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The student loan bubble

[ 90 ] February 4, 2013 |

canary in a coal mine

Law schools are merely the place where the craziness of the system is most self-evident.

Comments (90)

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  1. DanMulligan says:

    Having been at ground zero in the home loan fiasco, I can only add:

    1. Why would you do any underwriting on a guaranteed loan?

    2. What is the value of a financial asset where the underlying borrower can never declare bankruptcy? Trust me, there will always be a market for the debt.

    3. You need to follow the securitization train.

    • Nathanael says:

      1. You’d do underwriting if the guarantor arranged to imprison or kill you for not doing underwriting. (Yes, this isn’t happening.)

      2. The value depends on how strong the private security force of the debt “owner” is. Debt slaves do tend to rebel. Violently.

      3. Oh yeah.

  2. UberMitch says:

    I graduated from law school in 2006 at age 25. my final loan isn’t scheduled to be paid off until 2039 when I will be 58 years old. I haz a sad.

  3. James Hare says:

    DanMulligan: So are you saying student loans are not a “bubble?” If so, I think you’re right. There may be some moral issues invovled in the current system, but there’s no real chance of investors losing great deals of money. Of all the hobbyhorses for liberal blogs to jump on, this is one of the most annoying. Here’s a hint — there’s plenty of people in this country who have it far worse than college students with onerous debt loads. You could do far more good by pushing for programs to pay off debt at payday lenders and other predatory lenders.

    • Anonymous says:

      An Autobiographical Play, by Anonymous

      ME: So I know I got this student loan but I can’t pay it. I don’t have any money.

      CITIBANK REP: You need to pay $X to bring your account current. Can you pay anything today? Are there any friends or relatives who can pay it?

      ME: No, and if I was going to ask them for money paying you would be far down the list of priorities. I’ve been disabled since last year and Social Security Disability is my only income. Could I get some sort of deferment? I *might* be able to start making payments in 3 years or so.

      CITIBANK REP: I can do 1 year max. Paperwork’s in the mail. Best fill it out quick because we’ll keep charging you.

      ME: God Bless America!

      • Sherm says:

        Doesn’t being on social security disability qualify you for forgiveness?

        • Anonymous says:

          Only for government loans. Since you brought that up I’d also like to mention that customer service agents working for the federal government are much more pleasant to deal with.

          • Linnaeus says:

            Yes. I’ve never had a problem working with the Dept. of Education folks regarding my student loans. They’ve been really good.

          • customer service agents working for the federal government are much more pleasant to deal with.

            But but but… That’s impossible! Free hand of the invisible market! Evil government workers!

            But slightly more seriously, can you imagine what kind of person you’d have to be to work in customer “service” at one of these loan places? It’d take a particularly hardened and/or twisted type of individual to enjoy telling people all day long that they didn’t give a shit how fucked up their lives are, they want their money now thankyouverymuch.

            But I guess there’s a good spot for loan sharks that want to go legit and stop breaking kneecaps. They even already know the business.

            • Speak Truth says:

              The part you left out is the part where you agreed to the terms. Unless you are a retard, or for some other reason was not legally competent when you agreed to the terms of the contract, why shouldn’t those you contracted with expect you to hold up your end?

              And why do you *now* believe it’s such a hardship to expect you do do your part?

              I took out student loans. I paid them back.
              I guess that makes me the sucker.

              • James Hare says:

                That’s one part that bothers me a great deal. I realized my student loan debt was becoming more than I could afford to pay back in a reasonable amount of time so I left college. I didn’t get a degree and I’ll always hate that, but I realized I was on the hook for my loans and had to make some hard choices. I realized that I was an adult and didn’t expect anyone to save me from my poor judgment.

                When I hear a 20-something complaining about student loan debt I just want to punch them. Nobody is putting a gun to their head and demanding they take out too much debt — they made a choice and are now trying to use the hardship it causes them to demand a mulligan. What’s going to be done to deal with the hardships I have experienced? Should I demand that the government pay for the 1 course I need to finish my degree?

                • Linnaeus says:

                  Nobody is putting a gun to their head and demanding they take out too much debt…

                  True, there’s no explicit coercion or anything like that, but these days, a college degree is more expected in order for one to get gainful employment. Back when my father started working in the mid-1960s, one could still get a decent job (like he did) with out a college degree (and he didn’t have one). No one’s hiring for the job my dad did for 40 years (at the place he did). So I can understand why someone going to college these days feels between a rock and a hard place: complete college in debt, or leave and take your chances that you’ll be deemed less qualified for a decent job.

                • Nathanael says:

                  James, bankruptcy exists for a reason.

                  Making student loans “not dischargeable in bankruptcy” is obscene, and brings us back to the days of debt slavery. There’s supposed to be some risk to lending, including the risk that the borrower will have unfortunate accidents (the leading cause of bankruptcy is medical problems).

                  If there’s no risk, there’s no excuse for charging interest above T-bill rates.

              • We allow bankruptcy in this country because sometimes shit just happens. That the same shit that can put you in a position to default on the car loan you agreed to is somehow inapplicable to the student loan you agreed to is fucking ridiculous.

                I agree people should pay it back. Sometimes you really, truly, can’t. Those people are completely screwed. Glad to know you think that’s cool — you have all the qualifications needed to be a customer service agent at one of these places.

    • Nathanael says:

      James: debts which CANNOT be repaid, WILL NOT be repaid.

      The default rate on student loans is going to skyrocket. This is actually already starting.

  4. Loud Liberal says:

    I think law school is the place where the craziness of the system is the least self evident. Courtrooms, legislative/congressional committees, captured regulatory agencies, those are places where the craziness is turned up a notch or three.

  5. shah8 says:

    Some people apparently think that loans that can’t get paid, still will be paid–somehow.

    • BigHank53 says:

      After the non-dischargable debt is auctioned off to the highest bidder, the Ownership Society will be able to offer a selection of indentured service contracts to the indebted graduates. Alternatively, they can sell their organs. Through the MorganStanleySachs Equitable Health Futures Exchange, naturally. Fees are quite reasonable.

      • shah8 says:

        I kinda think they will try that. However, I think what would happen would be…

        • Nathanael says:

          Look at the public mood. People are cheering Christopher Dorner, because the rest of the LAPD are callous killers who shot innocent *newspaper delivery women*.

          There’s only so far you can push people — especially educated people, who have learned of a *lot* of options.

          Creating an underclass of highly educated unemployed people in debt slavery is about the stupidest possible thing the elites could ever have done, if the elites wanted to remain in power.

  6. Winchester says:

    I don’t know whether the laugh, cry, or wish for a disaster to destroy the nefarious clowns involved in this assault on young people.

    Nearly all student loans — over 90 percent of them last year — are made directly by the State, which asks little about borrowers’ ability to repay, or about what kind of education they intend to pursue.

    The State doesn’t care if one can pay. All the State cares about is making sure that the banks and colleges get to screw one, and — if they can manage to get one to “consent” for that screwing, then so much the better.

    This student loan bubble will be THE next bubble to bust, and the worst part of it is that it was targeted directly at inexperienced people of barely legal age. It has screwed ‘em young adults both through exploitive terms (cf. the no ability to discharge that debt via bankruptcy) and the feedback mechanism into college pricing.

    • Sherm says:

      But what will the burst of this bubble look like and what will be the short-term and long-term consequences?

      • Winchester says:

        I can’t say, but I have been hedging my wealth against further devaluation of the Dollar for 3 three years now: physical gold and silver.

        In 2008, the governments of the Western world bailed out the banks (except Iceland).

        The student loan bubble busting means the governments busting; most of them student loans in the US are backed by the US government.

        The biggest of all bubbles is the government bubble now.

        And no one will bail out the government.

        • Murc says:

          I can’t say, but I have been hedging my wealth against further devaluation of the Dollar

          Dammit, and you were halfway sane in this thread to. WHAT further devaluation?

          The dollar loses value every year due to inflation, which has been running at incredibly low rates over the past five or so years. In fact, if we end up in another financial crisis or other disaster, the economy will contract again, which tends to make dollars worth MORE, not less.

          Unless you meant the devaluation of the dollar on international markets. Which I don’t know how we stack up against the other currencies currently… but I also don’t know why you’d care.

          • Winchester says:

            I care because I trade a lot and I am exposed to the US dollar, and seek to hedge that exposure.

            Suppose you are a Chinese manufacturer. You sell goods to the United States. They pay you in dollars and you take those dollars back to China. When you exchange those dollars into Yuans (¥), that’s going to drive UP the value of the Yuan. But instead of that happening, the value of the Yuan stays the SAME… You do exchange those dollars for Yuans, but the Chinese central bank prints Yuans TO BUY those dollars, so as to keep their currency where it is. By doing this however, China is importing INFLATION from abroad.

            The USA are also doing the same thing. They are cheapening the Dollar to increase exports, by making export prices less expensive. The problem here is that a country like China or the US does not just export, it also IMPORTS. The USA for instance import more than it exports. So if the Federal Reserve cheapens the Dollar, the price of those imports is going to go UP, which will bring inflation into the United States from abroad. The American people will be paying much more for iPads and iPhones and flat-screen TVs and French wine and vacations in Italy and clothes made in Korea. It brings inflation into a country, and that’s why a currency war is always a losing game.

            And when you devaluate your currency that way, it generates retaliation from other countries. China reacted to the devaluation of the Dollar by trashing the Yuan in return. (Weaker countries who can not do that develop measures of capital control, such as freezing the assets of foreign investors for extended periods, which can trigger trade wars.)

            Growth (gross domestic product) = consumption + investment + government spending + net exports

            There is too much debt around the world now: sovereign debt, corporate debt, consumer debt, individual debt, student loans, car loans, etc. Too much debt that can’t be paid, and won’t EVER be paid.

            Individuals can default, corporations can go bankrupt, but governments usually don’t. The US government is not going to default on its $16 trillion debt. It will just print the money, and pay the debt with severely devalued, virtually worthless “money.” Governments who print their own currency don’t have to default. They can just inflate their way out of their debt.

            The US governement and the Federal Reserve want higher inflation in the USA because the dominant force in the global economy nowadays is deflation. Widespread debts lead to generalized deflation.

            So to fight deflation and to boost exports, the USA began in 2009 to “print” a lot of money. A LOT. By “printing money,” we mean that the Federal Reserve buys Treasury bonds from the market in exchange of dollars. The Fed credits bank accounts electronically. We are talking about computerized entries into the Federal Reserve’s ledger. The Fed literally types in an addition of X billion or Y trillion dollars into its balance sheet, creating dollars out of thin air that exist as zeroes and ones on a computer server, and then use those new dollars to purchase US Treasury bonds. In this way, by INFLATING the supply of dollars, the Fed devaluates the Dollar. It has debased the US dollar by roughly one half the total GDP in less than four years.

            But why are not the prices out of control in the USA yet, despite the Fed having increased the money supply by several trillion dollars?

            First, a lot of inflation (US dollars) went to China.

            Second, the VELOCITY of money is very low now. Velocity is the turnover of money, how quickly money turns over: do I take it and spend it, or do I stick it in the bank.

            The Fed can increase or decrease the money supply, but it can not control how it is being spent or saved.

            Well, if I take my friends out to dinner and you know, the restaurant owner uses the money to buy some new equipment or whatever, that money starts to have velocity, which means it’s getting used; but if I take it and stick it in the bank, or if I take it and buy gold, that money has a velocity of zero because it’s not being used.

            The Fed can not control how money is being spent. It’s behavioral, it depends on how I feel and how you feel and how everybody feels. And frozen money does not affect prices.

            The government has to affect behavior in order to control the velocity of money, which means they have to make the people worry about inflation, or scare you into spending your money. They think that by holding “interest rates” low, they can encourage inflation. And they bet on the people, spooked by inflation, will get out and buy cars or houses before the prices go up. The US government also tries to increase “lending” because it wants to get inflation ABOVE the interest rates. If borrowing rates are two percent and inflation is four percent, that’s a NEGATIVE interest rate. Which means that you can pay back the loan in cheaper money. So it’s actually not only a low interest rate, it’s FREE MONEY. The bank is PAYING you to borrow because you can pay them back in cheaper dollars, in dollars of lesser purchasing power.

            And that is precicely what is happening. The US and many other countries want to do pay back their debt in a severely devalued currency. It’s called “monetizing” the debt.

            They’re doing so by cutting interest rates to near zero, and by printing money. Printing money de facto creates negative interest rates because the value of the dollar is eroded by this inflation of the money supply.

            • Johnny Sack says:

              Teal dear. Condense, friendo

            • Murc says:

              I’m not sure that dollar and yuan are supposed to be capitalized like that.

              Devaluates is not a word.

              If you do a lot of business that requires dealing internationally, I can see why you’d be concerned about the value of the U.S dollar as it relates to other currencies. I don’t get what that’d have to do with your personal finances, though. The only reason I could see to stock up on precious metals is if you can get really good prices and it’s a long-term investment. As a hedge against inflation, that seems like gambling on the fact we’ll turn into Germany into the 1920s.

              Also, I don’t think the Federal Reserve is trying to encourage inflation.

              I mean, I wish. I’d love some inflation. I could do with three or four years at five percent. But the Feds seem to be crazy paranoid about that.

              • Winchester says:

                If you do a lot of business that requires dealing internationally, I can see why you’d be concerned about the value of the U.S dollar as it relates to other currencies. I don’t get what that’d have to do with your personal finances, though. The only reason I could see to stock up on precious metals is if you can get really good prices and it’s a long-term investment.

                Gold is not an investment; it’s sterile; gold is money; it’s the currency of all currencies. That’s why gold is needed to bootstrap a new currency, a new monetary system, a new national banking system.

                Since we are living in a time of massive, systemic corruption; with a global deflation; whilst state governments publicly, overtly aim at inflating their own money supply, thus creating monetary inflation — gold is a proper STORE OF VALUE. Ain’t the only one; anything that is physical, and receals actual value: farmland, cattle, guns, ammo, grains, etc.

                The Dollar is losing value against physical commodities since 2000 in a DRAMATIC manner. Not only against gold. Watch the prices of corn and of cattle.

                It’s the not that gold is becoming more expensive; it’s the purchasing power of the Dollar that is devolving.

                An ounce of gold buys you now the same quantity of oil or corn than it did 50 years ago.

                Furthermore, we’re seeing the disintegration of the financial and monetary system before our eyes. There’s NO ACTUAL REGULATORY OVERSIGHT OF THE FINANCIAL INDUSTRY anymore.

                Gold does not require a third party. You own it physically. It’s pretty safe when there’s hardly any faith and credit within the system anymore.

                Google “rehypothecation.” The banks are all doing this now.

                Gold is just a very compact storage of wealth.

                I don’t think the Federal Reserve is trying to encourage inflation.

                Google “nominal GDP targeting”.

                • wengler says:

                  Gold…something, something…Gold.

                  I’m pretty sure I could’ve heard this same speech back in the 1890s.

                  I will simply respond and tell you that gold has no fixed value. It is simply a commonly accepted trade currency. In a famine, you can not eat it, in a war you can not shoot it. You cannot put it in the ground and grow a gold tree.

                  It is like the US dollar, just another means to represent wealth.

                • Winchester says:

                  It is like the US dollar, just another means to represent wealth.

                  No. Gold does not represent; it is wealth IN ITSELF. It is self-referential. Some kind of performative value.

                • Murc says:

                  Google “nominal GDP targeting”.

                  I did this. And lo and behold, a whole lot of stories about how the inflation hawks at the fed are terrified of inflation rising above 2%.

                  Gold does not represent; it is wealth IN ITSELF. It is self-referential. Some kind of performative value.

                  I do not think gold works that way.

                  It’s a very malleable, very soft metal. It’s pretty, and it’s semi-rare, which made it a good currency back in the day. But why does gold represent wealth more than, say, salt does? A number of societies used salt as money and it worked pretty well. And it’s actually useful, which gold really isn’t.

                  I don’t think the dollar can lose value against physical commodities. Physical commodities can get more expensive, but that’s not entirely the same thing.

                • Lurker says:

                  This opinion has two deficiencies. One is the fact that gold is not “the” intrinsic measure of value. In fact, Western world has mostly used silver as bullion metal. Pure gold standard was an important, but ultimately short-lived phase of monetary history. Its importance stems from the fact that gold standard was used in the era when
                  a) Great Britain was the most important superpower.
                  b) US became a superpower.

                  On the other hand, many countries have had successful economic development without gold standard. As an example, Sweden gave up gold standard in 1710s and did not return to bullion standard until 1770s. And during that time, they had the most democratic form of government of the Western world, and were pretty successful economically.

                  The second, more important point is that if you were right, and gold were intrinsically important for an economic system to re-start, you would be sure to lose that gold in that hypothetical re-start. Look at 1933: FDR confiscated all bullion in the US. After that, even those who were able to retain their bullion hoards were unable to trade in gold. No one would accept it as payment, as holding gold bullion was illegal. You could as well stash crack as a hedge against inflation.

                • Malaclypse says:

                  The Dollar is losing value against physical commodities since 2000 in a DRAMATIC manner. Not only against gold.

                  That’s why property values have skyrocketed since 2007. Because nothing holds value like land.

                • Erich von Däniken says:

                  Winchester’s ideas intriguing; newsletter?

                  We know what he thinks of gold, guns, meta-tribes, the shape of male and female bodies and the homosexualists. But what does he think of the following?

                  Negroes
                  Tara Lipinski
                  The Chariots of the Gods
                  Jason Statham
                  Those that from afar look like flies
                  Fluoridation of children’s ice cream
                  Jack Morris

                • I don’t think an ounce of gold buys the same amount of wheat, or oil or whatever as it did 50 years ago– that seems to run counter to the way that money works. Do you have authority for that?

                • Linnaeus says:

                  A number of societies used salt as money and it worked pretty well. And it’s actually useful, which gold really isn’t.

                  1. The folks I study used beaver pelts (“made beaver”) to represent value. Gold was pretty hard to come by in the northern two-thirds of North America.

                  2. There’s a reason that Thomas More, in Utopia, made gold the metal of chamber pots and chains.

                • Lurker says:

                  The nominal price of wheat (earthpolicy.org) in 1960 was 1.58 $/bushel and of oil (inflationdata.org, Illiois Crude), 2.91 $/bbl. In 1960, gold was 35.27 $/oz (nma.org).

                  Currently (data from this or last week), wheat is at 9.02 $/bushel, oil at 115 $/barrel and gold at 1669.4 $/oz. (All data from indexmundi.com)

                  Thus, in 1960, an ounce of gold bought some 22 bushels of wheat or 12 barrels of oil. Now, it buys 185 bushels of wheat or 15 barrels of oil. For me, this tells that wheat is going to get more expensive, not gold.

                • Winchester says:

                  re: Nominal GDP targeting

                  Nominal GDP is the inflation rate plus inflation-adjusted GDP. It refers to the value (in dollar) of the production of an economy; it signals a nation’s ability to pay off its debt.

                  When you don’t have much GDP growth, you will not be able to pay off the national debt. The Fed said clearly it will encourage higher inflation so as to boost nominal GDP, thus throwing in the towel on inflation. Fed vice-chair Janet Yellen openly supports this move.

                  Inflation is low now because a) it’s in China, and because b) the velocity of money is pretty low. But there’s no way to predict any change regarding that velocity; and China is pretty fed up with American monetary policy; China has actually declared a currency war in 2010.

                • Sherm says:

                  And this all started with a simple question regarding the consequences of the bursting of the student loan bubble.

                  Anyone else care to take a shot at it?

                • James Hare says:

                  Should the scenario you’re describing come about, you’ll find that gold makes poor bullets. I’ve never understood the idea of gold as some currency of last resort — you would have to get someone to trade valuable things (food/weapons/tools) for a substance that they can’t make other valuable things out of and can’t easily determine is genuine.

                  As to “nominal GDP targeting” — that’s a great idea, but it’s not Fed policy. They’ve announced that they will continue their extraordinary measures until an economic recovery is well underway, but they have not announced any commitment to nominal GDP targeting.

                  TL:DR; There is nothing special about gold. It’s a soft shiny yellow metal. It is poorly-suited for tool-making. In a crisis, gold will not be especially useful.

                • Nathanael says:

                  I decided that chocolate was a good hard investment — one which would retain value.

                  There’s actually a lot of drugs which qualify, but I dislike the rest of them.

        • Josh G. says:

          Gold is way overpriced.

          If you’re really worried about inflation (though there’s no reason to be at this time), and you insist on investing in a hard commodity rather than stocks or some other financial instrument, then you’d be better off stockpiling sacks of nickels. Seriously. The bullion value of a nickel has been hovering above 5 cents for some time, and the downside is obviously limited since they will always be worth at least face value.

      • Nathanael says:

        “But what will the burst of this bubble look like and what will be the short-term and long-term consequences?”

        Pretty complicated, since it’s going to be happening simultaneously with a lot of other institutional collapse and change.

        My bet is on popular revolution. What comes after that, I have no idea.

        • Nathanael says:

          To try to answer Sherm’s question:

          - now that the student loans are being concentrated in the government, there is going to be little or no reaction on the financial market end when the bubble collapses; a few more firms will go bust, nobody will care

          - the government can eat the losses, obviously, since it can print money

          - however, the colleges and universities can’t. People will stop going to college due to the danger of debt slavery, and as enrollments drop, colleges will either have to find private endowments, or shut down.

          Colleges are already savaging teacher pay. They will never agree to cut administrator pay (’cause it’s the crooked administrators who make the decisions). The money wasted on constructing buildings is sunk and can’t be recovered. It’s possible that some state or local governments will decide to start funding colleges again, like California did back in the 50s and 60s. Otherwise, we’ll just see a lot of colleges shrinking and shutting down.

          - The large numbers of highly-educated students who are unemployed or working minimum wage while in debt slavery will not tolerate the situation forever. There aren’t enough slots in the “Public Service Loan Forgivement Program” to account for all of them. First, large numbers will start working only “off the books” or “under the table”, with predictable results for the government: vanishing tax collections, inability to enforce working conditions law, and a culture of “no talking to the man”.

          Those who are unable to work for medical reasons, but don’t qualify for SSDI, will probably not be major revolutionaries (medical reasons!). Many of the others probably will, eventually, get sick of the off-the-books life, and start asking “Why do we have this government at all? It never did anything for me and I have to hide from it all the time.” At that point, they’ll hook up with the other disaffected groups. Result: revolution.

          The best outcome is that the revolution is simply a peaceful ballot-box revolution where (say) the Socialist Workers Party or Green Party gets control of Congress and the Presidency. Given our sclerotic and obstructive election “system”, with a malapportioned Senate, a gerrymandered House, Duverger’s Law, the Electoral College, etc., this unfortunately seems unlikely.

          • Nathanael says:

            There’s a couple of other possible outcomes, mostly involving the intervention of powerful corporate execs at places like Google. None of them results in the survival of the national political system as we know it.

  7. Orpho says:

    The soft forgiveness that’s available to folks with student loan debt, if they can manage to land a job, is to work at a non-profit or in a government job on account of the Public Service Loan Forgivement Program. 10 years of income-adjusted payments and the rest of your loan/s are forgiven. Of course, I do believe that means the federal government is picking up the tab on the rest of those loans – but, “thanks” to Bush Jr, the loans are currently locked at 6-7%. It won’t cover the amount forgiven if you’ve racked up $100k+ and are making $20k/year for a monthly payment of, say, $200, so it’s still a giant systemic problem of government-subsidized education funneled straight into the pockets of gems like John O’Brien.

    I think that could count as a circumstance that creates a bubble, no?

    • Pestilence says:

      It’s only a bubble if it can burst, which I can’t quite see happening. Otherwise its just an enormous, endemic financial problem creating a massive drag on society & long term wealth creation.

      • fledermaus says:

        Precisely. It’s actually worse than a bubble because it has the potential to take money out of the economy and depress spending for decades.

        • Speak Truth says:

          Just think of this as a franchise tax for being educated. As an educated person, you will make more money…and as good progressives, you want those who make more money to pay more in taxes, don’t you?

          Enjoy!

          • The Dark Avenger says:

            It’s like insurance, would you expect somebody who owns a 30K car to pay the same amount of insurance on a 80K car?

            But, like a good conservative, you’re probably happy that most of the recovery from the housing bubble has benefited the 1% instead of the 47% of ‘takers’, correct?

          • Nathanael says:

            Except that the fact is that educated people do not necessarily make more money. Student loans hurt the people who don’t get jobs, or who get poorly paying jobs, thanks to our crappy economy-for-the-1%.

  8. Winchester says:

    This guy gets it:

    Was college worth it? A huge part of the problem relates to federal financial-aid programs. Annual student loans, Pell Grants, tax credits and other federal assistance totaled some $169 billion a year in 2010-11 — more than 1 percent of national output. These programs are based on two erroneous premises: that almost everyone needs higher education for vocational success, and that they reduce student costs.

    ….

    Fourth, the Free Application for Federal Student Aid form, associated with these programs, aside from being unbearably complex, gives colleges private information about family finances that allows them to gouge students more.

    – Richard Vedder

    http://www.bloomberg.com/news/2012-06-17/end-u-s-student-loans-don-t-make-them-cheaper.html

    • Chatham says:

      Yeah, the money should be going to affordable public colleges, not subsidizing overpriced private colleges.

      • Paula says:

        If you are applying through the FAFSA, your financial aid eligibility is the same regardless of whether you go to a public or private college.

        Students of private colleges can graduate with the same or maybe even less debt than public university students because there’s a lot more of the institution’s own money that can go into scholarships and grants.

        Also, public universities supposedly charge lower tuition for in-state students, but that doesn’t mean much if you don’t get enough non-loan aid or if you end up staying longer, which is the case for a lot of people who can’t get into their grad requirement classes on time.

        Not everyone has to go the straight four years in a college/university; community college is a great idea for people who need to work/save money/don’t know what major they want yet to get basic requirements out of the way. But the idea that public schools are so much cheaper than private schools is erroneous given than public institutions are no longer funded the way they used to be.

        • James Hare says:

          I went to a public school and one reason I couldn’t finish my degree was a required course that I could never get registered for. The course was offered once a year and had 35 seats. In the 4 years I was in school the senior class was never less than 35 people. The course was open to juniors and seniors so it filled up within the first few minutes of class registration. Even worse it was offered in the spring so taking it would have required either staying an extra semester where I would have no courses to take OR leaving school and returning for a 5 month period. Neither was reasonable. Folks used to laugh about the “5 year plan;” however, the department basically decided that some folks would be forced to attend school for 5 years because they refused to open enough seats in a required course.

          • Nathanael says:

            It took me a while to figure out how to deal with crap like that. First rule: the official registration system is not official. You find the teacher and get them to let you in. If that doesn’t work, you find the department chair and get them to let you in. If that doesn’t work, you find the registrar and get them to let you in. If that doesn’t work, the Dean. After that, you start pulling strings; if that doesn’t work, you go to the student newspaper and start raising a ruckus. (You do this all BEFORE official registration opens.)

            Yeah, nobody should have to do that. This is, however, the way the world works. Most systems are corrupt and it’s worth knowing how to deal with it.

            • Nathanael says:

              Another alternative: if you still haven’t gotten in, you show up in class every day anyway and do all the work. Best case, the professor is impressed by your persistence; worst case, they arrest you. In that case, you’re probably quite capable of creating a student movement sufficient to embarrass the administration.

              As you can see, I tend to relish escalation. I know most people don’t.

    • Pinko Punko says:

      Yes, Richard Vedder is not a conservative think tank hack or anything. Wait, what?

      • Tracy says:

        Vedder is also the brains behind the Center for College Affordability and Productivity, whose report Mr. Campos cites in his Salon column.

      • Paula says:

        You know, I haven’t read Vedder before and don’t want to assume anything just because of a comment like this, but it sure reads like he is.

        All those food service workers and truck drivers with *gasp* a COLLEGE EDUCATION they didn’t need!! As if food service workers and truck drivers wouldn’t benefit from a college level English class on other levels. I suppose that shit should be preserved for the elite who can truly appreciate it.

        College isn’t purely utilitarian for everyone. While in many cases, people just go in for the credential, there are another set of people for whom it’s still a gateway into a different social class, which affects general job and life expectations in ways beyond income. The Washington Monthly, for ex, collects stats of schools stat provide a picture of how they affect class mobility.

        Kids should have the ability to opt out if more school isn’t for them. We should stop focusing on the four year uni as the standard credential and promote trade and vocational programs again. But the implication that only rich people’s kids should consider the four year college is dangerously close to implying that only rich people’s kids could benefit from a well-rounded liberal arts education.

  9. Winchester says:

    The current system:

    (1) drives up cost;
    (2) has NO accountability whatsoever;
    (3) treats student loan debt as akin to child support (by making it non-dischargable in bankruptcy); and
    (4) it’s none of a college’s business what the parent of an student makes or has, since the student is an ADULT.

    And here’s why these elements drive up cost and destroy the value of the education provided:

    We end up having young adults who are very ill-suited to college in college. This situation winds up driving down expected competence to graduate as the market is flooded with so-called “graduates” for jobs where there is NO DEMAND and hobble those who do graduate compared to graduates from places like India who comes here on H1(b)s with no debt & superior skills…

    They then take the jobs that our graduates can not afford to take since our graduates are saddled with debt. And because the more supply there is of a given thing the lower the price, as you flood the market with college graduates, the offered salaries go DOWN.

    Then our graduates don’t have the income to both pay the loans and do things like buying a house. So the impact spreads through the entire economy.

    • LawSpider says:

      Then our graduates don’t have the income to both pay the loans and do things like buying a house. So the impact spreads through the entire economy.

      This. In another 7-10 years, when the remaining baby boomers are all ready to sell their houses, they will turn around and notice that relatively few middle-class people between 25-35 can afford their house at their original price + inflation (much less original price + expected investment markup). Because if one is paying even $500-700 post-tax towards loans each month, there is little left over to save for a down payment and deal with repairs. And housing demand, and prices, are going to plummet.

      I know a 36-year-old surgeon 3 years out of residency in a “wheelbarrow specialty” (in which you supposedly need a wheelbarrow to carry all of the cash you make). By the standards of 15 years ago, he should already be living in a 4-bed/4-bath/yard/garage suburban luxury. But he has ~$200K in debt, so their house is 3-bed/1.5 bath and seriously modest. And they have no plans to upgrade in the next 3-4 years, despite 2 kids. He’ll certainly do fine in life — no need to cry for him — but these loans are creating a different future.

      • Loud Liberal says:

        Okay, I’m selling NOW!

      • Nathanael says:

        The housing market is already dead for several other reasons. It’s become clear that a mortgage is very dangerous so people are getting very conservative about them. Something like a quarter of the house titles in the country are clouded by MERS, and nobody in their right mind will buy the clouded titles; they’re being snapped up by bottom feeders.

        Cash purchasers are king, as are (on the sell side) people who own their houses free and clear, and can prove it.

  10. UserGoogol says:

    Stuff like Income Based Repayment seems like it really solves this problem. (Although it needs to be expanded more.) If people can’t pay back their debt, then they don’t, the debt is forgiven, and no harm is done. And unlike the housing bubble, ultimately the only party which depends on the debt being paid back is the Federal government itself, and they can easily accept rather massive losses both because of their size and the whole control of the currency thing.

    • Julian says:

      If people can’t pay back their debt, then they don’t, the debt is forgiven, and no harm is done.

      citation needed

      • UserGoogol says:

        Well, the program would need to expanded more for my statement to be strictly speaking true, because as of right now you do need to pay taxes on the forgiven debt. And I guess whether the formula for “affordable payments” is actually affordable enough is also relevant. But at least if you don’t have an income, you don’t have to pay.

        • UserGoogol says:

          But yeah it’s not really there yet. If they made the payment system phase in more gradually that would be good. The ideal of course would be to just have free college and have paying for college be spread out among the general population paying taxes, but in the sense that IBR is basically a tax on having gone to college, making that “tax” more progressive would be very helpful.

          But still, the basic principle that if you make below a certain amount you never have to pay anything back is a very encouraging one. And more generally, I’m definitely optimistic that things are moving in the right direction.

  11. John says:

    The student loan system is a disaster that needs to be fixed, but calling it “the next housing bubble” seems self-evidently wrong. Are student loans being securitized? Would a sudden collapse in the student loan industry lead to a collapse of the entire economy? Is a sudden collapse of the student loan industry even really possible? Just because something is bad does not mean it necessarily makes sense to compare it to another bad thing, and in this case the linked article doesn’t even begin to make the case that student loans are “the next housing bubble.”

    • Winchester says:

      You are right.

      The student loan bubble, however, is a sign pointing to this reality: there is too much debt in the system, too much debt around the world now: sovereign debt, corporate debt, consumer debt, individual debt, student loans, car loans, etc. Too much debt that can’t be paid, and will NEVER be paid.

      In this situation, each government wants to pay back its own debt in a severely devalued currency. They’re doing so by cutting interest rates to near zero, and by printing money, by inflating the money supply — which is akin to STEAL from the users of their money.

      If you put your money in a bank at zero or one percent interest rate, and you get 3, 4, 5 percent inflation, the value of your money is going to be cut in half in 15 years.

      Labourers and pensionners are suffering a lot from it; anybody who can’t hedge against this inflation of the money supply by owning physical stores of value — from artworks to cattle to gold — will see their wealth vanishing as the purchasing of their paper-money is disappearing.

      • Murc says:

        Labourers and pensionners are suffering a lot from it

        Laborers actually tend to do pretty well in periods of moderate inflation, dude.

        Also, don’t you have to provide some evidence of high inflation being a risk? Inflation has been anemic for the past… well, I don’t even want to think of the last time it was a thing. The 90s, maybe? When Greenspan freaked out because we got up near 3%?

        • Winchester says:

          I’ve already explained it: in the actual context of global deflation, where there is way too much debt into the system, the temptation for the State to steal growth from its trading partners by devaluing its own currency becomes overwhelming: it makes a State’s productions less expensive to foreign buyers. It increases growth by boosting exports.

          Consumption confidence is low and folks are indebted. Investment is anemic. The State spends borrowed money. So hope relies on exportation. How to boost exports? By trashing your currency, bu devaluating it.

          By way of INFLATION of the money supply.

          I’m talking about monetary inflation (inflation of the money supply) resulting from a strategy of stealing growth from other nations by way of devaluating a currency.

      • Nathanael says:

        I wish governments were printing money to inflate away the debt.

        Sadly, governments are mailing money to the 0.1%, while refusing to give money to anyone else. This does NOT inflate away the debt. Only by giving the money to the 99% can you inflate away the debt.

  12. David says:

    Paul:

    In the Salon article you link to you use an example of an American University student borrowing the full $70,000/year. Is that common? My niece, a good but not great student who graduated from a large public university and did 2 years in the Peace Corps, is applying to law school right now and she has received what seem to me to be very generous offers of merit scholarships. George Washington U offered half (~$35,000), then I think she can get financial aid and student loans on top of that, so I’m just wondering if many students without parental support really pay full sticker price for law school.

    Thanks.

    David

    • John says:

      Student loans are the borrowing that Paul is talking about, so getting student loans on top of the scholarship is the same as borrowing on top of the scholarship. Or am I missing something?

    • Paul Campos says:

      Two-thirds of law students at American last year paid sticker tuition. Almost all the rest paid more than half tuition.

      • Anonymous says:

        …which is therefore quite unlike tuition for college students.

        • Tracy says:

          “For the average full-time student, net tuition – which subtracts grants and tax-based aid – is less than half of the published price at private nonprofit four-year schools and less than a third of the published price at the typical public four-year institution.”

          • Nathanael says:

            Given that the published price at private nonprofit four-year schools was running over $20K/year FIFTEEN YEARS AGO and has gone UP since then, this isn’t very helpful.

            “Less than half the published price” is still enormous.

            Sure, it’s not as unaffordable as private medical insurance (running at $15K/year for one person in NY State). Incidentally, Obamacare will probably not help at all with that. NY already had pretty much all the regulations in Obamacare, and the mandate won’t apply to anyone because premiums are so high.

            When people in states like NY and MA realize, in 2014, that Obamacare didn’t help at all, the political landscape will become very interesting. In a bad way.

  13. [...] Program That Pays Down Your Student LoansConsolidating your student loans should be a top priorityThe student loan bubble – Lawyers, Guns & Money : Lawyers, Guns & Money .recentcomments a{display:inline !important;padding:0 !important;margin:0 !important;} var [...]

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