
Why The Student Loan Market Is Insane - tokenadult
http://www.businessweek.com/articles/2014-06-11/heres-why-the-student-loan-market-is-completely-insane
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beloch
Parts of this article bother me.

Let's say that banks could set rates based on risk and this did force lower
quality colleges to reduce their tuition. Those colleges would bring in less
revenue and program quality would likely suffer, possibly resulting in a
feedback loop. Meanwhile, ivy league universities that are funded primarily by
endowments would be able to raise their tuition without burdening their
students, who would be able to afford larger loans given that they would be
paying lower interest rates. In short, rich schools get negligibly richer
while poor schools get significantly poorer. More importantly, Ivy league
program quality would not improve significantly while lower tier college
programs would spiral downwards.

If the goal is to promote quality education, the current system lets ivy
league students subsidy lower tier college students to some extent. It makes
more tuition dollars available to institutions that depend entirely on tuition
at the price of restricting tuition dollars available to institutions that are
less reliant on them. The status quo has significant advantages over what this
article proposes. Higher default-rates are a problem, but the lesser of
several evils (unless you happen to be a banker).

North of the border, university tuition is subsidied by provincial governments
and regulated by them as well. It varies from province to province, but
average tuition in Canada is far lower than it is in the U.S.. In most
provinces, tuition is still expensive enough to be considered an investment,
but cheap enough that thrifty living, summer jobs, and a minor scholarship or
two can see you through undergrad without debt. It's a different approach
that's worth considering.

~~~
Swizec
And yet in much of Europe (or at least where I'm from), colleges where you pay
tuition are considered substandard whereas colleges without tuition are
considered high quality.

Mostly to do with the expectation that if you pay tuition they will make
bloody certain you get that degree, whereas colleges without tuition fail some
50% of their students.

Hell, Universities don't even want to accept tuition-based colleges under
their umbrella because the quality just isn't there.

~~~
aianus
This just seems bizarre to me. How can state funded schools compete for good
professors with rich private schools?

~~~
gambiting
Same here in Poland. Only the free universities are the good ones. Any paid-
for private university is immediately considered worse and is very unlikely to
result in a good job. All top 100 universities in the country are completely
free.

And like the commenter above said - private universities will push through 90%
of their students, so the degrees they get are worth close to nothing,no
matter how much they paid. Meanwhile, the most prestigious schools in the
country lose over 50% of the students in the first year because requirements
are so high,and because they are not afraid of letting people go(they are not
paying, so they are not entitled to anything). Out of 200 people signing up
for an engineering course,only 20-30 people will actually graduate(and those
engineers are sought after by every company in the country,because they are
guaranteed to be good).

~~~
doctorKrieger
oh you must be joking, i'm graduating from top1 polish university and even the
professors are saying the quality of education is piss poor -but well whan can
you expect when the TA's are getting paid around 1500 zloty (500$) and the
professors are grabbing ~4000zloty (a bit more than 1000$). But there are
parts in which you are right - the graduation rate is 30% and the quality of
education in paid unis is even worse. And no we're not sought after in the
country because we tend to leave it.

~~~
Paul_S
The problem with leaving the country is that your very good degree is now
almost worthless. I got mine (from a good technical uni) issued in English, I
even wrote my thesis in English. Not a single employer wanted to look at it.
Yet, I earn the same as my colleague with a PhD from a local uni. Turns out no
one cares about degrees in software engineering. Maybe it's different in your
industry.

~~~
ceejayoz
Software engineering is probably one of the specialties better suited for an
apprenticeship-style program rather than a degree-based one.

~~~
gambiting
Yeah. I got my job in the games industry as an intern programmer before even
graduating. When I finally did graduate, they were like "oh , cool", and
that's it. I guess that even if I dropped out of uni they wouldn't care - I
was doing my job and that's what was important.

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ChuckMcM
Is this surprising to anyone, structurally it is exactly the same as the
mortgage issue in 2009 with Freddie and Fannie. The government finances the
lending of money (by absorbing the risk) and gives banks money at a few
percent which they loan out at 5 - 6% or more. You combine that with for
profit universities which have discovered that the bank and their interests
are aligned, they charge what ever they want for tuition, the banks make sure
the students can get that in the form of guaranteed loans and non-dismissable
loans, and the students play their part by putting themselves into indentured
servitude. There is no other way for this to play out.

I've written my congress critters and suggested they notify the banks that
they are going to make loans dischargable in bankruptcy in 4 years, they are
going to change the guarantee to be 60 cents to the dollar. Its going to get
very very painful.

~~~
bradleyjg
That's not how the system works anymore. FFEL which was the government
guaranteed but bank issued student loans was ended in 2010. Now almost all
student loans are made directly by the government (Stafford, PLUS, & Perkins),
with a small rump private student loan industry. Those loans are non-
dischargeable but not government guaranteed.

If this had been an actual article rather than a puff piece for SoFi,
presumably that would have been made that a lot clearer.

~~~
waps
Translation: they're government guaranteed by making the students seel
themselves into loan slavery instead of by taxpayer money.

Note the evolution of public finances since this started : expenses increased.

Same thing will happen : government will bow to public pressure to make these
things dischargeable, and suddenly the loans aren't worth their interest rate
anymore. The government's companies panic and try to get back their principal.

Why ? Because these companies weren't financed by the government, in true
American style they loan on the public market, then reloan to the students.
Right now they're rated AAA of course, and loan at very low interest to people
who probably aren't even worth BBB rating. And they roll over debt. As soon as
anyone finds a way to discharge large amounts of student loan debts, there's
more than a trillion dollar of loans that go from AAA to < BBB. Then at the
end of the month, these loans need to be rolled over ...

~~~
bradleyjg
There are no seperate bond issues that back federal lending to students. They
are funded out of general obligation debt (i.e. treasuries). Despite being
warned over and over again that bond vigilantes are just around the corner,
for the better part of a decade now investors have been willing to take near
zero interest on them. There's no reason to believe that a few hundred billion
in lost repayment over 10-30 years, would move the needle at all.

~~~
waps
That's actually true. Greece demonstrated what happens after a default, and
then Cyprus did. In both cases it didn't prevent them from reissuing bonds and
selling out.

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rbobby
So kids that can't afford/qualify for a top school would also face much higher
student loan interest rates. Humm... that doesn't seem that much different
from "tax the poor" style of economics.

Perhaps schools with a lower default rate should get a higher interest rate...
the banks are leaving money on the table. Students attending schools with a
higher default rate should get the lowest rate and more government support
(grants/bursaries/scholarships).

Or perhaps the student loan "industry" should not be focused on how to make
the most money from students. It should be focused on higher graduation rates,
higher paying employment for graduates, and perhaps even employment in
strategic fields (i.e. increase the amount of loans available for engineering,
compsci, whatever fields will be important in 10 to 20 years).

And private industry (aka the banks) should not be in the business of student
loans at all. It should be 100% government funded and run, with the goal of
being a non-profit. It's hard for me to see any added value that private
industry brings to the table for it's "share of the profits" (do they help
sell a student on getting a loan? is servicing/tracking a loan so complex that
the gov't couldn't easily run a loan servicing application?).

Profit is the incorrect incentive for student loans (again it should be
graduation rates, higher paying employment, perhaps even employment in
strategic fields).

~~~
mgkimsal
"(i.e. increase the amount of loans available for engineering, compsci,
whatever fields will be important in 10 to 20 years)."

If fed govt tries to do this, it's "meddling in the market" (or "distorting
the market"). If a private co does this, it's smart/fwd thinking. ?

------
bayesianhorse
Tuition rates don't reflect the cost or even the value of the education, in
many senses of the word "value", but rather they have a strategic aspect to
them which justifies the high rates.

Tuition rates are essentially "costly signals". Those who have a degree are so
sure of themselves, and had other people believing in them so strongly, that
they were able to finance even the highest cost. This system both guarantees
the elite students go to elite schools and that employers can sort applicants
by school and degree.

Problem is, this kind of equilibrium in the modern economical world tends to
blow up in the faces of the "players" at some point.

------
jlcummings
The missing link is insurance or a hedge with buyers/students opting for
protection from the schools product or service if not delivered in spirit or
letter of its premised promise (aka marriage of warranty/collision-
comprehensive). Secondly insurance or hedge against themselves as
students/buyers for when life happens or they otherwise screw up delaying,
discontinuing, rerouting their pursuit (liability).

The fix for one sided finance is to add a second dimension in an equal and
opposite direction.

------
logicchains
I think an important step to take would be allowing lenders to discriminate
based on students' course of study, considering the massive effect it has on
students' ability to pay back their debt. Such a change would, all other
things being equal, reduce interest rates for STEM degrees and increase those
for arts, thus potentially increasing the number of STEM students to the
benefit of the wider economy.

------
alkonaut
It should be in the public (government) interest to have Young adults date
start and thus complete their degrees as early as possible in life.

It's also presumably in the public interest that as many as possible are
included in the pool eligible for qualified jobs (you want the top students to
be doctors, not the children of rich parents).

Social mobility is also a factor, if university studies are expensive that
will severely limit social mobility.

The conclusion is this: higher education should be free, and governments
should not only ensure that it is, but that the free education holds at least
the same quality as non-free (perhaps surprisingly this is already the case in
many countries with free higher education).

Even without tuition fees, housing, food and books are expensive, so grants or
cheap loans are still necessary.

The solution in Sweden and many similar countries is to have state guaranteed
(I.e subsidized) loans where there is no private entity wanting a premium for
the risk of lending money. The result is that anyone can afford taking loans
to study, and it usually pays off very quickly.

------
aluhut
I would love to know when this "why"-titles fashion finaly ends.

~~~
netcan
I like it. It sets out a format that I think works well. 'Why' means ' _This
article is going to argue that xyz_ '

Much better than the 'is' titles which usually mean ' _This article is going
to ramble vaguely about xyz and avoid even attempting to answer the question
in the title (even though the answer is obviously no)_ '

~~~
aluhut
To me it seems most of the times like the author had no idea how to make up a
title that would describe the text in one sentence. It becomes even worse if
the answer to the question is not really there in the end.

------
pm24601
Gee cry me a river:

    
    
      'As a result, “the government has made it difficult for banks to price to default rates,” says Mike Cagney, founder of Social Finance, a socially based student lending operation known informally as SoFi. “By accepting FDIC insurance, banks lose pricing flexibility and can’t charge interest rates commensurate with the quality of schools—and default rates vary widely by schools.”'
    

How about the banks just get out of the student loan business?

Banks are make _shitloads_ on the student loan program: all loans that default
are insured.

~~~
netcan
The meat of the article is about the follow on effects from that. Higher
default should mean higher interest rates is a higher cost which would push
down enrollment in those underperforming schools (which also underperform for
students) and/or push the the school's price down. To the extent that loans
are insured, the banks profits aren't really affected by incorrectly priced
risk.

I'm very skeptical of free market solutions to higher education affordability
issues. I think it's nonsense. But, screaming your slogan (fuck banks!) at a
sentence from an article making a point about a different point of view is
basically youtube comments.

~~~
rlucas
The "meat" of the article is PR hamburger for SoFi.

(Not that SoFi aren't doing something genuinely interesting. But this is a
straight-up advertisement. I'd bet a nickel that SoFi's agency even made the
graphs for it.)

------
tn13
Only if Mr. Obama would stay out of education market half the problems would
get solved automatically.

Few NBA players make million dollars a year. But that does not mean if
government provides cheaper loans for basketball training it would produce
more millionaires or even increase overall quality living.

If government meddles in education, forces banks to give cheaper loans it only
means one thing. A big "Student Loan Bubble".

~~~
ceejayoz
Half the problems would get solved by the President staying out of it? Why
were they problems at all _before_ he started pushing for the reforms, then?

~~~
tn13
So the world has not solved any problems unless government wastes taxpayers
money on solving them ?

~~~
ceejayoz
The President was staying out of it. There are now reform proposals to fix
issues. You argue that if he'd stay out of it - as he was - that the issues
would go away, so why were they there in the first place prior to him getting
involved?

~~~
tn13
He was not. He says everyone should afford a college degree. Nothing wrong
with that. He wants to spend someone else's money to make it affordable which
only means worthless degrees will be dozen a penny.

