Once Again, On Student Loan Bubbles

We are in something of a crisis, although a frequently overblown one, when it comes to student loan debt. I have written at great length about ways both to lower the cost of college and to help those who are struggling under the weight of student loan debt. However, I firmly believe that this problem needs to be understood as a humanitarian one which has the chief problem of hurting people who don’t have to be hurt, and not as an asset bubble which could cause ripple effects that sink the rest of the economy.

I think the urge to call a student loan debt bubble is based on multiple factors. First, we have bubbles on the brain, for obvious reasons, and calling bubbles has become a hallmark of lazy journalism and commentary. Second, this is a favored argument of  conservatives, and libertarians, who don’t like government subsidizing education and largely hate the professoriate and dislike what they perceive to be the politics of the university system. Finally, you get it from Gawker, which is always eager to call other people chumps, as part of its basic financial model which trades stroking its readership for clicks.

What contributes to conventional asset bubbles, whether they be in condos or tulips or stocks? There’s a few key factors that don’t apply at all to student loan debt.  Assets in typical asset bubbles are transferable and they are appreciable and they are held by private entities.

Take the housing bubble. It’s the go-go 2000s. Financialization has attracted a massive amount of investment capital. Why? Because rates of return are so high. Why? Because you can speculate, in part. What can you speculate on? You can speculate on assets that can appreciate and that can be transferred. So take a house and a mortgage. I’m Joe SubPrime. I want to buy a house. The mortgage company is hungry for more business, as is the bank that buys the loan as part of a big CDO, as is the hedge fund that wants to make bets about the value of that CDO. Everybody wants me to get the house, so I do. Being SubPrime, I can’t actually afford to pay the mortgage. But, crucially, the mortgage is backed by the collateral of the house, an asset which can appreciate itself. There is a value to the collateral, in other words, that is independent of the value of the loan. This is supposed to make mortgages safer for the banks than unsecured debt like credit card or student loan debt, where the only enforcement mechanism is the negative impact on a borrower’s credit report.

But, as we know, in practice the collateral of the physical property made mortgages far riskier. Because the value of the real estate kept going up, borrowers could keep refinancing their loans (and often, their lifestyles). And in the event that someone did default, the banks could take their real estate at a time when that was a valuable asset. Everything was groovy, save for those poor squares who got predatory loans they couldn’t afford, as long as everybody believed that housing values could only go up. For as long as housing prices were rising, the bubble expanded and expanded and expanded….

That, really, is the fundamental bubble mechanism that cause the financial crisis, the (bizarre in hindsight) conventional wisdom that housing prices couldn’t go down. Once it became clear that housing was overvalued in some places, it punctured the market and brought prices down almost everywhere. That meant that individual borrowers now couldn’t refinance to stay ahead of their payments, which led them to default, which pumped the now-cratering housing market full of foreclosures, left in the hands of banks who couldn’t sell them and who suddenly had previously-valuable CDO assets reduced to nothing, causing banks to approach failure, forcing them to discontinue their normal operations like lending to businesses, which forced those businesses to downsize dramatically or fold altogether, sending millions into the job market and dramatically slowing the growth of our economy.

The basic mechanism, in all of this, was based on the misconception that the collateral associated with the mortgages could not depreciate. In other words, the housing bubble was just that, a bubble in housing and not in mortgages.

Now take my (Joe SubPrime’s) student loans. I take out loans to go to college. The loans are guaranteed not by a private entity but by the federal government. The value of the loan is what it is– the principle and the interest. There is no asset that can appreciate independent of the principle and the interest. There is no collateral, and there is nothing that can be transferred; you can’t sell your diploma. There’s no speculation possible on the value of the education; whether I get a job or not, the loan is worth what it’s worth.

So I graduate from college and, in the face of an employment depression, I find myself unable to get work. It’s not a matter of my choosing an “impractical” major, as there is no evidence that our current employment woes are structural, despite the constant claims otherwise. But no matter; I can’t get a job. It sucks. I negotiate for awhile with the Department of Ed collectors, who are well-known for being flexible, but it’s no use. I default on my loan. What happens?

Well, my credit score gets hit. It gets harder for me to get a credit card or car loan or to rent a new apartment. I get a lot of notices and letters. Life is very tough for me. And… that’s pretty much it, as far as greater exposure goes. The “asset” that I bought with the loans, my education, isn’t transferable and isn’t secured against anything but my credit score. The lender is thus not left with closets full of useless education, the way they were left with lots full of empty houses. The value of the loan was never pumped up to grotesque proportions by speculators and irrationality, the way housing values were; the best the loan was ever going to return was the principle and interest. And for the vast majority of the debt out there, the lender is the federal government, which is not going to vanish overnight the way that Bear Stearns did. If the government ends up with a bunch of unpaid loans, the consequence will be… that it runs at a deficit as it always does. Given that student loans are not dischargeable in bankruptcy, it can always collect as much as it can, and it has the benefit of endless time.

Yes, it is entirely possible for the investment of a student loan to not pay off for the student or for the lender. But that does not mean that we’re talking about a “bubble.” If we call it a bubble every time an investment does not return as the investor hoped, the term has no meaning. What could be inflating? The perception of the value added to a person’s earning potential by his or her degree? Sure, people can overestimate that– but I must continue to note that the college wage premium and employment advantage remains robust, and for most borrowers, will mean that their investment returns dramatically more in compensation than they make in payments, over their lifetime. (Particularly for the poor, and even for those whose jobs don’t require the degree.) But even if people overvalue the financial aspects of a degree, so what? That isn’t and can’t be reflected in the value of the loan itself. The loans have a fixed value; they can’t inflate. You can’t speculate on an asset which can’t appreciate in value. That is a problem. It is not a bubble. 

I don’t doubt for a minute that bankers can find arcane methods to securitize private loan debt, and that they could do what bankers do and implode. But the scale we’re talking about is vastly different here. The median student debt countrywide is $12,500. 43% of borrowers have less than $10,000. And 34% of graduates in the class of 2008 had no student loan debt at all. Are these numbers indicative of a problem? They are. Is that problem anything like the size of the mortgage crisis? It is not. What’s more, again: the numbers, beyond the hype, say that college is a great investment, with an annual rate of return of over 15%. And with the government guaranteeing a significant majority of the extant debt, the chance of an economy-wide contagion like the one that struck with housing is much, much smaller. Immaterial assets that can’t be transferred simply have far less ability to create disastrous bubbles in the typical sense. Our media keeps overselling this problem, and they are doing it for a reason. Whenever I read articles calling student loan bubbles, I look for the part where they express the actual mechanism through which the supposed bubble will pop. It’s never there.

I hope it’s perfectly clear that this isn’t an endorsement of the status quo; far from it. (Of course I’m sympathetic towards people struggling with student loan debt; I’m one of them!) Like so many of our current problems, this one could be fixed if we had better priorities and a dedication to reducing harm. I do agree that college is not for everyone, but why do so many pursue a college education? We created the conditions we’re in not by being too generous about college lending but by destroying the value of our own uneducated workers. The neoliberal policy apparatus directed us to undermine our uneducated workers in manufacturing and similar fields, cutting the legs out from under those workers and compelling them to go to college. Our system of higher education now struggles to educate an entire nation into prosperity, a role for which it was never designed. Those struggling without jobs and with college loan debt deserve our material support, but they are part of a fundamentally flawed system that requires serious and widespread overhaul. We need to rebuild wages for uneducated labor by reinvigorating unions, by protecting them through the enforcement of existing labor law and the creation of new. And we need to keep a viable and cheap public option alive through public universities.

If you are worried about bubbles or concerned for the human suffering, the fix is clear: forgive all the federal debt. It’s an incredibly easy stimulus to implement, and it would put money into the hands of exactly the kind of upwardly-mobile young people who would spend it on housing, cars, and material goods, which would provide a major stimulus to the economy and in so doing improve the lot of the worse off. Yes, I am concerned about targeting what is still a privileged class for relief, but they are suffering, and this could be packaged with more social programs for those at the bottom. And if you want to call all that debt a bubble, despite everything, then student loan forgiveness would let all the air out, productively, before you have to fear a pop.






59 replies
  1. 1
    kindness says:

    Paid my student loan off last year. Thank the FSM.

  2. 2
    khead says:

    I’m so thankful I went through college and escaped with no debt.

    Thank you Mom and Dad.

    And Va Tech.

  3. 3
    terraformer says:

    …and indeed, much like health care, education should be paid for by the State. But then we can have Nice Things®, which means that folks with an oligarchical mindset who have historically made their gazillions via Nice Things® operating as commodities, will haz a sad. So we just can’t do that, sorry.

  4. 4
    Martin says:

    Loan bubbles are quite easily defined:

    + The value of the loan is, or is likely, to exceed the value of the asset that was borrowed against.

    So, for housing, the bubble isn’t defined by the mortgages alone – but also by the asset value of the homes. It was a bubble because over-easy access to mortgages helped drive housing prices up by putting more buyers in the market. When housing prices fell, the bubble burst.

    That’s the same definition for the tech bubble, but where security prices exceeded the redeemable value of the companies.

    For education, you need to show that loans exceed the value of the education they are buying. That happens in two ways:

    1) Students take on loans and don’t earn a degree (thereby never fully acquiring the asset – the degree)
    2) Students take on loans and then can’t find work that pays enough to justify the cost of the education

    1) Has always existed, but because loan sizes were historically lower, was relatively easy to recover from. Now, taking on 10s of thousands of dollars in loans only to get kicked out of college after a year or two can be devastating.
    2) Has also always existed (can I hear from the French Lit PhDs out there?) but was generally relegated to historically low-paying professions like early childhood ed. As even public schools have gotten wickedly more expensive, and wages across the board have stagnated, more and more schools and degrees are falling into this trap. The value just isn’t there like it used to be. It still largely is for STEM programs, even at privates. It still is for many degrees that lead directly into professions like Psychology. It’s a real crapshoot for a lot of others though.

    But the most fundamental law of debt is this:

    + Only borrow money for assets that appreciate faster than the rate of the loan.

    That’s it. That’s the alpha and omega of borrowing. Car loans are a scam. Revolving credit is a scam. Borrowing should generally only occur with homes, with education, and with your health. No point avoiding loan payments if the alternative its that you die. The argument for borrowing for a home was pretty weak for the last few years. With 3% rates, it’s pretty good again – assuming the mortgage interest deduction stays. Without it, it’s iffy. The argument for borrowing for education was always fantastically strong, until recently. The for-profits are screwing it up, as is the combination of wage stagnation and abandonment of public education by the states.

  5. 5
    Chris says:

    Timely statement. My parents had enough money to pay for my undergrad, thank the gods, but not grad school, which I’m beginning in ten days. That debt… yeah. That’s going to leave a mark.

  6. 6
    smintheus says:

    It’s a college pricing bubble. What can pop are the excessive costs that colleges charge for an education that can be provided more cheaply at relatively little disadvantage.

    A large part of the reason that college prices have inflated so quickly is that the market has for decades rewarded inflated prices. In particular, you have the US News College Ranking factor, whereby increased costs tend to be treated as a sign of higher status, which are leveraged into lower acceptance rates, which are treated as a mark of quality and status, which lead to higher costs, etc. All of that can be exposed for the cruel joke that it is if colleges over-reach to the point where students and families simply cannot continue to buy into the fiction.

  7. 7
    PeakVT says:

    If you are worried about bubbles or concerned for the human suffering, the fix is clear: forgive all the federal debt.

    That would create a stupendous amount of resentment. Tying the interest rate to the government’s cost of borrowing (currently 1.5% for 10 years) would be a better way of providing relief. Or having the government cover interest payments while the principle is deferred when a person is unemployed. Or basically anything other than forgiveness, especially implemented as a one-time jubilee.

    Apart from that, the government should buy up all of the privately-held student loan debt so the collection parasites don’t wreck people’s lives. This story on The Story about one guy’s student loan debt problems is sad and frustrating.

  8. 8

    I’ll agree with terraformer here… we’re begging the question of why private entities should be profiting from these loans, at all.

    IMO, one of the distinguishing features of an advanced civilization is (reasonably) free education.

    As with health care, we need to put those against advanced civilization on the defensive.

  9. 9
    Villago Delenda Est says:

    Oh, people need to be hurt here.

    The banksters need to feel searing pain.

    These parasites need to be dealt with. Severely.

  10. 10

    @Chris:
    I’m old enough to remember when the old saw: “If you have to pay for grad school, they don’t really want you” was the norm.

    And I’m not that old.

    Good luck, whatever it is you’re studying.

    (ETA: Just reread this, wanted to stress that I was musing about how much postgrad education has changed in a little over 20 years, not dissing your ability!)

  11. 11
    Todd says:

    If you want to understand the current education loan bubble, you need to consider the following:

    1) The govt loan inclusion of for-profit vocational education involving programs with low wage occupations as the “reward” for the consumer.

    2) The extreme bloat in administrative pay, which leads to bloat in faculty pay. Here is a jaw dropping set of examples from my locality:

    http://datacenter.courier-jour.....lts=136414

    HODES, JONATHAN EZRA CHAIRPERSON & ASSOC PROFESSOR NEUROLOGICAL SURGERY UNIVERSITY OF LOUISVILLE $991,820
    COOK, LARRY EXEC VP FOR HEALTH AFFAIRS EXECUTIVE VP – HEALTH AFFAIRS UNIVERSITY OF LOUISVILLE $912,989
    BOLING JR, WARREN W PROFESSOR TERM NEUROLOGICAL SURGERY UNIVERSITY OF LOUISVILLE $733,330
    MOLITERNO, DAVID PROFESSOR INTERNAL MEDICINE & DIVISIONS – CARDIOLO UNIVERSITY OF KENTUCKY $728,000
    BOLLI, ROBERTO ENDOWED CHAIR PROFESSOR MED- DEPT ADMIN UNIVERSITY OF LOUISVILLE $717,196
    DUNN, DAVID LEWIS EXEC VP FOR HEALTH AFFAIRS EXECUTIVE VP – HEALTH AFFAIRS UNIVERSITY OF LOUISVILLE $712,500
    KARPF, MICHAEL VP EXECUTIVE HEALTH AFFAIRS/UKHC EVPHA ADMINISTRATION UNIVERSITY OF KENTUCKY $706,291
    PLUNKETT, MARK ASSOCIATE PROFESSOR SURGERY/CARDIOTHORACIC UNIVERSITY OF KENTUCKY $700,000
    ZWISCHENBERGER, JOSEPH PROFESSOR SURGERY/DEPARTMENT UNIVERSITY OF KENTUCKY $669,500
    NAUTA, HARING JETSE WALLES PROFESSOR TERM NEUROLOGICAL SURGERY UNIVERSITY OF LOUISVILLE $652,460
    EVERS, BERNARD DIRECTOR COLLEGE OF MEDICINE CANCER CENTER-CORE SUPPORT UNIVERSITY OF KENTUCKY $650,000
    HALPERIN, EDWARD CHARLES DEAN MEDICINE – DEAN’S OFFICE UNIVERSITY OF LOUISVILLE $586,592
    WALZ, JEFF J HEAD COACH VPA-BASKETBALL-WOMEN UNIVERSITY OF LOUISVILLE $575,000

    Even the chief of staff for one health VP gets a salary of 220K.

    http://www.courier-journal.com.....ck_check=1

    Like I said – bloat.

  12. 12
    Roger Moore says:

    @smintheus:
    The related problem is that in many fields a college degree is being priced as a status good rather than for the inherent value of the education the student got there. As long as going to a prestigious school is seen as the entryway into the upper tier of the economy, it will be vastly overpriced. Reduce economic inequality, and prices for the top-tier schools will come down.

  13. 13
    Gex says:

    There may be some benefit in giving this privileged class a shot to see what kind of help government can be if it cares about the well being of citizens.

  14. 14
    Chris says:

    @Judas Escargot, Acerbic Prophet of the Mighty Potato God:

    Unfortunately, the new saw is “undergrad degrees are the new high school degrees.” And thanks for the wishes!

  15. 15
    smintheus says:

    @Roger Moore: My reply to you was just swallowed up, don’t know why.

  16. 16
    Linda Featheringill says:

    I think you could make a good argument for a society offering education for its members free of charge, based on how much more the educated individual has to offer the greater society.

    Won’t happen in my lifetime, though.

  17. 17
    Emerald says:

    @Chris: Chris, borrow as little as possible, and pay them off as fast as you can. Make it your top priority. Your life is not your own until you get them paid.

    I just paid off my loans on Monday, from an inheritance, after 18 years of paying through the nose. The banksters made a 150% profit off of me, without ever taking one dime of risk. The loans were not worth it, but if I’d borrowed less and paid them off quickly, they would have been worth it.

    I just managed them poorly. How new students will fare, with even public universities getting too pricy, I can’t even imagine.

  18. 18
    geg6 says:

    @PeakVT:

    THIS. A thousand times. I’m in the trenches of financial aid for college students and the most crippling thing for most is the interest rates on unsubsidized Stafford Loans (6.8% is totally ridiculous) and the even more insane variable rates on private loans. A related issue is parent debt from federal PLUS Loans (with interest rates of 7.9%!!!!).

    I’d set the interest rates for all of them as you suggest. I’d increase the borrowing limits for the Stafford, so students would be able to borrow more on their own, private loans would be less needed except for grad professional programs, and parents wouldn’t have to bear so much of the debt. I’d beef up the grant programs. I’d keep the current dozen or so payment plans, but market them aggressively. I’d allow families to consolidate Stafford and Plus loans together, transferring the debt to the student (and parents could still help out). I’d also reinstate the interest incentives for consecutive payments that got negotiated away in the last student loan battle. And I’d make all student loans, public or private, dischargeable in bankruptcy.

    This is how I’d start anyway. I have lots of ideas on this subject, but all the things I enumerate above would be a hell of a start.

  19. 19
    burnspbesq says:

    @Todd:

    Those aren’t the most convincing examples you might have put forth to support your point.

    Med school profs’ salaries are what they are because the competition is private practice, and good surgeons can easily make that much or more.

    University health system senior managers are running, in some cases, multi-billion dollar businesses. The relevant market for determining their comp is C-level execs of Fortune 1,000 companies.

    But I take your point.

  20. 20
    jl says:

    @Martin:

    There is a tie in with macro policy here. A good counter cyclical macro economic policy can affect employment prospects in the short run, and short run increases in employment start of a virtuous circle of income growth and asset accumulation for the people would be unemployed otherwise.

    The link is much weaker for housing and tech company valuations.

    So, in addition to your points, the creation of any kind of bubble (with associated risks to individuals and the economy) with student loans is far more under society’s control than in housing and stock market.

  21. 21
    burnspbesq says:

    @Roger Moore:

    As long as going to a prestigious school is seen as the entryway into the upper tier of the economy, it will be vastly overpriced.

    Sorry, but no. If it actually is the entryway into the upper tier, it isn’t overpriced. Try telling a partner at a big New York law firm, who makes in excess of $2 million a year, that he overpaid for Harvard law, and see what the reaction is. Or (west coast version) try telling a partner at Kleiner Perkins, who has a decent shot at amassing a net worth of over $100 million over the course of her career, that she overpaid for her Stanford MBA.

  22. 22
    jl says:

    @geg6: Seems to me that in an economy that does not have a long term unemployment problem, 5 percent should be absolute maximum for student loans. Building human capital should be considered a low risk investment for society as a whole. So, 5 percent absolute maximum. Probably 3 to 4 percent maximum is better guess.

  23. 23
    Roger Moore says:

    @smintheus:
    I think the phrase you’re looking for is FYWP.

  24. 24
    burnspbesq says:

    @geg6:

    The problem with the rate on unsubsidized Staffords is that it’s not indexed. The rate wasn’t outrageous when it was established, but I agree that when the rate on the ten-year T-bond is 1.5, 6.8 is ridiculous (said the guy who is going to pay off his kid’s unsubsidized Stafford).

    AFAIC, the optimum rate for Staffords is the current yield on the 30-year T-Bond, plus 75 basis points to cover administrative costs and contribute a little bit to deficit reduction.

  25. 25
    PeakVT says:

    @geg6: And I’d make all student loans, public or private, dischargeable in bankruptcy.

    I’m not sure if that’s the best idea, because a student could declare bankruptcy within a couple of months of graduating, and there’s no way to take back the asset purchased with the loan. However, the worth of the asset declines over time, especially if it’s not being used, so perhaps an increasing amount could be dischargeable, say 5-10% more per year starting 2 years after graduation.

  26. 26
    Chris says:

    @Emerald:

    Oh believe me, I know, but heck, what can you do? At least it’s a public university, but that won’t really start helping until a year from now when I’ll have lived here long enough to get in-state rates (part-timing until then). We’ll see how it works out. The only thing to hope for is that it actually does pay off and help me get a decent (e.g. not minimum wage) job after graduating, because if not, shit creek.

  27. 27
    smintheus says:

    @geg6: My grad school loans in the ’80s were all at 8%. They bled me almost dry for more than a decade until I finally paid them off.

  28. 28
    Emerald says:

    @Chris: At least you’re more realistic than I was. Good luck!

  29. 29
    geg6 says:

    @jl:

    I think 5% is a good maximum. But interest rates in the current economy should be no more than 2% and really should be at around 1.5%.

    A freshman should be able to borrow up to $7-8000. Sophomores up to $9000. And juniors and seniors up to $10,000. This would keep many from needing to borrow any more (those who have financial need and will get grants). It will also decrease the need for parents to borrow or borrow as much. It would keep more students within the federal system and out of the private loan market.

    And people need to understand the great flexibility and variety of the federal repayment programs. If more people were aware of how easy it is under Obama’s DoE to avoid default, they would take advantage of them. There really is no reason to default on a federal loan, if people only knew or understood. It drives me nuts! The private loans, OTOH, are about as predatory a business as the credit card and mortgage companies. Just awful entities that ruin lives forever. They need to die.

  30. 30
    Roger Moore says:

    @burnspbesq:
    Two points. First, you’re talking about graduate school rather than undergraduate, which is where most of the total student debt is being run up. There’s still a strong feeling that going to an elite undergraduate school is a huge economic advantage, which is why undergraduate tuition at top-tier private schools is so high.

    Second, there seems to be a really skewed distribution of incomes, so that most of the reward for getting one of those great educations comes to the handful of top earners rather than to typical alumni. For example, I believe that the top 0.1% of alumni of my alma mater are wealthier than the other 99.9% put together; it only takes a handful of Gordon Moore and Charlie Munger types to really throw off the distribution. Because of that, it probably makes more sense to consider the median accomplishment of people at the school rather than the mean when deciding how much to spend on your education.

  31. 31
    gwangung says:

    Second, there seems to be a really skewed distribution of incomes, so that most of the reward for getting one of those great educations comes to the handful of top earners rather than to typical alumni. For example, I believe that the top 0.1% of alumni of my alma mater are wealthier than the other 99.9% put together; it only takes a handful of Gordon Moore and Charlie Munger types to really throw off the distribution. Because of that, it probably makes more sense to consider the median accomplishment of people at the school rather than the mean when deciding how much to spend on your education.

    OT: Well, screw me, I seem to be old fashioned.

    I went to an elite school, and I’m definitely on the left hand side of the income curve.

    But it was damn all worth the money I paid for what I learned outside of class and the people I met (which include a couple NFL athletes, a Silicon Valley millionaire and a Tony Award winning playwright).

  32. 32
    Chris says:

    @Emerald:

    Thanks! And congratulations on your newfound freedom, even if it did take longer than would have been preferable.

  33. 33
    ponce says:

    The best way to lower the cost of college?

    The average professor in China makes less than $10,000 a year…

  34. 34
    jl says:

    @geg6: If burnspbesq (see comment 24) has a good feel for administrative costs, and say 75 basis points would cover administrative costs, and if you used economists’ standard or 2.5 percent for long run real rate of interest for federal debt, then that would put rate at 3.25, average over business cycle. Now add in what should be low risk premium for defaults, then maybe around 3.75 or 4 percent maximum.

    So, on second thought, my 5 percent guesstimate seems a little high.

    But I agree with others, a rate of almost 7 percent is ridiculous and analogous to government approved usury, at least for helping kids build human capital.

    There will be long term problems due this garbage policy. As in, lower skill workforce in 30 years when boomers are falling apart, and X-ers are retiring. The real cost of flow of real goods and services will be higher than otherwise. A far more serious threat to future retirement than BS about social security insolvency.

    Your nominal retirement money only means something in terms of affordability of flow of real goods and services when you are retired in the future.

    What is going on right now is sociopathic financial sector and short sighted middle age and oldster acquiescing in mining the real economic assets of the economy. the oldster might have a time horizon short enough for it to make sense, but I do not think that is the case for some of the greedy middle age and about to retire boomers.

    Odd, though, that from my personal contacts, many oldsters are more aware of need to provide for future generations than younger boomers and X-ers.

  35. 35
    khead says:

    So, am I the the only dude out there that got a Bio Chem Eng degree because I wanted to be a Biochem Engineer?

  36. 36
    Roger Moore says:

    @gwangung:
    I don’t dismiss the value of the education I got in school, or the value of the non-educational side of going there. But we were talking specifically about paying for school as a purely economic investment. If anything, I’d think that the outrageous tuition they’re charging these days would make going to an elite school for the social aspect less and less reasonable. It might have been reasonable to pay $15K/year for the social benefits when I was an undergrad, but paying $50K/year for the same environment seems a lot more questionable, especially if most the increase is going to be paid for with student loans.

  37. 37
    khead says:

    This thread is depressing me.

    Jus sayin….

    See post @35.

  38. 38
    Roger Moore says:

    @khead:

    So, am I the the only dude out there that got a Bio Chem Eng degree because I wanted to be a Biochem Engineer?

    I doubt it. I got a Chem degree because I wanted to be a chemist, and that’s what I’m doing for a living today. If I had been a money grubber, I would have gone for ChemE instead. Or maybe I’d be working in industry instead of academia.

  39. 39
    burnspbesq says:

    @geg6:

    And people need to understand the great flexibility and variety of the federal repayment programs.

    When I took the kid up to Seattle to register for fall semester, we were required to sit through 45 minutes of Stafford loan counseling. At least 30 minutes were devoted to describing a mind-numbing array of repayment options and ways to avoid default. Is that not universal?

  40. 40
    burnspbesq says:

    @jl:

    The last time I looked at the data, the typical mortgage servicer was making a shit-load of profit off 25 basis points, but that was at least 15 years ago. My 75 was for admin “and a contribution to deficit reduction.” If you want to skip the deficit reduction, then a 35-40 basis point markup is probably plenty.

  41. 41
    Chris T. says:

    You’re (Freddie deBoer) mostly correct. However, for-profit colleges are attempting to turn this problem into a real bubble, by monetizing “college students” (basically “enrollment size”). It’s not clear how this will play out.

  42. 42
    Martin says:

    @khead:

    So, am I the the only dude out there that got a Bio Chem Eng degree because I wanted to be a Biochem Engineer?

    No, that’s really common.

    The issue is more whether it’s worth paying MIT for that Biochem Engr degree or should you just settle for East Jesus State University and save some bucks.

    In the case of that field, you should be able to pay off that education with no problem no matter the price. Starting salaries should be in the high 50s, midpoint career at 100K. And there are reasonable numbers of jobs out there – mainly because if you need a Biochem Engr, you can’t settle for someone even with a Mechanical Engr degree, let alone someone with Sociology or Linguistics.

    But if you want to study Sociology, the situation is completely different. Is it worth paying Stanford $200K for that BA degree? Uh, no. Go to the state school, get As, and then go to Stanford for your PhD perhaps, but that loan will break you because what you’re buying isn’t worth $200K.

    And the general rule of thumb for grad school should still apply – grad school shouldn’t cost anything for domestic students, unless you’re going into Law/Medicine. Foreign students pay, domestics should be offered research/teaching positions and fee remission.

  43. 43
    Walker says:

    @Judas Escargot, Acerbic Prophet of the Mighty Potato God:

    PhD programs are fully funded. Not masters. Masters degrees are the new cash cow.

  44. 44
    liberal says:

    The entire problem with education, student loans, etc, can be summarized thus:
    (1) The state has an interest in having an educated citizenry.
    (2) The market alone cannot be counted on to advance that interest, because there are no assets to capitalize, unless you legalize indentured servitude.
    (3) Given (2) and no indentured servitude, the market will underinvest in education, hence the state should step in (in the form of e.g. cheap tuition).

    The thing about nondischargeable student loans is that it’s effectively a form of indentured servitude. As such, it’s morally repugnant and ought to be done away with.

  45. 45

    If I had one general critique to make of Freddie’s posts it’s that they are so dense (visually, I’m not speaking cognitively)

    It’s not that I have trouble with that in general, but it’s the flippin medium. LCD induced eye strain.

    If only I could beam his FP posts to my nook – e-Ink is so much easier on the eyes.

  46. 46
    Walker says:

    @ponce:

    Ever read a research paper published by one of those Chinese professors?

  47. 47
    liberal says:

    I think the urge to call a student loan debt bubble is based on multiple factors.

    I’m not sure about student loans themselves, but college tuition has one characteristic of a bubble: the underlying asset has some properties of a collectibles market, namely limited supply. If supply can be readily added, then the likelihood of bubble formation is limited.

    That’s why the phrase “housing bubble” is a misnomer. A better phrase, in terms of the underlying economics, would have been “residential land bubble”—land is in fixed supply, and that’s why real estate bubbles are so common in history.

  48. 48
    negative 1 says:

    I have college debt between undergrad and grad school (MS Accounting) over 6 figures. So do many of my friends. I think that one thing that is so often overlooked in this argument is who owes what for what.
    Elite private colleges have always cost a lot, and the reward is usually high. However, state schools, like the one I went to, used to be a LOT cheaper. Generally the typical state school student didn’t come from a wealthy family, most people I went to school with (and myself) borrowed the whole education. Nowadays in my field you really need a masters degree, so back I went. I borrowed that too, since if I was making that kind of money I wouldn’t need the masters. That’s how I got to 6 figures, no ivy leagues, no ‘useless’ degree. For a lot of people I know, that’s a familiar tale. I’m 35, and VERY lucky with the job I got in my field – it paid enough to make it worth it, but it’s just dumb luck. Statistically speaking there are a lot of people who aren’t that lucky.
    Someone above said that there would be a lot of resentment if the loans were forgiven, to which I say tough s&*t. Social welfare programs are all about the good of society and correcting a wrong. Isn’t this just that? We’re making indentured servants out of a generation whose only crime was believing the bulls&*t about an education being the path to success. We gave out free money to the banks; basically we bailed out the value of 401(k)’s. No one complained then, but heaven forbid we bail out younger people?

  49. 49
    Dave says:

    Incredible, Freddie, how you can get behind forgiving federal debt, including student loan debt, but when Occupy Wall Street and its affiliates demand it, they’re just privileged assholes.

    Unless, of course, your thinking on that has changed.

  50. 50

    @danah gaz (fka gaz):

    If only I could beam his FP posts to my nook – e-Ink is so much easier on the eyes.

    Instapaper has a version that runs on the Nook.

    (Not sure if/how well it works with BJ, though– I use it to beam articles linked on twitter to my kindle, so I can read them all at once at my leisure).

  51. 51
    geg6 says:

    @burnspbesq:

    It is only universal recently. Stafford Loans won’t disburse until loan entrance counseling is completed. And no one really takes it all in at the start of a kid’s college career. We do online loan entrance counseling and, later, exit counseling that cover the “mindnumbing” array of options available. But I don’t know how much schools and individual student aid officers reinforce that message, continuously, all through a student’s college career. You start with simple concepts about debt management and increase the complexity of the info as the student moves through. This means, of course, that people like me have to take the time and effort to build relationships with the students. In my case, our average campus enrollment is about 900-1000. I am the only person who coordinates our campus’ student’s aid (thankfully, awarding, with the exception of campus funds, is done centrally at University Park), coordinates veterans’ benefits, runs the student employment programs, awards scholarships, and “other duties as are required” by my supervisor. I do my best to get to know students and I’m considered quite good at my job. But I’m at a small campus and still can’t get close enough to most to have them call me by my first name and beyond their vague distaste for what I stand for in their eyes, the person who is involved in distasteful and mystifying and frightening things like how much things cost and how they should borrow more than they actually need and who doesn’t understand how much I NEED a brand new iPad which, they think, is required, much like their books, for their major in applied psychology.

    There needs to be three of me. Or, at least, a fulltime assistant. I could do a lot in this area to educate students, given the time to do it. I just don’t have it.

    By the way, the power to require the entrance counseling came into its own when the Stafford program became a direct loan program for all loans, leaving the money-wasting FFELP program completely by the wayside. Obama did that. Also too.

  52. 52

    I’m grateful that I avoided college. I did get some vocational training at Shoreline CC near Seattle, but I never even ended up using it. I look at the piles of debt that most of my friends have, and I just feel like they got swindled, particularly when so many are not doing anything that is making direct use of their majors.

    I’m burnt on I.T., but it served me well through most of my adult career, and I was able to avoid the mess of college debt.

    I’m not bashing higher education. Far from it. Instead, I believe that it should be within reach of every person who is committed enough to work at it. Like police protection, fire protection, and universal health care, I believe that higher education should be heavily state subsidized, if not entirely so, as it is a vital service that provides a clear and tangible benefit for any wealthy modern nation.

  53. 53
  54. 54
    geg6 says:

    And of course, I meant “shouldn’t be borrowing” in #51.

  55. 55
    Ben Johannson says:

    Mr. deBoer,

    Your characterizaion of a bubble in this context is not correct. An asset bubble, such as occurred prior to the dot com explosion and the Great Recession, is a product of ponzi finance. At this stage asset prices are drven ever higher by the production of accelerating levels of debt. The more debt is produced the higher asset values climb the more profits can be realized. Eventually households take on so much debt that more cannot be sustained. Ponzi schemes are dependent on growth: when asset growth ceases the entire edifice falls apart in a financial crash as revenue streams dry up and the financiers can no longer service their liabilities.

    Student loans are not driven by ponzi finance but the results can be similar. At some point households, if the process continues, will take on so much debt they are forced to reduce spending to service their liabilities. When this occurs the economy will tilt into recession, as all recessions are a product of insufficient spending.

  56. 56
    Dave says:

    @Ben Johannson: There is so much wrong in your comment it’s hard to know where to start. Try reading the original post again, this time for comprehension.

  57. 57
    Ben Johannson says:

    @Dave: If you have a specific criticism, then by all means. Otherwise your comment is rather useless.

  58. 58
    Katie says:

    I don’t know that I’d call this a bubble either, but student loans are a real sore spot for me. Every time I read something about forgiving student loans I get steamed. When I went through school, not that long ago, I got out with no debt at all. Granted, I went to a state school, but I also worked close to full time during the year, two jobs in the summer and didn’t live high on the hog like many of my friends did. It also took 5 years instead of 4. Didn’t have a nice car, had a limited number of clothes, drank beer instead of funny named drinks etc. It was soooo worth it to not have any debt after graduation, and it gave me a lot more options with regard to jobs since I didn’t have to start repaying loans right away.

    Forgiving student loans is a slap in the face to every student that worked hard to pay their own way. The amount of debt that many students have upon graduating is pretty appalling and trying to come up with ways to bring those costs down would be a better thing to do imo than to start forgiving debts.

  59. 59
    mclaren says:

    You guys are forgetting the main appreciation that goes on when a student graduates with an expensive education and can’t find work. They get another loan and go back and get a masters degree. That’s even more expensive. So they still can’t find work…and get an even bigger loan and go back and get a PhD.

    It’s a constantly appreciating bubble. The more you fail, the more money you spend on education. Eventually you get in so deep that you default on a loan payment, and the way things are set up now, your loan payments skyrocket. And the creditors can garnish any wages you get from anything — even money from social security or welfare payments. Anything can be taken to pay back the loan. Absolutely anything.

    It’s work than a loanshark.

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