said that they actually really make it harder to be a good artist- whether from undermining your individual muse to cramping your style, or simply putting your mind in the box of what is "good" art.
For that matter, does society need full-time artists and poets who have not yet proven their abilities to the point where they can sustain themselves at a level they are comfortable living with? Maybe, maybe not. There are jobs related to art (say, visual design or writing copy) that can be done on full or even limited part time basis.
This is the part I don't get. You're totally right. The skills taught in liberal arts programs are actually useful. I think university liberal arts departments could do a much better job of pointing students toward areas where they could use their skills. I flinch when someone says their poli sci or history degree is useless. Those are extremely useful for journalism and all subfields/areas where your vocabulary pays your rent. If done right, those degrees make you a better writer and generalist /specialist researcher than like, I don't know, at least 60% of the general population. I got an English degree just because I like reading books and writing. I wanted to be a journalist, which where I'm from is generally another year of specialised training after a three-year undergraduate degree. Then I went and lived overseas a couple of times and didn't want to be a journalist anymore. Used my skills for other things. It worked out fine. The liberal arts are more useful in the workforce than many people think.
I dont have a reference for this, just anecdotal from when I grew up near University of Montana.
Literally every single friend of mine bought a new car when they graduated from college and got a job. Anecdotal, but I suspect it is more common than people realize.
It doesn't mean they were living above their means, but I think buying a new car at the start might be a financial misstep.
I graduated in 2003 and had to buy a car. I was driving an 88 Chevy Blazer that was starting to hit around $750 per month in maintenance. Final straw was when a cylinder was losing compression. This was already on an SUV that had its engine rebuilt and had more than 165K miles on it. It had a Kelly Blue Book value of about $100.
So, couple months out of college, I bought a modest Chevy Cavalier. Monthly payments were 1/3 of what I was paying in repairs, around $240/month. I could afford the car payments, I couldnt afford the monthly repairs.
I didn't buy my first fun car for about another 4 years. By then, had a well paying job, only debt was what lingered on the previous car loan. At the time, didnt have a great salary, probably around $100k, but I was getting generous bonuses. Every bonus I had went to paying off atudent loans before I did anything more than a couple hundred splurge. I think that I had my student loans paid off in the first 3 years at my first salaried, full time job.
I think the key, for me, is that when my income tripled from when I was an intern, I didn't change my lifestyle. I lived the same, with a slightly more expensive so I could be closer to work & public trans. Everything went to paying down debt.
I think this is the misstep for younger people that suddenly come into earning a lot more money: more money in, increase the life style and spend the increase in income. It's an easy trap to make. And no, I'm not ragging on Millenials. Its a problem that has happened to previous generations in the same situation. I think it might be a lack of personal financial maturity (you know, out on your own, gobsmacked with more money youve ever seen in your life), not a generational thing.
Edit: clarification about exspense on the old vehicle
Just think, the whole student loan thing is decided when they're even younger.
However... if you were making $100k 4 years after graduating college, you were doing better than probably 97% of people who started college at the same time as you (I don't say graduate, because many didn't). Maybe 99%.
I think you're incredibly disconnected from what most people are making four years after graduating.
1. Private colleges that spend a lot on marketing, cost a lot, and don't provide a worthwhile degree, nor transferrable credits. Think about all the unaccredited "tech" school advertisements all over the TV a few years ago.
2. Getting degrees that aren't marketable outside academia, such as Mideval Literature, etc. As an incoming college student, I had no idea what was a marketable career and what wasn't. Universities probably don't undermine their own departments either, so it can be a crap shoot.
3. Very expensive private liberal arts colleges, like the one Steve Jobs dropped out of.
I'm sure there are other pain points, but a kid that gets an in-state, public college degree in something he can earn a living doing isn't much of an issue. Typically, it's the vultures that pray on government programs intended to help the citizens.
Depending on when you graduated, a couple of things changed:
- college pricing increased (duh), so a loan balance for a comparably situated student will just be higher for recent grads
- median incomes for college graduates have risen a lot slower than the increase in college costs, so repayment will be more difficult at the median. (Even in engineering, this is true. Starting software engineering salaries ca. 1996 were in the range of 1.5x all-in fees for a year at a top private college. This ratio has moved decisively against students. Carnegie Mellon is quoting $74k for a year of education now, so the ratio is closer to 1.1x. Obviously it's easier to pay back loans if you earn more relative to the cost of the education. The numbers will be worse for people not pursuing a select few STEM degrees.)
- employee health insurance premiums are frequently on top of these numbers, making the arithmetic worse for payback.
- I'm sure there are other factors, especially when you add that some students go on to pursue fields (e.g. law) where similar dynamics are at play as well.
So yeah, it's worse now than it was even a couple decades back.
Frugal living (aka sharing a studio apartment with a spouse, not eating out or making luxury purchases) makes that entirely doable, probably faster. OTOH, living above your means or lots of unexpected expenses (pet health care, personal health care, car maintenance, etc) can put that out of reach pretty quickly as well.
That reminds me, I forgot the other big item. Housing costs have risen tremendously. (Yes, even in places that are not the biggest cities and/or on a coast.)
Basically: all the financial factors that changed, changed against new graduates. I'm struggling to think of a meaningful expense that is relatively lower now than it was in 1996, and I can't think of any.
I'm not saying it's not doable at all. I'm just saying that 20 years ago that $28k in debt might have been $14k instead, the $400 might have been $200, housing + other expenses would have been lower, and the graduate's relatively higher salary would have made the arithmetic easier.
Put another way: if one had to share a studio apartment with a spouse to make the math work in 1996, consider how much worse the picture would be today for e.g a person unfortunate enough to graduate college single and unable to share a studio with a spouse.
As you point out: there's less room for error now, which aligns with more people speaking and writing about the topic.
I recall my grandfather being proud of only having a $25 electricity bill... granted, it was about 20 years ago, so prices were a bit lower, but it was for a two story house.
Edit- also, that $400 was chosen for the payoff period, not a minimum payment. I believe the minimum on that would be closer to perhaps $200 a month.
I get what you're trying to say - you see that people have the latest iPhones, buying expensive sneakers and sharing pics of their exotic holidays. It's easy to then look at the student loan crisis, connect the dots and think "Ah, it's all these people with their iPhones, sneakers and holidays! I however have lived frugally, more people should live like me". Everyone's circumstances are different, but I think I can guarantee that student loan debt is a problem not because graduates go on to eat avocado toast every day (or whatever people are upset about this week) but simply because to attend higher education the costs in the USA are astronomically high and generally require either incurring huge quantities of debt or the enormous good fortune of coming from wealth.
That's in the 83rd percentile of income Nationwide and 72nd percentile for Boston.
source: https://dqydj.com/income-percentile-by-city-calculator/
Two recent grads making a combined 90k pre-tax is 45th percentile for a household for Boston (per the calculator you linked). You have to actually prioritize it and consequently make all your little day to day decisions with an eye towards cost (which is going to be very hard for an upper middle class person who's never done that in their life to suddenly start doing) but you can definitely aggressively pay down debt or save money.
Good luck ever earning that much in the UK, let alone a few years after graduating.
I think Americans don't realise just how much richer the USA is than most of the world, including Western Europe.
That sort of question is the new "How can poor people afford cellphones?" in terms of accidentally looking judgemental and out of touch by referencing past experiences without considering present reality.
I was doing volunteer work a few years back, speaking to some kids from the local community. One said he was going to a 4 year college, probably paid for by the government given the circumstances. Said he wanted to study "coaching". And our tax dollars are paying for this...
Yes, student loans need to go, but not so that people don't go to college. That should be free for undergraduates in today's economy, where you need high level ed. for what used to be done by people who barely finished high-school 30 years back.
Besides, “private student loans” would be based on an ability to pay. Guess who that leaves out?
Is it harder for poor students? Of course. But is it prohibitively harder for a smart, poor student to do well in school and demonstrate their ability? Absolutely not.
If they could “all learn from books”, I guess no one needs teachers.
Unfortunately, we've done a disservice to ourselves: Instead of teaching others how to think, we've taught them what to think. Most graduates coming out of the ivory tower of education lack the ability to bootstrap their own intellectual development. Historically, universities served a purpose: the higher-level of information and application could only be consumed through them (gatekeepers). We are in a new era of information. Information is abundant. We'd be better off as a society if we focused on the "how to think" than the "what to think".
Wikipedia: "The Higher Education Loan Authority of the State of Missouri, aka the Missouri Higher Education Loan Authority or MOHELA, is one of the largest holders and servicers of student loans nationwide."
I learned way more in my degree about software principles and about theory than I could in years on the job. Computer Science degrees may not prepare people directly for software development in the workplace, but they do lead you to a greater understanding of what's around and underneath you that you're just not going to get commercially coding.
I'm not saying everyone has to do it, but I am going to say it helped me tremendously to be a better creator of software.
(--edit-- I'm also going to say that I was part of the last year of students that didn't have to pay for their degree's at all in England, I appreciate the value proposition is different when you have to take on debt to do the course.)
These bubble can go on for decades but once it bursts, the bottom of the bucket drops out and all the water goes with it.
Free college for all coming in Fall 2025!
So instead of paying for education directly and accounting for it as an expense, the politicians can claim they helped, taxpayers can feel like they helped and save money, and future generations get shafted.
There are US citizens with over a million dollars in debt. [1]
This is crazy. Other countries invest in people, sometimes including non-citizens.
1. https://www.marketwatch.com/story/he-ran-up-a-million-dollar...
I think I would have been screwed in this current climate.
IIRC, I received those loans at an advertised “teaser” rate of 1-2% APR, but since they were variable the percentage tended to increase over the years - 5-6% APR before refinancing.
Well, bad for student. ¯\_(ツ)_/¯
I keep being baffled by continued use of the newspaper title style on the English-language web—but at least it's a steady source of entertainment.
It won't change because they want to hold onto their profits.
There is a significant difference between the two lending fiascos, but mostly in how the fallout will look. Both the mortgage crisis and the student loan crisis started out as government programs meant to incentivize borrowing. They succeeded, mortgage debt rose 12%/yr in the years leading to the crisis, student loan deb at 11%/yr. Student loan debt now outpaces credit card and auto debt, and is 2nd only to mortgage debt. An increase in easy borrowing lead to higher prices in both cases, in the 10 years leading up to the housing recession, home prices went up 80%. In the last 10 years tuition prices have risen by also 80%. Not a problem if the value of the home or degree continues to rise, but labor income for college grads hasn't grown in 60 years. At all. In fact, if you adjust for inflation there has even been a slight decrease since 1960. Currently 30% of student lending ends up in default, but this number is also growing quickly and projections show this number at 40% by 2025. Sub-prime defaults were around 11% at its peak, so the rates of default for student lending are WAY worse than those of sub-prime mortgage lending, even though the total debt is significantly less. The big problem w/ sub-prime lending was the inability to pay them back (obviously), and same is happening with student loans - due to a lack of underwriting. You can't exactly repossess a degree, and even if you could the value on the 2nd hand market would be null. Filing bankruptcy would make mortgage lending debts go away, but that isn't the case with student loans, which will remain in perpetuity. True, overall mortgage debt was about 10x what student loan debt is at its peak, but there haven't been large derivatives markets set up to eat it like what happened with the mortgage collapse. Since the student lending default overage is going to be WAY more than what the US Government will be able to recoup from Social Security checks or income tax refunds, the person who will ultimately foot the bill for this lending crisis will not be insured banks; it will be you, the taxpayer, and ultimate the economy writ-large. Unless payroll wages somehow magically jump high enough to cover the stagnation we've experienced since the 1960's - unlikely without intervention.
It won't be easy for our economy to recover from this downturn either because the issues will be cultural and systemic. The course-corrective measures would be lenders locking out lower-income families from colleges, which prevents economic mobility and leads to a faster collapse of our middle class. Colleges will maybe drop tuition rates slightly but tuition is largely sticky, unlike housing prices. This may even lead to some colleges going out of business. Loans will likely start to be under-written appropriately, but this means degrees will be prioritized based on earnings potential, which means only a narrow field of study (medical, lawyers, tech, etc) will be eligible for lending. Schools may even price degrees differently, meaning schools will likely trend towards degree programs with the largest earnings potential, to the detriment of many other crucial fields of study. Ultimately college will become an institution to perpetuate a narrow focus of study, and only to those already in positions of wealth - which will further hasten the collapse of our middle class.
The student lending crisis is already having far-reaching economic slowdown implications, from decreased home ownership, higher rental rates, to lower purchasing of goods/services overall; with no clear indication of how to easily course-correct. Not to mention a worsening of cultural and systemic issues already in place. We may not be smart enough to even realize what hit us until it does.
There are stock market ETFs which do precisely this.