
What a Student Loan 'Bubble' Bursting Might Look Like - elliekelly
https://www.vice.com/en_us/article/qvqw3x/what-a-student-loan-bubble-bursting-might-look-like
======
exabrial
Just like the housing crisis... when are we going to learn that government
backed debt is a terrible thing for our nation? Creditors _should_ turn away
bad lendees or cap loan limits, or increase your interest rate based on risk
factors. Some exmaples of this might be:

* Limiting the amount of money you can be loaned for majors that don't have good job prospects. People should turn to grants for these types of educations

* Increasing your interest rate if you miss class

* Increasing your interest rate for poor grade performance

~~~
JamesBarney
I don't think GPA has very much of any effect on lifetime earnings except by
being a proxy for IQ and conscientiousness.

Same with missing class, they don't reduce someone's lifetime earnings, they
just tell you how conscientious they are.

But extroversion is actually one of biggest contributors to lifetime earnings.
Maybe if they miss a party we should increase their interest rate too.

~~~
exabrial
Well the difference between a 3.0 and 4.4 isn't likely much, but a gpa of 1.5
would very much indicate failure to focus

~~~
JamesBarney
If you control for IQ and conscientiousness then it's probably what classes
they took, how motivated are they by school, whether they found a girlfriend
they really liked that semester and decided to blow off class, founded a
company, decided to teach themselves french.

~~~
exabrial
I mean, exactly

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number_six
The fact that people can't ever discharge their loans makes it hard to imagine
it "bursting" in the way that the housing market did in 2008. The whole notion
of bursting is people collectively realizing their folly and everyone
scrambling as quickly as possible to make out with whatever they've got left -
like a run on a bank.

In this case there is no bank to run on - people will just continue to have
their wages/benefits garnished to continue to repay these loans that they are
forever tied to. I feel like there's not really a "burst" that can happen -
just that hopefully there can be some sort of debt forgiveness program or
something that will alleviate the burden of the debts.

~~~
dragonwriter
> The fact that people can't ever discharge their loans

They can, it just has a higher bar of unaffordability before it can be
discharged even in bankruptcy. OTOH, the higher the ratio of student loan debt
to income becomes for typical borrowers, the more likely it is that there
would be a wave of discharges.

Even without discharges, though, you can have an escalating problem of loans
becoming worthless to those with the right to collect them; that the loan
isn't legally discharged doesn't mean that the borrower isn't practically
judgement-proof.

> The whole notion of bursting is people collectively realizing their folly
> and everyone scrambling as quickly as possible to make out with whatever
> they've got left - like a run on a bank.

No, not like a run on a bank, more like a panic sale of a marketable asset
class, in this case student loan assets (or student loan asset backed
securities, just like the mortgage-backed securities that went through the
same thing around 2008.)

OTOH, this is really only likely to be a big issue with private, non-
government-backed student loans, which exist and have high per-borrower
balances, but are a minority of student loan debt.

On the federal side, increasing defaults mostly reduce the difference between
loans and grants and probably push public policy away from generally-offered
loans to more targeted (by some mix of need, individual merit, and social
desirability of course of study) grants. (These also are marketed and
privately collectable after the government originates them, but the government
guarantee limits the risk of value crash.)

~~~
nopriorarrests
>On the federal side, increasing defaults mostly reduce the difference between
loans and grants

Interesting tidbit here is that half (yes, half) of the US government's
financial assets are student loans.

It was discussed here previously --
[https://news.ycombinator.com/item?id=16136330](https://news.ycombinator.com/item?id=16136330).

Something I find very hard to comprehend, tbh.

~~~
acover
I believe this does not include most of the mortgages. For example, Fannie Mae
has 3.35 trillion in assets, which dwarfs total student loans.

[https://en.wikipedia.org/wiki/Fannie_Mae](https://en.wikipedia.org/wiki/Fannie_Mae)

~~~
dragonwriter
> I believe this does not include most of the mortgages. For example, Fannie
> Mae has 3.35 trillion in assets, which dwarfs total student loans.

Fannie Mae is a publicly-traded, privately-owned corporation, despite being
federally chartered for a public mission.

So, yes, their holdings are not counted in government holdings, because they
aren't the government.

~~~
zeusk
Fannie Mae and Freddie Mac are currently under the authority of the Treasury,
since the TARP program.

Which is why, their stock is worth a lot less than even their own book value.

------
konaraddio
> Meanwhile, some people are more than happy to spend $100,000 on a graphic
> design degree that may get them a job paying roughly $40,000 a year

> A lot of that has to do with what Goldfarb likes to call the narrative—one
> that convinced kids that the only route to middle-class respectability was
> to get a college degree and that suggested failing to do so meant having
> failed at the American dream of upward mobility. To keep using the
> economist's terms, I would also say that 18-year-old high school seniors
> definitely qualify as "novice investors." Their philosophy can be summarized
> by Colin Hanks in the 2002 movie Orange County. When asked why he's so
> obsessed with getting into Stanford University and college more generally,
> he snaps back, "Because that's what you do after high school!"

Too often I see articles about student debt make a comment about how students
have been tricked or misled into pursuing a degree. Why does no one talk about
the alternative?

Let's talk about the alternative: You don't get a degree and now you're resume
gets automatically thrown out of most applications. Only a small fraction of
those without degrees manage to get well-paying jobs; they're the outliers.
Albeit unrelated to employment rate, look at the salary differences:
[https://www.bls.gov/careeroutlook/2018/data-on-
display/educa...](https://www.bls.gov/careeroutlook/2018/data-on-
display/education-pays.htm)

Some might say it's worth making $X/yr and debt-free than making $Y/yr with $Z
debt but this only holds true when Y > (P*Z + X) where P is the percentage of
the total initial debt being paid off per year (e.g. P = 0.2 if you're paying
$10k/yr to get rid of a $50k debt). And these values are hard to predict.

~~~
ajtaylor
Or you could go into the "blue collar" trades like plumbing, electrical work,
etc. After you get some experience, the trades can be a very lucrative line of
work. Albeit you have to sweat and get your hands dirty. Mike Rowe has a few
very persuasive thoughts on the subject as well, and can do it much more
eloquently than I can.

~~~
nightski
It's also dooming yourself to a life of little mental stimulation and lots of
repetition. I have no problem with physical labor (love house projects and
hobbies), but these jobs would suck the life out of me for that reason.

~~~
FeloniousHam
My father was an electrician by trade, but generally very capable. He loved
the problem solving aspect of his job. Wiring and code are not so far apart as
you might think.

I've often felt, given the pedestrian nature of the problems I have to solve
in code, he got the better end of the bargain.

------
JamesBarney
Summary of what a student loan bubble bursting would be from the article.

The government would guarantee less student loans. This would be means some
for profit institutions might shut down.

~~~
sys_64738
The govt shouldn’t guarantee any student loans. My tax dollars shouldn’t be an
ATM for student tuition.

~~~
elliekelly
> My tax dollars shouldn’t be an ATM for student tuition.

In _theory_ tuition is a great way to spend tax dollars because it creates
better educated citizens who will earn more money (and pay more taxes). In
practice it does seem to be more like monopoly money that props up sub-par
schools and provides even worse education to those who could benefit from it
the most.

~~~
ThrustVectoring
Depends on the theory. If you believe that college education is a positional
good - that it allows people to be classified as middle-class and be
prioritized for white collar work at the expense of non-college-educated
competitors - then tax subsidies is the _last_ thing you'd want to do.

~~~
elliekelly
Wow. That's a really good point... subsidies lead to overconsumption and
overconsumption of education leads to "degree inflation" which leads to...
even more overconsumption of education.

Yikes.

------
motohagiography
If the loans are guaranteed by the government and people can't discharge them,
then there is almost zero risk to the creditor. How do they justify charging
interest higher than a government bond?

I can see why there are rumblings of loan forgiveness, as it has metastasized
into something truly horrible.
[https://en.wikipedia.org/wiki/Debt_bondage#Definition](https://en.wikipedia.org/wiki/Debt_bondage#Definition)

~~~
smolder
I think that profitability at all levels is the core of the issue with crazy
student loan debt. Why do guidance counselors steer kids toward expensive
schools they can only afford through huge impractical loans? Why do overpriced
schools exist in the first place? I suspect because some institutions getting
rich off loan interest use their influence to encourage this.

Mass exploitation of a population is best done when you can advise them to act
in your best interest while convincing them its in their own, and that's best
done from a position of authority.

If the health of society was a primary concern then the conflicting profit
motive would have been legislated out of existence, so we could maximize the
benefits of an educated population for the least cost.

------
the_antipode
Unrelated to the topic of the student debt bubble, the opening paragraph left
a bad taste in my mouth:

> I hated the film adaptation of The Big Short. The acting was good and it did
> have a surprising amount of energy for a story that centers around men in
> suits doing math. But I felt condescended to. Maybe director Adam McKay
> tested an original cut—one minus Margot Robbie—and realized a good amount of
> the audience couldn't follow the plot without having a sexy lady in a
> bathtub break the fourth wall to explain subprime mortgages and the
> financial crisis.

Sounds awfully pompous, like it came from r/iamverysmart. Much of the impetus
behind The Big Short certainly was to break down the 2008 financial crisis to
those that aren't economics/finance wonks, or for whom a narrative holds more
weight than a several-hundred page non-fiction book about it.

It's not that I want journalists to coddle their audience, I just think it's a
bad look to completely dump on other creators to inflate one's ego while
trying to make a point.

How about this, which still includes a bit of criticism of the director (but
milder):

"While the film adaptation of The Big Short had good acting and a surprising
amount of energy for a story that centers around men in suits doing math, it
wasn't exactly my cup of tea. Perhaps it's because I felt Adam McKay didn't
trust his audience quite enough to understand the ins-and-outs of complex
subprime mortgages and the financial crisis, instead falling back on gimmicks
like having Margot Robbie in a bathtub break the fourth wall to explain it
all.

"In some ways, America's student-debt crisis is a lot simpler than all that."

I don't know, maybe that's not any better: and maybe by criticizing the author
I've become the thing I set out to...criticize. Whatever.

------
zomg
At it's core, this is an economic problem. When there's an "endless" supply of
money, prices go up.

Combined with the newfound belief that, you must, and in fact, are entitled to
go to college, "demand" goes up too.

The result is students racking up needless debt when they probably shouldn't
have gone to college to begin with. College is NOT the only option to build a
successful career, but in America, with no degree, you're seemingly sub-par in
the eyes of our backwards society.

So, who wins? All these "Not-for-profit Universities" whose profit margins
(non-profit, doesn't mean that aren't profit-ABLE) are probably better than
many Fortune 500 companies.

The solution is to dry up the source of loan money, reduce the pumped up
demand for bogus degrees kids are getting and encourage young people to
consider other career options. You don't need a piece of paper to be
successful.

~~~
downrightmike
There was an article over the weekend about MIT and that 58% of their students
receiving financial aid. And how the tuition has gone up over 1000% in the
last 20 years. And that MIT is purposly setting the tuition so high because it
enables them to be a tax exempt charity based on that 58%. Point is that it is
in the school's best interest to make it unaffordable for most of the students
that go there. More loan money is available, so the tuition goes up to keep it
unaffordable for most of the students.

------
equalunique
I cannot fathom what it must be like having near $100K in college debt. I
dropped out in the middle of my 3rd year from a state college that only
charged $279/credit hour, and a lot of my credits were already transferred
from high school.

Putting people into massive amounts of debt in exchange for a shot at a
prosperous future puts a lot of pressure on them to rake in the dough, which I
fear is going to corrode the morality of those going into high-paying
institutionalized positions. In effect you are looking at the upper-middle-
classes of the economy starting out with a big incentive to stratify because
everything they have worked for rides on being able to pay off those loans - a
toxic praxis.

On the other hand, if you are a policymaker for a nation's central bank, then
this might be your strategy for ensuring your workforce produces measurable
value.

------
iambateman
While we may not see a big burst, it’s possible that a generation of
defaulting borrowers will gain steam. As more and more people justify and
publicize non-payment, it may become politically untenable to collect on those
loans.

Imagine a collective movement of 9,000,000 all ceasing to pay their student
loans at once. If I thought all my friends weren’t planning on repaying, I
would be quick to join them. Is the government really going to dig thousands
of dollars from the bank accounts of millions of people at once?

------
closetCS
I don't see this here, but could a student debt bubble result not in a wave of
defaults but as a contributing factor in a market slowdown or recession
because the average borrower will have less disposable income to spend on
other goods and products due to the insane debt payments? A wave of defaults
most likely won't hurt any major institution except the federal government,
but the lack of consumer spending seems like a potential problem for our
consumeristic economy.

~~~
beefalo
I've had similar conclusions when considdering this as well. These loans are
not wiped out by bankruptcy so they will be a permanent drain to personal
wealth indefinitely. I think we will see lasting effects as more and more
young people are unable to invest, save for retirement, and buy real estate
but there won't be a sudden shock to the economy like the mortgage bubble.

~~~
closetCS
I think we are seeing this drain already occuring actually. The popular news
sources are all reporting that millenials are struggling to buy homes and
build savings, though this may be due to low wages rather than debt servicing
costs

------
csense
I'm thinking the solution will be political, not economic.

Once there are enough people in enough pain that it turns them into single-
issue voters on this issue, someone will create taxpayer-funded relief.

If it's a Democratic-led solution, it'll probably be in the form of massively
expanded support for universities that eliminates the cost entirely, or
reduces it to what one might be able to reasonably earn/save at a minimum wage
job.

If it's a Republican-led solution, it'll probably be in the form of creating a
tax-deferred savings account for college, combined with subsidized work-study
program.

Both parties will probably agree to bail out degree holders who can't pay
after a certain number of years. They will probably also force cost cutting
reforms on schools.

~~~
rexpop
Debt should be forgiven, not relieved. We should not reward the debtors for
constructing this byzantine nightmare.

------
nixpulvis
I strongly believe that lower cost vocational education with group housing for
18-23 year olds is part of a solution to this problem.

You don't need the full college experience, but as the article mentions,
getting away from home is a part of it for most.

~~~
rglovejoy
> I strongly believe that lower cost vocational education with group housing
> for 18-23 year olds is part of a solution to this problem.

In other words, the Army.

~~~
smolder
I don't think a bigger military is what the US needs, unless we were
simultaneously shrinking the private sector money fire that the DoD provides
fuel for. On an individual level, freedom-impeding loan debt is still less of
a personal cost than what army recruits pay.

------
heyjudy
I have $9k in student loans that bankruptcy wouldn't set aside for a degree I
can't use (nothing to do with the degree, the defect is I) and Navient, Betsy
DeVos' company, can go straight to hell.

------
ep103
Aggregate student loan repayment should be capped as a percentage of yearly
income. This should have been included as part of the same legislation that
made student loans non-dischargable by bankruptcy. If you make 100k / year,
and the rate is set at 10% (random number), 10k is the maximum amount you pay
on your loans, regardless of the total amount you loans you have accrued.

Currently, there is no downward pressure on either universities or banking
institutions for tuition rates or amount of money lent in student aid, because
the government guarantees repayment. As a result, tuition rises every year far
faster than inflation, and banks are happy to join in the reaping of the
profits. Capping repayment rates would correct both of those issues, as the
ROI goes down significantly over a certain total amount lent, if indeed the
sum total can be repaid within a lifetime.

This would additionally ensure that while student loans are available to all
students, all parties involved (student, bank, university) have an interest in
ensuring the student will be able to pay back the loans, as opposed to now,
where two parties have an interest in loaning as much as possible, and one
child has conflicting interests.

This would additionally force some accountability on universities for their
programs. For-Profit institutions, which currently largely exist to gather
tuition money while providing no real educational value would suddenly become
unprofitable, and collapse. Simply put: if your graduating students make
little money after graduation, their rate of repayment will be significantly
smaller than an institution that provides actionable skills.

Similarly, this would incentivize universities to ensure that all of their
students are pursuing reasonable / coherent career paths. Currently,
universities have the dual incentives to ensure that their students that go on
to significant success and high paying industries do so (alumni donations),
but also to collect as much tuition/room/board etc as possible from their
existing students. This change would negate impact of the this second option.

This would allow students who go to expensive schools to go into lower paying
professions. This would allow students with the best and most expensive
education to pursue all types of jobs (for example, teaching), not just the
jobs best fit to pay down their debt.

This would cap how punitive the accrued debt can be to the graduating student,
and resolve the original issue mentioned in the article: student debt is now
so overwhelming, it is preventing a generation from entering financial
adulthood.

And lastly, this is just a guess and could be wrong, but I would paradoxically
expect that in addition to all of the above changes, capping repayment rates
would also result in lower amounts of student debt willingly taken on by
students. This is for the simple reason that it is easy to rationalize "I'll
be able to pay back {Insert_Any_Abstract_Dollar_Figure_Here} once I graduate
and get my dream job", but everyone intrinsically would understand: "If I take
out this loan, I'll be paying 10% of my income for the next 30 years"

~~~
jointpdf
This exists—income based repayment plans. There are different types [1], but
basically you pay a maximum 10% or 15% of your income, and the remaining
balance is discharged after 20 or 25 years. AFAIK, it’s open to everyone—but
you have to apply. It would probably help a lot of people avoid default if
everyone was auto-enrolled in IBR.

Also, there’s the public service loan forgiveness program (10 yrs public
service job -> discharged loan balance).

[1] [https://studentaid.ed.gov/sa/repay-
loans/understand/plans](https://studentaid.ed.gov/sa/repay-
loans/understand/plans)

~~~
ep103
Correct, unfortunately, this is only for federal loans. I'm advocating that
this program should be expanded to also apply to private loans, since those
are also not dischargable by bankruptcy.

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popcorn49
Infinitely scary.

