The Government Profits from Student Debt Defaults

by on August 21, 2013 at 7:27 am in Economics, Education, Uncategorized | Permalink

Matt Taibbi’s expose of Federal educational loan programs is over-the-top and not balanced but it does have some shockers. Most importantly, according to Taibbi, the Federal government makes a profit on student defaults.

While it’s not commonly discussed on the Hill, the government actually stands to make an enormous profit on the president’s new federal student-loan system, an estimated $184 billion over 10 years, a boondoggle paid for by hyperinflated tuition costs and fueled by a government-sponsored predatory-lending program that makes even the most ruthless private credit-card company seem like a “Save the Panda” charity.

…In 2010, for instance, the Obama White House projected the default recovery rate for all forms of federal Stafford loans (one of the most common federally backed loans for undergraduates and graduates) to be above 122 percent. The most recent White House projection was slightly less aggressive, predicting a recovery rate of between 104 percent and 109 percent for Stafford loans.

The government claims the net after costs is less than 100%:

..Still, those recovery numbers are extremely high, compared with, say, credit-card debt, where recovery rates of 15 percent are not uncommon…. After the latest compromise, the 10-year revenue projection for the DOE’s lending programs is $184,715,000,000, or $715 million higher than the old projection – underscoring the fact that the latest deal, while perhaps rescuing students this coming year from high rates, still expects to ding them hard down the road.

The loans are profitable even when the student defaults because the government has ways of making people pay:

…”Student-loan debt collectors have power that would make a mobster envious” is how Sen. Elizabeth Warren put it. Collectors can garnish everything from wages to tax returns to Social Security payments to, yes, disability checks. Debtors can also be barred from the military, lose professional licenses and suffer other consequences no private lender could possibly throw at a borrower.

The upshot of all this is that the government can essentially lend without fear, because its strong-arm collection powers dictate that one way or another, the money will come back. Even a very high default rate may not dissuade the government from continuing to make mountains of credit available to naive young people.

The government has also made sure that many laws, such as the Truth in Lending law, do not apply to student loans.

Some student debt can make sense but when 40% of students drop out of college, when even the graduates do not graduate with the degrees that pay and when the job market is weak, student debt can be life-crippling:

…Bottomless credit equals inflated prices equals more money for colleges and universities, more hidden taxes for the government to collect and, perhaps most important, a bigger and more dangerous debt bomb on the backs of the adult working population.

1 anon August 21, 2013 at 7:45 am

Matt Taibbi “over-the-top and not balanced”?

Say it ain’t so!

2 dearieme August 21, 2013 at 2:38 pm

Or, if you prefer, hyperbolic and hysterical. What is needed is calm analysis of an admittedly odious system. I was particularly struck by “The government has also made sure that many laws, such as the Truth in Lending law, do not apply to student loans.” For that alone you’d be justified in hanging (calmly) every congressman who voted for it.

3 John Thacker August 21, 2013 at 8:11 am

I believe that the Administration justifies this by saying that the extra collection efforts mean that lower interest rates can be charged in general than if regular private lenders, limited in what they could do to defaulters, were involved.

It does strike me as a bit of the reversal of what is going on with health insurance and the mandate, and the Administration’s preferred policy there. In health insurance they want the great mass of lucky and healthier people paying higher premiums in order to pay for the unlucky. Here the unlucky have a much worse time of it, in order to make things somewhat cheaper for those who are successful.

4 mulp August 21, 2013 at 4:41 pm

You would have preferred that medical debt be treated like student loan debt?

Note that a big part of student debt is secured by parents, so medical debt for children could be treated that way as well, so if you default on your medical bills, your parents are held liable, and the IRS collects from them for any medical debt you incur before say age 21 or 18, without time limit and very limited options to obtain relief.

For overwhelming medical debt you have the Constitutional option of redistributing the wealth from doctors, hospitals, creditors, to yourself by getting a Federal bankruptcy judge to declare the money they lent you to pay for medical care to be your money.

We have Detriot trying to redistribute the wealth from those who have the money that has been lent to the city to the city which didn’t have the money.

Republicans are clearly strong believers in wealth redistribution these days.

But back in the 70s and 80s, they saw bankruptcy to redistribute the wealth as a severe moral failure and thus pushed for increasingly draconian laws taking away the Constitutional provision of bankruptcy. To make people more moral and responsible.

But to advocate that government redistribute the wealth as a normal mode of business through bankruptcy sure seems to promote moral bankruptcy, and fiscal irresponsibility.

5 Linus August 21, 2013 at 8:16 am

Alex thinks Matt is merely “over-the-top and not balanced.” That tells me that this may be Matt’s more reasonable rant.

6 Benny Lava August 21, 2013 at 8:18 am

You find this shocking? People have been bitching about student loans for four years. Where were you?

7 prior_approval August 22, 2013 at 9:15 am

No, I remember one particularly inspired GMU-TV spirit in the early 90s (he was completely unconcerned with doing personal video business on the Commonwealth’s dime) complaining about his student loan then.

But then, he was a true entrepeneur (he billed people for calling him at the GMU-TV number – Fairfax Hospital being the one that struck me the most at the time when he was in the room). so I’m sure no one is surprised.

8 boba August 21, 2013 at 8:21 am

Is the piece at least truthful and factual?

9 Ironman August 21, 2013 at 8:32 am

Given how they work, student loans are not really debt – they’re taxes aimed at low income earning individuals for whom it is politically infeasible for politicians to hike their income tax rates.

As for what to do about it, making all student loans fully dischargeable in bankruptcy would do quite a lot.

10 lxm August 21, 2013 at 2:53 pm

Yes!

11 Mike August 21, 2013 at 3:56 pm

You’re right; no one would ever declare bankruptcy right after graduation to get out from under a crushing debt burden that maybe they shouldn’t have taken out in the first place.

12 mulp August 21, 2013 at 5:32 pm

They wouldn’t be granted relief “right after graduation” because they would need to show they were unable service their debt after using their degree to get a job and gain experience leading to income sufficient to do so. Parents required to pay child support often try to get relief on the basis of the too high burden of that “debt”, but they are often ordered to get jobs, second jobs, cut their spending, etc.

In bankruptcy, the student would be required to reveal all of his finances, and would be required to work with a personal finance councilor and a negative report from that process indicating an unwillingness to get a job, or cut spending or sell off assets, would lead to the judge sanctioning the person.

The reason student debt discharge through bankruptcy was ended was conservatives advertising this option by making national cases of isolated cases of student getting a bankruptcy judgment, often without background or context. Suddenly this became an option students with a lot of debt talked about. But not that many people got the court sanctioned discharge of student debt. Every deficiency and default transferring student debt to the Federal government was painted as students declaring bankruptcy, not students not being paid enough. If a student intending to be a Lit prof is only able to teach as an adjunct with really low income, is that a sign of moral failure, or the value society places on literacy is too low? In the 60s, this failed Lit prof would have gotten a job for GM and easily paid off the debt, but by the 70s, that factory job was no longer a solution.

But the theory that eliminating bankruptcy for student debt would reduce defaults proved totally false.

In the 50s and 60s, lots of college students paid no tuition, so that means the number of students and the cost of course would have shot up because it was free to the students. But when the only way to take courses was to pay high tuition personally, tuitions shot up, and the only way to afford them was with forever debt that will go on until you die.

But by the 80s, credit card companies were offering massive amounts of credit to people without jobs. Logically, students should load up on credit cards as freshman and use them to pay tuition, using cash advances to pay the minimum payment of the others, and just ponzi to graduation. Then when you have the first job paying $15,000, declare bankruptcy with the $200,000 of credit card debt.

Conservatives seem to come up with theory of deviousness thanks to cheap student loans, but ignore that much more logical “free” credit almost forced on students that can easily be discharged in bankruptcy. Clearly students are not rational borrowers.

13 Dick King August 25, 2013 at 9:55 pm

Child support is a bad example. It is non-dischargeable as well; no past child support is ever forgiven even if it was assessed fraudulently.

In addition, future child support is a percentage of income before taxes and not deductible. That being the case, a person who owes child support can face marginal tax rates in the 70-80% range. Needless to say, work effort diminishes, so the courts have assess it based on what you should earn, not on what you do earn. Not kidding about that one.

Child support in all ways is more vicious than student loans will ever be.

-dk

14 Handle August 21, 2013 at 8:34 am

It’d be interesting to see whether the combination of higher enrollments, higher tuition, and non-dischargeable student loans with highest priority, is crowding out the ordinary ‘post-college-path’ credit absorbability for other debt purchases (house, car, consumer credit, etc.)

What does the population profile of post-higher-education real-consumption smoothing look like? How have student loans affected that? Get to it Economists!

15 rpl August 21, 2013 at 8:41 am

Tyler,

The article certainly uses some emotional language that might be considered “over the top,” but in what way is it “not balanced”? What is the other side of the story that we aren’t hearing in the article?

16 Axa August 21, 2013 at 9:02 am

10 years later Alex is still mistaken for Tyler.

17 rpl August 21, 2013 at 9:23 am

Yeah, yeah, I noticed it right after I hit submit. It might have something to do with the fact that Tyler is a much more prolific poster and that the byline isn’t displayed very prominently. Mea culpa.

Anyhow, I’m still wondering what is “not balanced” about the article.

18 Alex Tabarrok August 21, 2013 at 9:32 am

Education pays for many people and loans help people to get education. No sense in the article of the numbers.

19 rpl August 21, 2013 at 10:45 am

Fair enough, but do loans help people get education? If the primary effect of loan programs is to drive up the cost of education to the point that students have to go deep into debt to get one, then they’re not really helping. Likewise, if a college degree pays mostly because you can’t get a job, not even one that didn’t require a degree a decade ago, without one, who is really being helped by that?

For some of the issues discussed, I think there simply is no other side. For example, I defy anyone to make a cogent argument as to why student loans should be exempt from the disclosures normally required by the Truth in Lending Act. For the rest, notwithstanding his slightly off-putting tone, I think Taibbi provides sufficient evidence to conclude that some of the phenomena we see surrounding higher education, namely, the soaring costs and ballooning debt, demand an explanation. Surely it’s not up to him to other side’s case for them, is it?

20 Andrew' August 21, 2013 at 11:03 am

“Surely it’s not up to him to other side’s case for them, is it?”

Well. Yes, it is. Although he’s right, he still has to say “I half-heartedly tried to reach the other side for comment and they didn’t pick up their phone after one ring.”

21 rpl August 21, 2013 at 1:17 pm

Andrew’,

I’m not entirely sure what you’re trying to argue. Are you saying that had Taibbi bothered to contact proponents of the current system of student loans, that they would have had reasonable explanations for all of the observations we’ve been discussing here? If so, then I’m genuinely interested in hearing what they are, and I wish someone would share them. Usually when politicians and university presidents talk about student loans we get a lot of unilluminating verbiage about ensuring access to all students and investing in our future. If that’s what the other side had on offer, then I don’t particularly fault Taibbi for not rehashing it.

22 Andrew' August 21, 2013 at 2:35 pm

Simply that he’s supposed to be a journalist. Otherwise I agree with everything else of what you say. However, anything is a bad buy when overbought. So, there isn’t much new about this or houses or anything else that voters view as a good thing regardless of price or sacrifice that the government then gets behind to subsidize.

As an aside it seems we live in a world nowadays where people like Taibbi have to oversell their angst to get people to be aware of something some of us have been worried about for years. So, my side topic question is what is being ignored to make room for his scorn du jour?

23 bob August 21, 2013 at 9:07 am

Nobody above 35 can comprehend what’s been done to the younger generation. This is your legacy.

24 Andrew' August 21, 2013 at 2:39 pm

I know we put an awful lot of the burden on people who are there because they don’t know anything.

25 Skip Intro August 22, 2013 at 7:24 am

I’m 41. What are my crimes?

26 8 August 21, 2013 at 9:09 am

It’s the education-government complex sucking the public dry and selling it as pro-diversity. The reality is many of these folks do not belong in college, but good luck selling the truth! The closest you’ll get is left-wingers like Taibbi who want more free stuff.

27 Bill August 21, 2013 at 9:10 am

Elsewhere in the article….

“Conservatives, meanwhile, with their usual “Fuck everybody who complains about anything unless it’s us” mentality, tend to portray the student-loan “problem” as a bunch of spoiled, irresponsible losers who are simply whining about having to pay back money they borrowed with their eyes wide open. When Yale and Penn recently began suing students who were defaulting on their federal Perkins loans, a Cato Institute analyst named Neal McCluskey pretty much summed up the conservative take. “You could take a job at Subway or wherever to pay the bills,” he said. “It seems like basic responsibility to me.”

28 Andrew' August 21, 2013 at 10:19 am

Bill,

That’s an asinine quote. Thanks.

29 Bill August 21, 2013 at 11:03 am

Andrew, Did you follow the recent changes in the law, and the position of the House Republicans?

30 Andrew August 21, 2013 at 12:25 pm

No. Why?

31 Andrew' August 21, 2013 at 12:36 pm

Please Bill, feel free to tell me what Obama is lying about today.

32 Andrew' August 21, 2013 at 10:48 am

Bill,

I’d bet that you hear about this topic far more and far earlier at libertarian sources that Taibbi for some reason identifies as conservative.

However, that’s a tough bet to structure, so what odds will you give me that over at LewRockwell there isn’t an article questioning traditional college TODAY.

Take whatever odds you want because I win that bet.

33 Bill August 21, 2013 at 11:11 am

Andrew, The asinine quote is totally consistent with Cato’s position for the article entitled: Student Loan Rate Hikes a Good Thing:

Here’s the link: http://www.cato.org/publications/commentary/actually-student-loan-rate-hikes-good-thing

34 Andrew August 21, 2013 at 12:21 pm

So what? You’ve now mischaracterized the exam same guy Taibbi appears to have mischaracterized who also says about the rate increase:

“So how could this be a good thing? Because the evidence is pretty powerful that cheap student aid largely fuels rampant tuition inflation.”

People who want cheap credit don’t don’t get it.

35 TMC August 21, 2013 at 1:21 pm

Bet you thought the 125% liar loans were awesome too.

36 Andrew' August 21, 2013 at 2:37 pm

Back in the day I joked that I couldn’t keep up with whether something was oppressively red-lined or it was predatory lending.

Now I REALLY can’t.

37 Dan August 21, 2013 at 9:26 am

1st rule of journalism: if its written by Matt Taibbi, it’s probably not true. He has a tendency to believe that 1+1 = massive fat cat conspiracy.

2nd rule of journalism: if the facts or interpretation of financial issues are coming from Elisabeth Warren, you have to be extremely skeptical. She has a tendency to believe that 1+1 = minimum wage should be $22/hr.

3rd rule of journalism: when combined, the first two rules multiply exponentially.

None of this is to say this article is complete BS, but you should be extremely, extremely skeptical.

38 Mr. McKnuckles August 21, 2013 at 1:41 pm

Journalist here –

I used to read Matt when I lived in E. Europe, and he was often spot on, talking about topics that no other news org would dare cover. Read his stuff on privatization at the time, and compare it to what is known now. His pieces hold up well.

He does over-egg the pudding sometimes. And he is overly polemical for many Americans’ taste.

But he has a habit of uncovering nasty stuff that wants to hide. That’s called good journalism.

39 Ad Nauseum August 21, 2013 at 7:25 pm

1+1= massive ad hominem attack on journalists who ask a good question, or make a decent point every once in a while.

40 babar August 21, 2013 at 9:31 am

the standard justification for making student loans not dischargeable in a bankruptcy is that they generally go to people who have no assets and they are completely unsecured. if they were dischargeable in bankruptcy, people would take them out, go to school, graduate, then choose to go bankrupt.

41 Andrew' August 21, 2013 at 9:36 am

Do you have 7.5 seconds for me to come up with an improvement/solution?

42 Andrew' August 21, 2013 at 9:37 am

If after 10 years you still have no assets, your college fauxed you over.

43 dead serious August 21, 2013 at 10:40 am

I’m pretty sure you’re aware of this, but there may be certain accounting or legal tricks to make it seem as though you don’t have much in the way of assets.

44 Andrew' August 21, 2013 at 10:46 am

Okay. Is or isn’t my idea an improvement?

45 Rusty Synapses August 21, 2013 at 11:01 am

Bankruptcy law is way ahead of you. Other than a couple of big state law exemptions (like homestead law in FL), which federal law could fix for student loans, it is very difficult to game bankruptcy – certainly can’t by “accounting tricks”

46 DougT August 21, 2013 at 11:10 am

Isn’t.

47 dead serious August 21, 2013 at 11:55 am

There are any number of ways of hiding your assets. Have parents buy your home and you pay them rent. Post-bankruptcy, take ownership.

Work for cash.

Contribute the max funds each year to a 401k. Those funds can’t be touched in a bankruptcy.

48 Andrew' August 21, 2013 at 12:22 pm

Is.

49 Urso August 21, 2013 at 12:34 pm

Dead serious, all of those things you listed apply, theoretically, to all bankruptcies. Yet they aren’t exactly common.

You’re assuming that these crafty18 year olds are taking out student loans with an ingenious and incredibly complex 15 year plan to get out from paying them, and that they’re willing to focus their entire lives on this goal for the next 15 years (and in the meantime, accept a terribly low standard of living for that whole period). Also, that bankruptcy courts & trustees are helpless against the plans laid by these Machiavellian 18 year olds. This is all nonsense.

50 Urso August 21, 2013 at 12:38 pm

I especially love “work for cash.” Yeah, I’m sure employers would fall all over themselves to help you out there, despite the fact that they’d be opening themselves up to truly massive tax penalties and possible criminal sanctions for knowing fraud.

Frankly, if you’re in the kind of job that your employer will pay you in cash, you’re not in a position to pay back your student loans anyway. We’re talking part time menial work, like Hispanic dudes sitting outside the Home Depot waiting to get picked up to hang drywall kinda work.

51 dead serious August 21, 2013 at 1:14 pm

In case you’re not following, government-backed student loan debt isn’t dischargeable in the current state of affairs. So none of what I’ve said applies to this situation, regardless.

That said, a young person getting started in his/her career who needed to claim bankruptcy has a limited, but real set of tools to shelter assets from repossession/liquidation.

Living at home and banking as much salary into a 401k ($17.5k max per year) as possible for a few years and working weekends as a bartender or waiter for cash, then claiming bankruptcy seems like a pretty smart way to go about it – assuming you had to claim bankruptcy and assuming you had the option of living with the ‘rents for a few years post-college.

This isn’t rocket science to anyone. Except you, apparently, since all your mind can conjure is a Mexican at Home Depot.

52 jmo August 21, 2013 at 2:12 pm

working weekends as a bartender or waiter for cash

Cash…? That might have been true 20 years ago but now most people are paying with their debit or credit cards. You add that to the IRS auditing cash businesses*

*If you’re an all cash bar the IRS will ask to see your invoices. Oh, you bought 100 kegs of beer in June and yet you only reported selling 200 beers…. something isn’t adding up.

53 Urso August 21, 2013 at 3:37 pm

You clearly have zero experience with the bankruptcy system. This idea that poor people are all purposefully gaming the bankruptcy system to get “something for nothing”, laughing all the way to the bank, is a tea partier’s fever dream of how bankruptcy works, but it’s completely divorced from reality.

“Living at home and banking as much salary into a 401k ($17.5k max per year) as possible for a few years and working weekends as a bartender or waiter for cash, then claiming bankruptcy seems like a pretty smart way to go about it” Your argument is that people will purposefully forego getting a decent, respectable job, and instead willingly live on essentially a zero salary, commit massive tax fraud, and stay with their parents until they are about 32 (and that their employers & parents will willingly go along with this scam). All so they can have the *opportunity* to go into bankruptcy, which will further wreck their credit for another seven years, putting them at about 40 by the time this whole deal is behind them. At which point their future is wrecked because they no record of any employment, and a bankruptcy. Again, you are arguing they will do this ON PURPOSE, and en masse. I will leave it to the reader to decide how likely this is.

54 Rahul August 21, 2013 at 12:21 pm

I think the trick is to try and not give too many loans to students unlikely to be able to pay them back.

Current US policy allows student loans far too indiscriminately I think. The discretion should consider both, the students ability and his choice of major. It ought to be much much harder to get a loan to study history than, say nursing, but I don’t see that in current policy. It seems totally agnostic to choice of major.

55 Lee August 21, 2013 at 1:40 pm

Indeed, I think that a student loan should require something akin to the “business plan” one needs for a business loan. Borrowers should show how likely they are to earn the income needed to repay the loan after completing this degree at this school, and why the borrower is likely to be able to complete this degree.

56 dirk August 21, 2013 at 2:52 pm

Agreed. If the government makes foolish loans they, the lender, are at least equally to blame for making the bad investment and should suffer the financial consequences accordingly. Lender and borrower both share risks in any venture. That the federal government won’t accept their portion of the risk is just further evidence that the USA is a police state.

57 rpl August 21, 2013 at 4:40 pm

I think the universities ought to take some of the consequences too. They are the ones who design the degree programs that, in some cases, don’t seem to be as valuable as advertised, and they are the ones who are admitting students that may not be qualified to be there in the first place. Most of all, they are the ones who collect the vast sums of money that are pouring into higher education through these loan programs. It’s only appropriate that they should absorb some of the losses when graduates (or dropouts) default.

In many ways, universities’ role in this is very similar to that of the mortgage brokers in the housing crash. Those guys wrote bad loans, took their cut up front, and left the mess for others to clean up. Likewise, in everything we’ve discussed here, universities are the only ones who always get paid, no matter what happens down the road. If universities had to pay off some portion of the defaulted loans from students that they admitted, maybe they’d be a bit more selective. Maybe then we could admit that a four-year residential college program isn’t right for everyone, and we could start thinking about career paths for people who don’t fit that mold.

58 dirk August 21, 2013 at 5:48 pm

Great points. Universities should have to co-sign for student loans. Sounds like a good idea to me. Would it create any *new* perverse incentives?

59 Andrew' August 22, 2013 at 6:41 am

The entire ability to repay, and a bunch of the willingness comes down to whether the experts in their field gave the student the wherewithal to obtain gainful employment.

Granted, if we take all the burden off the student we’ll get a bunch more useless degrees.

So, the best thing to do is reduce the sticker price. MRU!!!

60 Floccina August 26, 2013 at 2:45 pm

+1 and I add that it should not cost much to school a student in History or Sociology etc.

61 JWatts August 21, 2013 at 5:42 pm

I think the trick is to try and not give too many loans to students unlikely to be able to pay them back.

This seems to be a rather obvious solution.

62 MD August 21, 2013 at 7:53 pm

Wouldn’t it be much simpler to evaluate loans based on the college or university? Over 85% of Smith undergrads graduate within six years, and the default rate after three years is around 2.4%. Comparatively, only 26% of Idaho State students graduate within six years, and 8.3% default on their loans after three years. A Smith history degree appears to be – for whatever reason – a safer investment than an Idaho State nursing degree.

63 Eric S. August 21, 2013 at 1:44 pm

Everybody understands the standard justification. Few people understand that this is a hypothesis and the empirical evidence available doesn’t support it.

64 Ted Craig August 21, 2013 at 9:56 am

Federal student loans have advantages other creditors can only dream of. They can’t be discharged in bankruptcy, for example. Also, the government can take money directly out of people’s tax returns. That’s why they can charge lower rates. Interest rates are a direct reflection of a creditor’s ability to collect.

65 Edward Burke August 21, 2013 at 10:03 am

Only one coffee down so far, and here I go syllogizing informally in public:

Rolling Stone was born in November 1967 and has since served dutifully as celebratory younger sibling to rock ‘n’ roll.
Rock ‘n’ roll and Rolling Stone are but two of the many enduring cultural evocations of the Boomer generation (1946 to 1964 cohort, by most accounts).
Rock ‘n’ roll and Rolling Stone both style their perennial appeal to youth at every chance, but by now it dawns that rock ‘n’ roll Is not the idiom of perennial youth, it is the idiom of the Boomer generation and its slacker offspring incapable of launching their own unique idiom of popular music.
THEREFORE: Boomers in their present Establishment mode are themselves directly responsible for inflicting punitive post-secondary education costs on their unsuspecting offspring, which will extend Boomer employment well into the 21st century as the need for credit counseling shows no sign of immediate abatement.

(I could be missing a premiss or a conclusion or two, but unfortunately my undergrad class in Logic came the same semester I attended Mardi Gras.)

66 stillcurious August 21, 2013 at 10:51 am

Federal Perkins Loan Program –
ED.gov
Awards Information

2011

Amount of Aid Available: $970,705,017

Amount of Aid Available represents the amount of funds awarded to participants in this program. The total may include federal appropriated dollars and institutional matching dollars

Number of New Awards Anticipated: 493,244 Average New Award: $1,968

Range of New Awards: Up to $5,550 per year for undergraduates; up to $8,000 per year for graduate students.

67 Rusty Synapses August 21, 2013 at 10:58 am

1) I’m no fan of current program, but it wasn’t clear to me if this scandalous “profit” means just that government will receive back more than gave out (so ignores cost of capital).

2) Is this net of cost of government backed defaults and of forgiveness provided for in these new programs (reduces payments based on ability to pay and forgives balance after some period of time if in non-profit or whatever)

3) Allow discharge in bankruptcy (after 5 years after graduation to reduce gaming), remove government guarantee = problem solved.

68 DougT August 21, 2013 at 11:21 am

I don’t see how it could be otherwise. The government can’t just inflate the amount you owe–they are governed by contract-law and all that.

69 Andrew' August 21, 2013 at 2:42 pm

I think the point is (1) it ‘looks’ bad for them to recoup >100% from people whose educations didn’t work out financially for them and (2) it looks really bad compared to other types of credit such as the credit card companies that only recoup 15% on bad debts.

70 DougT August 21, 2013 at 11:07 am

Sounds eerily similar to the calls to allow mortgages to be discharged during bankruptcy. Yes, we have a debt problem. The solution isn’t more givaways. The solution is a growing, productive economy that generates opportunities. The problem is the crowding-out of entrepreurship (http://is.gd/0jTFcg) that comes from the high debt load.

We don’t have an alternative means of generating high-tech credentials other than a BA–yet. So potential employers will use the college degree to screen for intelligence, adaptability, sociability, etc., for the time being. And the Feds will throw money at the problem, creating higher costs in the process. Only when the exceptionally low-costs of Fed-free institutions like Hillsdale, Grove City, and BYU become well-known will we break the cycle of higher Fed aid, higher costs to administer the Fed aid, higher tuition-and-fees, higher Fed aid to handle the high prices, higher costs … lather, rinse, repeat.

But you’re right, 8, Taibbi just wants more free stuff.

71 Steve-O August 21, 2013 at 12:56 pm

Mortgages (or the deficiency claims resulting from insufficient collateral) aren’t dischargable in bankruptcy?

72 Rusty Synapses August 21, 2013 at 2:34 pm

Of course they are. Of course, they are also secured by the collateral (house) – fwiw.

73 DougT August 21, 2013 at 4:25 pm

The personal guarantee can be discharged. The lien is not.

74 Yancey Ward August 21, 2013 at 11:14 am

Uh, don’t budget rules basically force Congress to always project every bill be deficit neutral/deficit reducing? I am guessing the numbers are basically bullshit in a dogshit wrapper.

75 Irving Fisher August 21, 2013 at 11:16 am

Budge rules probably mean these numbers are bullshit in a dogshit wrapper.

76 hamilton August 21, 2013 at 11:31 am

“Collectors can garnish everything from wages to tax returns to Social Security payments to, yes, disability checks. Debtors can also be barred from the military, lose professional licenses and suffer other consequences no private lender could possibly throw at a borrower.”

This doesn’t bother me in the least; what bothers me is that private lenders do not have the backing of the government to enforce their lending contracts as written. To me, borrowing $X and failing to pay it back is equivalent to going into someone’s house and stealing $X, and should be treated as seriously by courts.

77 Axa August 21, 2013 at 11:42 am

Ahhhhh, it’s simple. Private lenders are more prone to use predatory lending techniques compared to the benevolent government. That’s why these tools are not available to them.

78 Andrew' August 21, 2013 at 12:28 pm

We get to see if the government can help create bursted bubbles in shelter and education in a single decade. Thank goodness medical is subscription pre-pay rather than re-pay or they’d be going for the hat trick.

79 dead serious August 21, 2013 at 12:04 pm

I was under the impression that private student loans, like government-backed loans, were immune to bankruptcy discharge (insert joke here).

A quick Google search returns a bounty of links from “services” telling you that’s not necessarily true, but I imagine those cases are outliers. I believe you have to prove extreme health duress to escape paying what you owe.

80 MD August 21, 2013 at 1:40 pm

If you are willing to live in poverty for 20 some odd years, your student loan debt will be forgiven. The only person I’ve known to go down that path willingly (i.e., not because of a crippling accident) was a guy who literally became a monk and renounced all material wealth a couple of years after graduation. Not a path many choose.

81 dirk August 21, 2013 at 12:43 pm

Like any other investment a loan is a bet. You don’t want to take a risk? Stay out of the lending business. Nobody forced you into it. Nice, stupid analogy, though.

82 Urso August 21, 2013 at 12:47 pm

So we’re back to debtor’s prisons, eh? Eccl. 1:9 and all that.

83 oon2ooo August 21, 2013 at 12:15 pm

I would be fascinated to understand the drop-out/post grad jobless rate between students who enrolled with major institutions vs. smaller schools/for profits/community college and how those numbers compared.

If the vast majority of these loans going to individuals who will not gain from them are for students who never go to a major institution, and those loans have a much larger percentage of drop-out rates or jobless rates post college this might be a bit misplaced.

Perhaps we should be looking at why these individuals choose to go to colleges/universities that will not result in good performance per student on average. Truth in lending seems incorrect. Truth in enrollment seems like something that is more important.

84 Boonton August 21, 2013 at 12:47 pm

So here’s an interesting fact, if the recovery rate is over 100% that means by definition most student loans can be repaid. If they weren’t then there would be no profit to be made from collecting on the defaulted principle and interest.

As for creating tuition inflation….I think it’s pretty clear cost disease is the root cause of ‘tuition inflation’ but it is also it’s solution. (Namely other products enjoy larger productivity increases in their production than education so education keeps getting more expensive relative to the rest of the economy….BUT since you’re able to produce everything else more efficiently you can pay the higher costs with money left over).

It’s also interesting because this is the system conservatives want. What have we been told the solution is for elementary schools? Vouchers. What are vouchers? Well the gov’t gives you money and you go shopping for the best school at the best price. What are student loans? Even better than vouchers…the gov’t gives you money which you have to pay back so you better spend it in a way that you get the most future income at the best price possible. Guess what, if student loans are causing a crises in education then every advocate of vouchers should be tarred, feathered, and then confined without due process or trial in Gitmo as an economic terrorist against the US.

85 Casey August 21, 2013 at 5:42 pm

The American college system may have a lot pf problems in terms of its cost structure but it also provides an unparalleled level of education that draws students from all over the world.

If the public school system had something even close to that level of success in the product it delivered most parents would be on their hands and knees out of thankfulness.

Really I think the success of the college system is what’s allowed us to get away so long as a society with such bad primary education.

So, what are you even talking about? Yes, if vouchers worked as well as student loans in securing the quality of education it would surpass even the most optimistic of libertarian predictions.

86 Cliff August 21, 2013 at 7:36 pm

U.S. public schools are pretty much as good as anywhere (adjusting for demographics, of course). Once you eliminate the 2/3 of the students who are worst academically, you have U.S. college.

87 mishka August 21, 2013 at 11:02 pm

I guess that’s why graduates IIT, Technion and Moscow Univ. are so highly valued here?

88 Boonton August 22, 2013 at 10:26 am

If the public school system had something even close to that level of success in the product it delivered most parents would be on their hands and knees out of thankfulness.

What is the objective evidence that the US public school system delivers an inferior product? I know everyone likes to say this, everyone likes to complain about it but in reality the evidence is lacking.

And by evidence I mean solid evidence that the US economy or the average US person is actively suffering from the education they received in public schools. Not some self imposed metric like some standardized test score unless you can also show me that superior performance on that test correlates to better economic outcomes.

most parents would be on their hands and knees out of thankfulness.

Not to be too hard on parents but most parents get education for free for their kids. Even though it may seem odd, the fact is people who get something for free tend to complain about its quality more than people who actually pay for something.

89 Al August 21, 2013 at 1:03 pm

I thought the way a free market was supposed to work was: as information circulates about the bad deal some colleges offer, the customer base wises up and chooses better deals — or just avoids the marketplace altogether.

And, since part of the bad deal some colleges offer is magnified by the government’s strong armed loan collection tactics, we should see most of the overpriced colleges (and majors) simply disappear.

That’s one theory anyway.

So why isn’t that actually happening?

90 Lewis Kirvan August 21, 2013 at 1:40 pm
91 John Smith August 21, 2013 at 1:42 pm

Do the requirements in the Truth in Lending Act really not apply to federal student loans?

92 Hillary August 21, 2013 at 8:35 pm

Last month thy changed my repayment terms without permission, and couldn’t even give me an amortization table.

93 Boonton August 21, 2013 at 3:24 pm

And, since part of the bad deal some colleges offer is magnified by the government’s strong armed loan collection tactics,

A thought, imagine the gov’t was not very effective against the Mafia. Would that make you more or less likely to borrow money from The Godfather? I would say less money and if I’m less inclined to borrow money from him I’d be less inclined to spend money on whatever it is one spends borrowed mob money on.

With that in mind, why would student loans then cause ‘tuition inflation’? Because demand goes up? What’s stopping supply from going up? All you need is to rent a few buildings and hire some profs (which should be in big supply if all these students are going to grad school). Is it that people don’t trust new colleges? Fine, all existing colleges have to do to expand supply is rent some more buildings and hire some more profs. Again not very difficult.

Maybe the problem isn’t that college is a ‘bad deal’ but that college is a good deal. It really does increase lifetime income. That would explain why people line up to take student loans (despite the danger of ‘strong arm tactics’). It would also explain why supply can’t keep up with demand.

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96 rpl August 21, 2013 at 5:17 pm

Boonton, you seem to have a misunderstanding about how supply and demand work. If you introduce a shock that increases demand, such as by going out and subsidizing the purchase of a product, then the result will be that both the price and the quantity produced will go up. How much of a response you get in each variable depends on the elasticity of the supply, but except in the unrealistic case of perfectly elastic supply there will always be a price increase. In the case of education, there are several factors that prevent supply from being as elastic as it is in other industries. First, you can’t just go out and start a university. To receive money from federal student aid programs you have to be accredited, a process that is to some extent politicized. Second, university rankings depend in part on a university’s selectivity; accepting a smaller fraction of the students that apply helps your ranking. Thus, the incentive to expand admissions is weakened. In the end, you get exactly the situation we see: admissions expand somewhat, and costs go up a lot.

(Note, by the way, that the last sentence in your post shows how confused you are about this supply and demand thing. If supply ought to be able to expand to absorb a demand shock from student loan programs, then it also ought to be able to expand to absorb a demand shock from everyone suddenly noticing that college is a good deal. The supply response doesn’t know anything about why there was a demand shock, only that there was one.)

Certainly college does seem to expand lifetime income, but how much of that is because we now require a college degree for just about any job worth having? Clerks, secretaries, and cargo agents were all cited as examples in the article. It’s easy to make your product appear valuable when you’re the gatekeeper to the labor market, but maybe instead of people taking on tens of thousands of dollars of debt to become secretaries a better solution would be to admit that someone we don’t need people with college degrees for secretarial work.

Finally, as to why students aren’t put off from student loans by the danger of strong-arm tactics, basically, we lie to them. We tell them that a college degree is a ticket to a good job, without mentioning that it’s only the price of admission, not a guarantee. We quote them a low rate without mentioning that there are hidden fees and restrictions on their ability to refinance (see the section of the article on the ways in which student loans are exempt from the Truth In Lending Act), and we don’t advise them that if things don’t work out, they have no way out, no safety net. Indeed, if things go disastrously wrong (e.g., the guy who had a pulmonary embolism that left him bedridden and unable to work), the student loan creditors will actually consume the safety net that society has provided to care for you. We always forget to mention that part. So, it’s no wonder that prospective students aren’t worried about strong-arm tactics; most of them have no idea until they’re on the receiving end of them.

97 Boonton August 21, 2013 at 9:25 pm

rpl

The ‘shock’ runs in both direction. If more people go to college because student loans have opened that opportunity up, then more, then there are also more college graduates which means more people with masters and phds. In other words, more ‘raw material’ to make a new college should demand require one.

The idea that the supply of colleges are fixed because of ‘accreditation’ is also a bit far fetched. First, there’s multiple accreditation groups and we have numerous examples of new colleges and trade schools that have managed to start up and benefit from student loans despite this supposed ‘political’ barrier. Second, there’s nothing that prevents existing colleges from expanding to meet demand. I don’t buy your supply restriction argument since we’ve actually had a problem with fly-by-night schools opening up charging up student loans on kids and then shutting down giving them marginal education. Unlike, say, medicine, the barriers to entering the education market are not as high as you think.

But here’s the problem with your demand theory: College used to be financed more by grants and scholarships and less by student loans. Getting a full scholarship or grant should cause a high stimulus to demand since the person never has to pay that back. Moving to a system of loans should dampen demand. I’m happy to spend free money. I’m less inclined to spend money I have to pay back….even if that loan is made at a low interest rate and has a very long term.

Second, university rankings depend in part on a university’s selectivity; accepting a smaller fraction of the students that apply helps your ranking.

Perhaps, but this doesn’t seem to be a student loan/demand problem but the classic economics of superstars. There can be only 1 #1 college just as there can be only 1 #1 movie or singer. If the college market doubles in size, then the value of being the #1 college goes up by much more than double. Just like being the #1 web page back in 1993 when there were 27 people on the internet is nothing like being the #1 page when there’s 3 billion people today.

Certainly college does seem to expand lifetime income, but how much of that is because we now require a college degree for just about any job worth having?

Again this is not a demand problem. You have a serious market model problem here. If a clerk without a college degree is just as good as one with, and if such a clerk gets paid less than a clerk with a college degree, then why aren’t you starting a business that only hires high school grads?

It seems pretty amazing when you see how many huge corporations have tried to offshore every job they possibly can to cheaper labor in India or China would do something like pay 30% more in wages than they have too simply because there’s some huge ‘fad’ in having a college degree.

Finally, as to why students aren’t put off from student loans by the danger of strong-arm tactics, basically, we lie to them. We tell them that a college degree is a ticket to a good job,

Except you just said it was the ticket to a good job. For some reason business got stupid and insists on paying people with college degrees more….so if that’s the case it really is the ticket to a good job and it’s not a lie to advise a student to prudently borrow to obtain a degree.

Look, I get where you’re coming from. But it doesn’t make sense when you scrutinize it.

Let’s us an analogy. You think karaoke machines are stupid. They aren’t fun, they aren’t entertaining, bars would be better off investing in having good quality live bands and better food. Yet you also say that people are stupid, for some reason they flock to bars with karaoke machines. So because of this ‘lie’ bars are borrowing money to install karaoke machines. OK but if people are paying for karaoke machines, even if you think that’s stupid, it makes all the sense in the world for the bar to borrow to pay for one.

Indeed, if things go disastrously wrong (e.g., the guy who had a pulmonary embolism that left him bedridden and unable to work), the student loan creditors will actually consume the safety net that society has provided to care for you.

Yea ok, well Obama proposed something pretty simple for that. If after 20 years or so you either haven’t made any income or aren’t making much (either because you opted to do low wage work or because things just ‘don’t work out’), your loan could be simply forgiven and wiped off. Something like that seems pretty simple and fair to me (although at the time I recall most Republicans went bat crazy at the idea). But if I was a 25 yr old guy and you told me in a year I would have a pulmonary embolism and spend the rest of my life bedridden…..quite frankly the last thing I’d care about would be the status of my student loans.

98 Sebastian H August 22, 2013 at 9:39 am

“With that in mind, why would student loans then cause ‘tuition inflation’? Because demand goes up? What’s stopping supply from going up?”

The problem is that college degrees from non awful universities have a positional component. I.e. a big part of the value is you have it AND OTHER PEOPLE DON’T. Government loans for a partly positional good enable the provider to raise their prices without supply going up properly to compensate.

99 Boonton August 22, 2013 at 10:21 am

Yes the supply of positional colleges is limited. There can only be one #1 college or ten ‘top ten’ colleges. But when you come to average colleges there’s no limit and there’s not much in terms of vocational positional schools (for example, there’s no ‘top school’ I’m aware of for auto repair, cosmology, etc.) We’d expect to see little or no inflation in non-positional schools but all inflation concentrated in the ‘top colleges’. Yet the inflation seems pretty much universal.

Also there’s no problem with a top college expanding its supply. Princeton or Harvard or MIT are perfectly capable of adding more classrooms, hiring more profs, and taking on more students…esp. when each student will add $20K+ per year to their bank accounts!

100 bob August 22, 2013 at 1:59 pm

You are just not modeling it right: It’s not that grants don’t exist anymore, but that people that don’t get grants now can get a “cheap” loan instead of paying it all through summer jobs. Since the market of uneducated kids is capable of paying more for college, since they can afford loans, the price of college will go up until the value of a college degree is very low.

The equivalent of the kids that before could afford college by working summer jobs are worse off, while those that could never afford college in the first place are better off. It’s like having laws against price gouging when a storm strikes that destroys the electric grid: With restrictions, those that have the opportunity to be the first in line get the generators they want. With price gouging, those that can pay the most get the generators.

101 Jay August 21, 2013 at 9:27 pm

Disclaimer: Donkey Kong Taibbi doesn’t know what DCF stands for. He thinks getting paid 104% of principle 10 years after it was due is a 104% recovery rate.

102 Andrew August 22, 2013 at 8:00 am

Again, the key is the comparison to other credits.

This is in fact the meta-key in my mind because the key subsidy is a bubble-creating preclusion of credit going to other investments, kind of like how we forced so much credit into houses while simultaneously not measuring home prices directly into the measures of Federal Reserve monetization.

103 Andrew' August 22, 2013 at 9:50 am

Hundy!

104 Boonton August 22, 2013 at 10:31 pm

I think there’s a chicken and egg problem with this theory that loans cause tuition to go up. It’s just as plausible that the opposite is true. Tuition has gone up hence people use student loans more to pay tuition. IMO this story is more plausible because it covers multiple problems with the alternative:

1. There’s not really any problem with supply…new colleges and schools are being created and existing colleges are able to expand. Since there are NOT serious barriers to entry, why wouldn’t increasing demand be meet by expanded supply instead of just price increases?

2. Student loans aren’t really that cheap. They are about 3.8%. The 30 year mortgage rate is about 4.5%. From what this article says student loans are actually safer for a borrower than mortgages. Even though a mortgage is secured by property, there’s no guarantee the property won’t be underwater causing the borrower to take a loss even after foreclosure. It seems the ‘enhanced collection’ aspect of the law makes it even less dangerous to loan money to students. That would put the ‘proper rate’ for student loans essentially very close to the ‘risk less rate’, and that is indeed where they are at.

3. Economic theories that depend on everyone being stupid are not very sensible. The ‘loans cause inflation’ theory depends on students being stupid….thinking a loan is ‘cheap’ when in fact it’s not. The rest of the economy is also stupid….paying people more with college degrees even though they aren’t really producing more. Yet this also makes the person making this argument stupid. If people stupidly pay more for a college degree, then it makes sense to borrow money to get one. And if student loans have ‘low’ interest rates….well the debt can’t really be crushing on average can it?

105 Bob Hertz August 23, 2013 at 4:49 am

We need more paternalism. We should not allow humanities majors to borrow more than about $10,000 total, considering their true job prospects. (Medical and law degrees are something different altogether.)

In the absence of paternalism, maybe the absence of government guarantees plus easy discharge in bankruptcy would do the job.
Any bank or fund which lent $100,000 to a humanities major would be an idiot, and the practice would cease on its own.

As for curing the current mess, one solution is a version of the Australian system. After graduation, the ex-student must pay a flat percentage of their income for 10 years. If there is a loan balance left after 10 years because the student earned low income, then that balance is forgiven without tax consequences.

The interest rate on the ‘loan’ during the ten years would of course be zero. Charging interest for student debt is morally as repulsive as charging interest for medical debt. These are supposed to be gift relationships.

The whole issue is expanded in my article called The Anti Debt Agenda. You can find it on my website http://www.healthcarecrusade.com

Bob.Hertz@frontiernet.net

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