Hear that "pop"? It's the student-debt-driven education bubble springing a leak and starting to deflate.
Thanks, Bush 43, for your legacy in this when you "reformed" the bankruptcy laws to make it impossible to discharge student loans in bankruptcy. That set educational institutions free to raise their rates to ludicrous levels: it took away the incentive for student lenders to push back.
It took away lenders' incentive to say such things as "$126,000 is too much debt for a special education teacher. She'll never be able to pay it back. We won't lend it to her to give it to you. Reduce your tuition, and cut your administrative overhead."
Institutions with some cachet, like Westminster, will get rescued. Others will just collapse.
I had a bad year last year and the couple before. I defaulted on my student loans, they got sold off, and it just so happened that I was in a group of sold off student debt that didn't get the information sold to the new organization handled correctly so for me and a couple hundred thousand delinquents had their student loans lost in the mail.
It's completely unfair that mine went away and people that are upside down and have been "playing the game" are still in the slog, but it by a wide margin the most fortuitous thing that has ever happened to me.
It was an episode of Last Week Tonight a few years ago. They noted that you can not buy individual debt, just large blocks of it. So HBO let them buy a large block of it and they told everyone they wouldn't be collecting.
The standard argument for why student loan debt survives bankruptcy is that otherwise students would declare bankruptcy on graduation. At least with our current system, where bankruptcy is wiped from your record after 7 (or 10) years this would be a good move for most students.
Canada solved this in the most obvious way possible:
> If you file bankruptcy in Canada a federally guaranteed student loan is only automatically discharged if the date of your bankruptcy is more than seven years from when you ceased to be a student. This rule was created to prevent student from incurring huge student loans, and then graduating and immediately going bankruptcy.
Or just look at how other countries do it - in UK your payments for the student loan are taken automatically from your salary each month(10% of anything above 20k/year - so if you make less than 20k/year you don't pay anything), but if there is any outstanding balance after 20 years it's automatically forgiven. No need to declare bankrupcy since if you can't pay it back there is simply nothing to pay. If you have a job it's paid back automatically without the employee having to do anything. If it's paid off in 20 years = great. If not = no big deal, you just get a letter saying that your outstanding balance is now zero.
I guess that system is possible because all loans are provided by the Student Loans Company which is ran by the government - and tuition is capped at 10k/year, so it doesn't matter what or where you study - the cost is exactly the same.
>The Public Service Loan Forgiveness (PSLF) Program forgives the remaining balance on your Direct Loans after you have made 120 qualifying monthly payments under a qualifying repayment plan while working full-time for a qualifying employer.
Small correction: current loans are written off after 30 years, not 20.
Also worth noting that loans can still be sold off by the SLC (though remain managed by the SLC, so probably makes little if any difference to the individual), and government ownership hasn't completely stopped the use of questionable tactics (e.g. debt collection letters purporting to be from "Smith Lawson & Company").
There are better ways to counteract that. Off the top of my head - if you declare bankruptcy to evict student loans, you are ineligible for retirement account contributions like IRA and 401ks for the 7-10 year window. Additionally you take a 5% tax increase for the duration of that window.
Not allowing people to put money in retirement accounts just means the govt has to support those people that much more when they get to old age, instead of them supporting themselves and getting tax revenue from the withdrawal.
And a %5 tax increase sounds like a pretty good deal. For most people it's going to be $25-$50k total, and you have no bill due when your unemployed.
I don't know if it wouldn't work out better for everyone but the lender. People paying student onerous student loans, like myself, already aren't putting money into retirement accounts because the banks are taking it all.
If I could just cut out student loan payments the money would go towards paying down any outstanding debt or towards buying a house/condo which would help me not need support in retirement. The tax advantaged retirement funds are nice but many people with student loan debt it's like telling them they have won't have to pay taxes on any yachts they buy. Technically nice, but practically useless
Being on the government dole in the US is not an outcome anyone would plan for. You're lucky if you can heat your apartment (if you even have your own) and eat processed cheese on what you'd be getting.
Also, many (most?) student debts are less than $25k, and unpayable huge debts should never have been approved in the first place. The latter clause is the whole point of this anyway.
> if you declare bankruptcy to evict student loans, you are ineligible for retirement account contributions like IRA and 401ks for the 7-10 year window.
That's something that a large percentage of people do anyway. What a strange and poorly-thought-out suggestion.
It's also a sure fire way for the public to have to spend even MORE on social programs since you'll be even more likely to reach retirement with zero money.
What good could possibly come from intentionally banning someone from saving for retirement?
>Off the top of my head - if you declare bankruptcy to evict student loans, you are ineligible for retirement account contributions like IRA and 401ks for the 7-10 year window. Additionally you take a 5% tax increase for the duration of that window.
Why don't we just do that for everyone, and make higher education free. This works for the absolute majority of students. Provide an opt-out for the few that can pony up the cash up front.
You could probably turn education free by reducing the defence budget by a few percentage points.
One of the reasons I'm happy to be European. Education is free in most countries. It makes no sense to burden young people with a load of debt when starting out.
> You could probably turn education free by reducing the defence budget by a few percentage points.
According to https://nces.ed.gov/fastfacts/display.asp?id=75, in the 2014–2015 school year U.S. colleges & universities spent $536 billion; the 2014 defense budget was $526.6 billion[0]. We could spend our entire defense budget and still not cover our higher education bill.
I'm not sure this is the best number to use. This is what is currently spent, it is not how much we would need to provide a free higher level education option. The entire department of education budget is 70 billion [0]. Using Pennsylvania as a baseline, they have approximately 185 million planned for public education[1]. Let's round that to 200mil and multiply it by 50. This gives us a ballpark spending of 100 billion at the state level. So let's approximate 170 billion spent on K-12 and higher education last year.
We were able to fund our entire K-12 system and give money to public universities for under half that 536 billion figure. So yes, we may not be able to cover our current higher education bill with the defense budget. However, what we are currently doing is not the best or cheapest system. Someone could definitely come up with a free higher education proposal for half of that 536 billion figure. The system needs reformed badly. Everyone knows the costs of higher education are out of control. Using it as the baseline isn't fair IMO.
It's a double whammy as they say in US because, students that can't find a job are both liable for student debt and also have to pay for health insurance.
I would too! I just think it’s important to understand that “free college” is only half the story and to recognize maturely that you’re making tradeoffs.
Right. That would have the correct feedback to properly represent what a poor investment investing in students actually is (not a good investment). This would cause interest rates for student loans to be much higher and there would be more rigor in who is allowed a loan.
You say that like declaring bankruptcy is painless. That was not the case before George Bush's reforms. It certainly would not become the case again -- lenders' job is to predict this behavior.
There is a reason it's not bankruptable. If it was, lenders would not loan to students.
And if, like now, the government backed the loans and they were dischargeable, it would create a death spiral of companies encouraging loans to no end with tons of students accepting them, knowing that they can just file bankruptcy right after graduating.
You act like the concept of bankruptcy is something lenders have no concept of. No, what would happen is that lenders would become more selective about lending. A mediocre high school student planning to get an underwater basketweaving degree for $40k a year? Yeah, probably not a good investment from a lender. And you can go the opposite direction to create equally obvious investments for lenders.
There's an even better side effect of this. There is no real and inherent reason that university prices have skyrocketed out of control. It's mostly a consequence of government removing all economic concerns for students. That of course sounds nice, but they also simultaneously removed all economic concerns from universities who can, and do, charge arbitrarily large sums and justify it by increasingly reckless spending. This a recurring problem when messing with the market - we create unforeseen problems, though in this case this should have been very foreseeable!
By returning to market forces universities would be obligated to themselves also take economic matters into consideration with their decisions. Too high of tuition and fees are unlikely to get paid off, thus unlikely to produce much in the way of loans, and thus generally not economically viable. Similarly there would be less of an incentive to grow programs that do not substantially improve the ability of students to create a comfortable life for themselves.
Basically we would start on a path back towards the world some baby boomers seem to think we still live in where somebody with a bit of hard work could put themselves through college with a part time job graduating not only debt free but with a enough of a nest egg put aside to have a nice down payment for their first place.
Good! Lenders should not lend to students whom they do not reasonably believe will be able to pay. Serfdom should be outlawed. Hopefully one day these debts are struck down under the 13th Amendment.
> I don’t really understand how there can exist any debt that can’t be bankrupted, apart from federal treasuries.
Because it's debt to get a degree. I don't agree necessarily but the idea is that students would get large loans, go to schools, get a degree, then declare bankruptcy.
I think the GP comments makes a good point that large loans would be harder to get if all of the sudden they knew bankruptcy option is going to considered after graduation.
So the taxpayer who didn't go to college and instead went to work because he lacked either the interest/ability or money to do so at the time, should be left holding the bag on the default of the person who irresponsibly took out too big a loan for a worthless degree? Yeah, great alternative.
No, the debtor should eat the default, and the lender, with insight into aggregate market conditions, should take their default rates into consideration when advising institutions on pricing.
This is the "systemic fairness" argument, also known as the "moral hazard" argument. It's a fair point.
But my original point (I wrote the top-level comment to which you're responding) was this: Taking away ALL risk from the .edus and the lenders took away a really important part of downward tuition-price pressure. Easy student loan money means escalating student fees.
Who should "pay" if a schoolteacher can't pay her Salem State College loans? Good question. The college who charged so much ought to be on the hook, at least partly. The same goes for the lender, taxpayers in the community where she teaches, and she herself.
Who should pay if an investment banker can't pay his Harvard Business School student loans? Is it a different kind of question? That is hard to know in general.
Without the ability to bring student loans to bankruptcy court, there's no legal way to address these questions of fairness. That is not sustainable for student debtors, colleges, or the society at large.
I didn't mean that to sound as bitter as it probably did, but I'm glad I got the point across.
What's often left out of these amateur discussions we have is that education loans are non-collateralized debt. There's no asset of any value to repossess, and except for a few specialized programs where you owe a few years in the military or troubled school or free health clinic, not even a pledge of the very thing this loan is supposed to return value on, i.e. the person's own labor productivity. (And even in those cases, if the person reneges and suddenly becomes liable for the cost of their education again, they're still probably eligible for the same kind of forbearance and forgiveness programs being pushed for the more general student-loan indebted population.)
That's a (if not the) key reason this kind of debt isn't dischargeable.
If you want to be fair at this point the college's and banks should be eating the default. The information assymetry is massively on their side and the college's have done nothing to try and use their money efficiently while the banks have seemingly given up on doing their job of making sure the investment is worthwhile.
Unfortunately that might make our entire economy collapse as we've let the student debt bubble get so large. We'll likely have to all shoulder some of the pain, regardless of how fair it is
They made the loans under the condition that they are not dischargeable and that the government would pay in case of default. You can't retroactively change the rules.
Why not? You totally can. It's not some fundamental law of nature that regulation can't be changed after some time. The loans were made under the assumption that they are not dischargeable, at that time someone could attempt to estimate what's the probability that the laws would be repealed or modified in some time horizon. That probability is going to be > 0. Is that risk large enough to change the business case for making the loan in the first place?
You could, but, in the U.S., ex post facto law is unconstitutional. Lenders have correctly gauged the odds of this provision of the U.S. constitution changing to be near zero.
This would be an ex post facto change. The government wouldn't be retroactively making the lenders guilty, it'd be a change in regulations. If this change was unconstitutional then you'd have situations like a company with a contract to dump industrial waste into a river going "oh sorry, I made this contract based on the regulations back then, so it's unconstitutional for you to make me stop polluting"
If you had a contract that was contingent on your ability to dump your waste in the river, and then a law was passed forbidding the dumping of waste, you would of course have to stop polluting, but your contract would be null and void as well.
Non-bankruptable student loans aren't "regulations" they are specific contracts between students, lenders, and the US government.
You can't get blood from a stone either and that appears to be the only alternative the lenders are seeking. The many of these loans are bad, they were for more money than the education provided in income. If they don't become dischargeable or just get written off the system is going to collapse
If the student defaults, the lender still gets paid. The government steps in and pays them. The debt is then essentially owed to the government rather than the lender.
I think a lot of people share your point of view. That's your right, but then there should be no surprise when eccentric politicians get into office after enough voters who are continually on the losing end by having not gotten involved in these bubbles are sick and tired of being fed this line.
I agree. There needs to start being punishments for leaders of these institutions who put our society at risk over pure greed. The institutions might need to be saved atm but if everyone on charge gets away scot free then it's just going to degrade people's belief that our system is worth having
Federally guaranteed student loans totaled $122,500,000,000 last year [1]. Subsidies create artificial demand and push prices upward. They take away the student's incentive to say those same things of the price that you're ascribing to lenders. Traditional college isn't necessary for everyone.
You make it sound like tuition wasn’t already increasing at unsustainable rates before GWB. Or that people are just now foolishly pursuing degrees without factoring in ROI.
That's because tuition costs were not increasing at unsustainable levels before GWB (and technically the big debt explosion almost entirely happened during the Obama terms). University costs were extremely reasonable in the US prior to the year 2000. They were hilariously cheap compared to today.
As so nicely represented by the explosion in student debt:
> University costs were extremely reasonable in the US prior to the year 2000.
Remember that I knew a few people who managed to both work and go to school at the same time and pay the tuition with the salary. So they took longer to graduate (5-6 years) but graduated debt free. It was a state school in mid West not a fancy private school or anything like that.
I will say that the slope of the curve gets a bit steeper after 2000, so perhaps you’re on to something to a degree, but to say that college costs weren’t increasing at unsustainable rates prior to Bush is laughable. And with everything, perspective is key. I started school in 2000, and what you consider reasonable my dad balked at (because it was roughly 3-4x what he paid 25 years prior).
> As so nicely represented by the explosion in student debt:
There is more to this than just the raw tuition value to consider: far more people are attending college than in years past (far more than should really be doing so, honestly). A graph that normalizes against student population would be much more interesting (otherwise your graph doesn’t tell what portion of the increase is due to tuition explosion versus student population explosion).
A long time ago, college costs actually were not increasing at all. Based on the graphs I'm seeing in a couple of sources, there actually was a period from roughly 1965 to 1985 where college costs in the US were more or less at a sustained level.
From the 1940s to 1960s, college costs were rising some, and from 1985 to 2003 costs also increased some. But the rate of increase after 2003 definitely is higher.
Both sources are blaming things other than student loans for rising costs. I will say the second link is intriguing, in that it postulates that state education budget cuts play a responsibility in rising costs. This might go hand in hand with the student loan balloon: basically, the cost of college is shifting heavily to the individual student, but in a very poor manner if the end goal is an attempt at meritocracy via education. I agree that demand might play a role too (the first link sort of implies this).
It would be interesting to compare tuition cost history in the United States to other countries, which as far as I know do not follow our funding model. (For some reasons this was not easy to quickly Google.)
I fundamentally agree but...student loans were made impossible-to-discharge-in-bankruptcy via the Bankruptcy Reform Act of 1978. This has been a looooooong time coming.
Thanks, Bush 43, for your legacy in this when you "reformed" the bankruptcy laws to make it impossible to discharge student loans in bankruptcy. That set educational institutions free to raise their rates to ludicrous levels: it took away the incentive for student lenders to push back.
It took away lenders' incentive to say such things as "$126,000 is too much debt for a special education teacher. She'll never be able to pay it back. We won't lend it to her to give it to you. Reduce your tuition, and cut your administrative overhead."
Institutions with some cachet, like Westminster, will get rescued. Others will just collapse.
This bursting bubble is going to hurt.