

Student Loans: Debt for Life - 001sky
http://www.businessweek.com/printer/articles/70218-student-loans-debt-for-life

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r4vik
Are student loans actually debt instruments any more?

They seem to resemble a tax.

First off you can't default on them. The companies providing them are
guaranteed by the government and have obligations to lent to pretty much
anyone.

You can defer paying them back if you don't have a job or you're not earning
enough.

Finally, they can't be inherited by your estate.

So if you never actually manage to pay them off they're effectively a graduate
tax.

~~~
Flimm
What tax would charge you $1400 a month if you're earning less than that? I'm
very unfamiliar with the American system for student loans, but your comment
sounds very different to the examples the article provided.

~~~
r4vik
They don't charge you $1400 a month if you're earning less than that, you can
defer. Your interest gets added to your principal in that circumstance. If you
model a tax as an infinitely large debt, this scenario makes the loan resemble
a tax more.

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randomdrake
The article aside, please take note of the infographics. They are among the
worst I've ever seen, particularly for a professional publication. I actually
stopped reading the article when I ran into them.

I only got to the first two, so I'll attack them directly:

1) Using all diagonal lines with no color and no difference in angle or
pattern, beyond a slight amount of thickness, makes it extremely difficult to
easily see the dividing lines. The text is tilted all sorts of different ways
making it very hard to digest. Why are there additional pie-looking things
stacked around with different squiggly lines? The effect is extremely jarring
and I wasn't able to garner any meaningful information from it.

2) Again, the text is slanted this way and that way. Why is 27% the largest
number? 40% appears the smallest. What does that even mean? The black points
seem to point to something, or maybe they don't?

When you're trying to convey information, this is a perfect example of how not
to do it.

~~~
tdicola
Came to complain about the same infographics too. I don't even understand why
they tried to make the charts look like a bad tetris game. Seems like a
perfect example of 'chartjunk'.

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gfodor
One of the bigger problems with student debt is the horrible interest rates
students are saddled with. Right now inflation is hovering around 1%, but yet
my fiance is saddled with 150k of medical school loans at 7%. At least if
student loans could be refinanced easily or had some regulations to pin their
interest rates at or below inflation in certain conditions, students could
tread water for a few years until their job prospects improved. Or, especially
if rates could be lowered below inflation over time, the loan could naturally
decrease in value as the likelihood of repayment goes down.

All-in-all the psychological pressures on the young that build after college
due to compounding interest on loans seems to be just as scary for the future
of our country than the absolute amount of the debt itself.

~~~
dman
I think we need to move the risk management away from the students and back to
the banks. Let students default under bankruptcy, let banks charge what they
want for the loans. Student defaults will keep the loans close to their fair
risk adjusted value.

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dchuk
The issue with student loans is not that they exist or that they have high
interest or any of that...it's that they're just given out to any and all
college students regardless of degree or career path. Just like a high school
teacher on a high school teacher's salary wouldn't be approved for a million
dollar loan to buy a million dollar house, a kid looking to go to Harvard to
major in Poetry shouldn't be approved for hundreds of thousands in loans.

Some degrees/careers are bad investment choices and some people shouldn't
receive loans for them.

~~~
dman
If students were allowed to default on the debt under bankruptcy there would
be a corrective feedback loop where lenders would be pricing the risk of
default in.

~~~
dchuk
I suppose, but at the end of the day it's still 17-18 year old kids getting
handed thousands of dollars to make a big (and most likely extremely
uninformed) career choice decision. I think there needs to be a lot more
education (irony) targeted at how to make a fiscally responsible degree choice
when entering college.

All of these kids majoring in creative writing and then protesting wall street
because they can't get a job to pay off their loans should garner no sympathy
as they made a bad fiscal decision that got them into that mess in the first
place. But since they were just kids when making the decision it's hard to
fault them entirely...I think the system itself needs to be doing a better job
telling people they're being dummies and helping them correct their course
before becoming a debt statistic.

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protomyth
Perhaps a student should go to a cheaper school if the profession they have
chosen isn't ever going to pay back the money they spent on college.

~~~
alanctgardner2
All of these articles are full of the same stories: 'I spent 100k on a degree
in sculpting, and now I owe 100k'. Does a hundred thousand dollar education in
sculpting really provide value to you?

I'm not saying people who are truly interested in art shouldn't go to school,
but pick a school whose costs are better aligned with your ability to pay, and
consider your ability to pay after graduation. Maybe apprenticeship /
community college / just starting a business is a better use of your time and
money.

~~~
Daniel_Newby
On the other hand, 18 year old wannabe sculptors are probably poor judges of
value. And why should they be? It's no crime for your talents and experience
to be outside business accounting.

The judge of value should be the underwriter. If Bank of America wants to buy
some goofy kid a $100,000 sculpting business, let them bear the risk if that
plan tanks. They can repo the chisels.

Edited for grammar.

~~~
jlgreco
This I think is a key insight. Young people tend to be idealistic, that isn't
going to change, and it _shouldn't_ even be changed. We need that idealism in
the world.

A viable and palatable solution should therefore address the people enabling
(or even encouraging) these idealistic young people to make poor decisions.

There is a lot of money in convincing people that getting degrees that they
won't be able to use is a good idea. A lot of money for everyone but the
student.

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harlowja
Stop getting degrees where-in you can't get a job that will pay the debt back.
Seems obvious to me.

~~~
btilly
The problem is that there are a lot of jobs, like lawyer, where people think
they will be able to pay it back and only discover years later that they
cannot.

Heck, my wife has an MD (from a top medical school, earned with honors) and a
wrist injury from residency that limited her ability to make money for years,
and will greatly lessen how much money she'll be able to make in the long run.
She'd be in a very tough spot if I wasn't paying her loans off for her.

You'd be hard-pressed to find a job that the public thinks is safer
financially than "doctor". Yet even that is not safe enough for the risk
structure that student loans impose.

Sure, I agree that there are lots of victims who deserve more than their fair
share of the blame. But don't make the leap from that to blaming the victim.
The risk structure that financial loans impose is guaranteed to result in many
victims who don't deserve particular blame. Bankruptcy exists for a reason,
and it is a travesty that corrupt politicians have been bribed into carving
out a targeted exemption for a powerful industry.

~~~
engrsrce
People who request and get loans are "victims" of "risk structure"? My parents
told me "this is what we can afford, the rest is on you. If you earn $xx,xxx
then xxx is about how much you can afford to pay per month." Seems to me that
a large part of the problem is that we're letting 18-22 yr olds make career
and financial decisions without adult mentor/parental input.

~~~
rayiner
The risk structure is a big part of it, yes.

Take law school for example. At a top school, you've got say a 70% chance at
getting a job at a big firm starting at $150k+, and a 30% chance of ending up
at a small firm making $45k. The ~$200k tuition for law school is, at least
purely financially, generally worth it for the people in the former group, and
not worth it for people in the latter group. The expected return, weighted by
that 70% risk factor is still positive. Purely objectively, for a risk-neutral
person it makes sense to take on the $200k of debt for a degree from a top
school.

But it really sucks for the people who aren't in that 30%. They didn't make an
irrational decision to attend law school, but they still got badly burned
because the process creates winners and losers in a very stark way.

The problem is the educational system. Schools should not be charging as much
as they do. The market is supposed to drive costs down, but the cost of a
legal education has skyrocketed since the 1950's despite being more or less
the same exact process it has been for 150 years. You have seen this across
the whole spectrum of degrees.

~~~
Evbn
Law school is a cartel controlled by the ABA. That is a special case.

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daledavies
Coming from the UK, $100k plus for a bachelor's degree seems ridiculously
high. Is this normal for a degree in the USA?

~~~
shoota
Definitely not. Most public schools have in state tuition of under $10,000 per
year with lots of financial aid for those in need.

~~~
droithomme
Where "financial aid" means "Loans you must pay back with interest which can
not be discharged in bankruptcy." An odd definition of "aid" to be sure.

Also readers should notice the parent post's qualifier "in state tuition".

~~~
colkassad
All of my financial aid was in the form of grants which I don't have to pay
back. However, I am the sole supporter of my family so I get a hefty Pell
Grant every semester.

~~~
droithomme
The maximum possible Pell grant right now, for an entire school year, is
$5500. That is $2250 per semester.

[https://bigfuture.collegeboard.org/pay-for-
college/scholarsh...](https://bigfuture.collegeboard.org/pay-for-
college/scholarships-and-grants/what-is-a-pell-grant)

The amount of the grant depends on the cost of tuition, so this only applies
to the most expensive schools.

Of course you already knew this. You say it is "hefty" and covers all of your
costs, do you go to a community college and live at home with your parents who
feed you? If not, please name your college and describe how you are able to
stretch $2250 to cover all your living expenses, tuition costs, fees and books
over a six month period. I am sincerely interested since you seem to have
brilliant financial management skills that others could benefit from learning.

~~~
protomyth
Not OP, but I too got Pell and OTHER grants (Pell isn't the only one). Many
schools (UND in my case), have institutional and national grants that are
tapped into for students.

Your final paragraph is pretty low class. colkassad did not say his/her only
grant was Pell, only that it was hefty.

~~~
droithomme
There's nothing low class in my post, I resent the implication.

The phenomenon of oppressive student debt in the US is well documented.
Articles about the problems with this situation often have posters claiming
that the problem does not exist, but with few particulars. I would like to
know more about the specifics of both your situations. Sharing such
information could help other students. Posting claims with no details helps no
one.

Being able to afford college on $2250 per six months is a remarkable
achievement and he should be proud of it, and willing to share exactly how he
did it with others so they can benefit as well.

~~~
protomyth
"do you go to a community college and live at home with your parents who feed
you?" and "since you seem to have brilliant financial management skills that
others could benefit from learning"

Those aren't exactly phrases that scream, "I want to learn". They do tend to
be read sarcastically and indicate a lack of belief.

The solution for me was to go to a state school with a good program and work
with a financial aide officer that knew what grants were available. I took out
some loans, but they were minimum and easy to pay back (more because I traded
work-study money for a loan). Many institutions have grants with their price
only being a thank you letter to the organization giving the grant.

I should also point out, I received no help from my high school counselor on
applying for financial aide or scholarships. He even cost me a $2,000 per year
scholarship . With that, I would have had no loans or work-study. So, if your
high school is not actually a hinderance, there are multiple sources of income
they can help you with.

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xiaoma
> _"The National Consumer Law Center, in a July report, said “pursuing the
> most vulnerable borrowers until they die” is inefficient and imposes
> “significant costs to taxpayers.” To help debtors avoid defaulting in the
> first place, the center advocates placing them automatically in repayment
> plans that make the payment a percentage of the borrower’s income rather
> than a certain dollar amount. Under this “income-based repayment,” which the
> Obama administration has pushed, any outstanding debt is forgiven after 20
> or 25 years."_

This sounds a lot like how it works in Australia now. Adding a minimum salary
cutoff below which the debt didn't need to be repaid would make it pretty much
the same.

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programminggeek
What is fascinating is just how much of the US economy is debt financed. Some
of the biggest industries - education, real estate, banking, construction,
retail (via credit cards) etc. are all basically financed by huge amounts of
debt taken on by either the government or individual citizens. So in effect,
the current economy is built on the future economy's ability to pay for
itself.

It seems to me if this trend isn't reversed, the "Great Recession" is bound to
keep happening simply because people can only borrow so much.

~~~
rayiner
It's the result of stability and growth. The country is so stable that people
feel comfortable making the long-term commitments that accompany debt. At the
same time, debt enables faster growth so long as there is room to grow. If you
think there is a market for trucks, it makes much more sense to take a loan to
build a truck factory, then pay it off with the sales into this new market,
than it does to just save up money until you can build the truck with cash.

It's when you run into instability (war) or limitations on growth that you
have to start deleveraging.

~~~
001sky
This would be a great theory, if the facts in anyway supported it. The
counter-examples in the data are not hidden, however: US government @ $1T per
year in defecit. Fed in third phase of QE (money printing). These policies are
meant to prevent debt write-offs (reductions in par value). And are a giant
subsidy to lenders at the expense of debtors and taxpayers. Business risk
currently has only orthogonal corrleation with debt pricing (or, by extension,
pricing any part of the capital structure...including equity). See for
example:

[http://dealbreaker.com/2012/08/lets-spot-a-high-yield-
bubble...](http://dealbreaker.com/2012/08/lets-spot-a-high-yield-bubble/)

tl;dr
[http://cdn.dealbreaker.com/uploads/2012/08/MattKing2-620x439...](http://cdn.dealbreaker.com/uploads/2012/08/MattKing2-620x439.png)

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salem
I find it insane that the interest rates are so high (capped at 8.5%) for a
loan that is next to impossible to avoid repaying, and is government
guaranteed.

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aleprok
I started collecting the past month debt from studying for the first time,
about 300 euro's per month for the next 2 years.

Though here in Finland student debt is not as big thing as it is in the US.

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joe_the_user
For those talking about "don't borrow if you can't pay":

Should a society allow a system where a person is allowed to gamble one of
their organs for a chance at a million dollars?

The argument against this extreme example would be: society has an interest in
keeping people from doing dumb things that gets them in over their heads
because one person being really screwed actually impacts the lives of others.
The same applies to student loans. Sure, only "dumb" people take out loans
without it being a good deal for them. But we have some interest in preventing
"dumb" people from screwing themselves up so much it starts to hurt us too.

~~~
stretchwithme
Private lenders don't loan money when the business plan makes no sense. When
the education won't increase a student's earning power enough to pay back the
money, a private lender is not likely to lend to them.

The government makes no such judgment when lending, for education, mortgages
or anything else it decides to "encourage".

And the result is oversupply and a drop in demand, followed by a long drought
in the production of the thing the government encourages. A bust.

Government is not smarter than the student. The student will at least learn
from his mistake.

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001sky
relevant: data on tuition inflaion. <http://project.wnyc.org/college-costs/>

