Should government make a profit off student loan debt?

[Cozarkian]

Right now the government is taxing its people, to pay for middle and upper class people to go to college. I have a big problem with the poor paying for those above them.

I don't think that is the case. Low-income families get grants and loans, middle income families get public loans, and upper-income families get private loans or pay for it themselves.

Here's a handy table from http://www.forbes.com/sites/troyoni...college-aid-and-expected-family-contribution/

The colors show the category of school at which you would qualify for at least $1 of aid:
Blue - 2 Yr public
Green - 4 Yr Public
Yellow - 4 Yr Private (Avg.)
Orange - 4 Yr Private (Elite)
Red - Won't qualify anywhere.

 

[fskimospy]

And yet according to the OP:


So either this $127 billion in profits is some kind of weird government accounting fiction.

Or despite the unperforming loans banks could make money hand over fist on private student loans.

Or private student loans wouldn't replace government ones because they have totally different risk profiles.

Dumbass.

 

[Cozarkian]

Or private student loans wouldn't replace government ones because they have totally different risk profiles.

Which is why they have different interest rates.

 

[OCGuy]

Which is why they have different interest rates.

Have you seen the interest on payday loans or Cashcall-type loans? That is what the rates are like for unsecured loans to people with poor credit, and on very small loans.

Your 19 year old art history major with no credit history and no real income is not someone anyone would lend college tuition type money to.

 

[Fern]

Should government make a profit off student loan debt?

No.

Fern

 

[LegendKiller]

I still think the private market would fill in the gaps vacated by the DoE if it were to reduce or eliminate the current student loan program.

No, it wouldn't.

 

[Cozarkian]

Have you seen the interest on payday loans or Cashcall-type loans? That is what the rates are like for unsecured loans to people with poor credit, and on very small loans.

Your 19 year old art history major with no credit history and no real income is not someone anyone would lend college tuition type money to.

What you say won't happen already does. Here is a report by the Consumer Finance Protection Bureau talking about the $150 billion in private student loans already made over the past 10+ years. Incidentally, 19 - 23 is the most common age to have private loans (by % of borrowers in that age range, not by total or % of all borrowers), I'd wager an art student or two is included in that number.

It also appears that the number of private loans are dependent upon the loan limits of federal loans, so if fed loans disappeared, private loans would grow to replace them. http://www.finaid.org/loans/privatestudentloans.phtml

Also, I'd like to point out I paid $75 in tuition my first year of college, because my college gave me a grant of over $15,000 based solely on financial need. I used student loans/work study to pay for books, travel and room. If less people are saddled with student loans when they graduate, they may be more willing to contribute to the school, allowing the school to provide financial aid for the students it wants to accept.

 

[LegendKiller]

What you say won't happen already does. Here is a report by the Consumer Finance Protection Bureau talking about the $150 billion in private student loans already made over the past 10+ years. Incidentally, 19 - 23 is the most common age to have private loans (by % of borrowers in that age range, not by total or % of all borrowers), I'd wager an art student or two is included in that number.

It also appears that the number of private loans are dependent upon the loan limits of federal loans, so if fed loans disappeared, private loans would grow to replace them. http://www.finaid.org/loans/privatestudentloans.phtml

Also, I'd like to point out I paid $75 in tuition my first year of college, because my college gave me a grant of over $15,000 based solely on financial need. I used student loans/work study to pay for books, travel and room. If less people are saddled with student loans when they graduate, they may be more willing to contribute to the school, allowing the school to provide financial aid for the students it wants to accept.

First, there needs to be a market to sell those student loans. Sallie Mae (now Navient), or Sallie Mae Bank originates those loans and sells them into securitization trusts. Investors buy securities backed by those loans. You choose where you want to invest by how much protection you have. For example, if the long-term historical default rate for Sallie Mae student loans is 20%, I may choose to only invest in a bond that has 4x that default rate in protection, assuming that 80% of borrowers could default before I lose $1.

Now SLM usually brings about 3-4 deals a year with ~700mm in each deal, or ~2.5bn in total issuance. That means that SLM would have to originate, fund (temporarily), and securitize 50x as much as they do now. That volume alone would crush the securitization market for those assets.

It is *impossible* for lenders to do this.

 

[Naeeldar]

You are both right - and both wrong. It depends on the metrics being used and measured. Taken only as two massive groups of 'college grads vs non-college grads' college still makes financial sense. (See most recently the NYT article). The average grad will make much more than the average non-grad.

However - if you dig into it more there are some fields facing tough times as they are at\have already reached the tipping point. Degrees in STEM, teaching, social work are being pushed out by high education costs vs low pay which many (Like Georgetown's Center on Education and the Workforce) think will cause economic problems down the road once existing degreed employees in those areas retire or growth exceeds available supply.

The biggest problem in all of this is that the supply and demand pendulum swings are being encouraged by the high costs. It would be difficult to leave higher education up to only supply and demand given the long lead times (4-8 years) in many areas. If we see a notable increase in demand due to a drying up of degrees its going to take a long time to recover that gap with potential consequences for every citizen yet higher costs push those to degrees with low unemployment but high pay. This is not a healthy cycle and has already caused problems (ex: MBA 2007 vs 2008, Law degrees currently) IMO the role of the government should be to smooth these swings and thats it

I agree with all of what you said. And yes people with degrees are generally doing better than those without today (so it's still worthwhile on a mass scale). but to the point you started to bring up - when you really dig into what kids are doing in terms of degrees and the amount of money being spent it gets a lot more bleak. Take a business degree at an ivy league university - if your at the top of the class great - if not you just spent major money on 4 years of debt that is going to take awhile to get out of it.

Also, we are looking at a major dry up of skilled trade workers soon that is only going to make those jobs even more lucrative.

That being said - the one thing you didn't really touch upon is what the college bubble is doing to the job market. We now require degrees for jobs that don't need them and didn't require them 15 years ago. We are literally pushing up the cost of living with this bubble - substantially.

I spoke with a Director the other day at a Fortune 50 company. When they hire new employees - the degree only tells them that they can work to get through something - they have it in them to be dedicated. That's it - and this is in the IT Field. They literally learn on the job. So why are we spending $150-200k for a degree then? Increased COL - all it does.

 

[JockoJohnson]

Don't federal student loans require co-signers? If we did away with federal student loans, why wouldn't the private industry offer loans that require co-signatures from the parents?

 

[realibrad]

I don't think that is the case. Low-income families get grants and loans, middle income families get public loans, and upper-income families get private loans or pay for it themselves.

Here's a handy table from http://www.forbes.com/sites/troyoni...college-aid-and-expected-family-contribution/

So a few things. Fasfa is not the only way schools get federal money.

But lets focus on Fasfa as that was your main point. Fasfa is paid for by federal tax money aka taxes. More than half of the students collected some federal money. This does not include state money given to the schools either. Now, understand the demographics of who is more likely to go to school, and who is more likely to graduate. The poor may enter college, but the majority do not finish. The middle and upper class finish far more often and most do get federal money. So while Fasfa may mainly target the poor, it works out that the wealthier students get far more benefit from the federal money. Now, given that the poor pay taxes and those taxes go to school, who is mainly getting the benefit?

Expand it out past Fasfa, and you realize how once sided it all gets. Reduced taxes, grants for new classes, funding for this or that, it all adds up. The better off students, because they finish more often get the majority of that. So while there is a very large chunk of poor students, they will not finish. After adjusting for test score, rich kids have a 2 in 3 chance of finishing a 4 year degree. The poor, have a 1 in 6.

 

[Cozarkian]

First, there needs to be a market to sell those student loans. Sallie Mae (now Navient), or Sallie Mae Bank originates those loans and sells them into securitization trusts. Investors buy securities backed by those loans. You choose where you want to invest by how much protection you have. For example, if the long-term historical default rate for Sallie Mae student loans is 20%, I may choose to only invest in a bond that has 4x that default rate in protection, assuming that 80% of borrowers could default before I lose $1.

Now SLM usually brings about 3-4 deals a year with ~700mm in each deal, or ~2.5bn in total issuance. That means that SLM would have to originate, fund (temporarily), and securitize 50x as much as they do now. That volume alone would crush the securitization market for those assets.

It is *impossible* for lenders to do this.

Sallie Mae is not the only originator of student loans. Remember when we had FFELP loans? There were over 100 originators of those loans, and I'm sure a healthy chunk of the 99 on this page that aren't Sallie Mae would be happy to share the burden of originating private student loans. Some of them even participate in that market already. http://www.finaid.org/loans/biglenders.phtml

The financial industry isn't a bunch of incompetents that can't respond to changes in the law and market conditions. They've found guarantors and secondary markets in the past when new types of loans developed, and they can certainly do so in the future if the government ended the student loan program. That is especially true in this case, as they can use the existing private market and rely on companies that were in the related FFELP market just a few years ago.

 

[LegendKiller]

Sallie Mae is not the only originator of student loans. Remember when we had FFELP loans? There were over 100 originators of those loans, and I'm sure a healthy chunk of the 99 on this page that aren't Sallie Mae would be happy to share the burden of originating private student loans. Some of them even participate in that market already. http://www.finaid.org/loans/biglenders.phtml

The financial industry isn't a bunch of incompetents that can't respond to changes in the law and market conditions. They've found guarantors and secondary markets in the past when new types of loans developed, and they can certainly do so in the future if the government ended the student loan program. That is especially true in this case, as they can use the existing private market and rely on companies that were in the related FFELP market just a few years ago.

Surely you must be joking...

You do realize the only way the FFELP market was that big was due to the government guaranty? Do you also realize that the SLM/Navient *TOTAL* portfolio of private student loans is only ~150bn. That's what they have that have been issued over a decade+.

Now you're saying that they can come up with the capital to fund that much *EVERY YEAR*?

And where, pray tell, will they get the equity to do that? The last SLM private deal I looked at, 2014-A, was overcollateralized by 15.17%, meaning that SLM had to put $120mm of equity into the deal. That means that for $120bn of issuance, they would have to come up with 17bn in equity, PER YEAR, to fund the entire government student loan market.

Do you ever realize the numbers we are talking here? That's 5x SLM's current market cap. They'd have to raise that *EVERY YEAR*.

Putting this into perspective to the entire securitization market. In 2013 there were $292bn of securitizations issued. About 22bn of that was student loan, about 15-18bn of that FFELP. That means that, on a net basis, the securitization market would have to swallow $100bn of additional volume, *EVERY YEAR* to make up the difference. Overnight student loans would become bigger than auto loans (92bn in 2013 issuance) and credit cards (38bn in 2013 issuance).

To put that into perspective, there'd have to be 8bn of just student loan issuance per month, when we usually only see less than 1/5 that. Furthermore, people are already concerned about whether privates can hold up, it's why spreads on the private bonds are wider than FFELPs and even the slightest noise makes them go wider still. More supply = wider spreads = costs passed on to borrowers = risk buckets getting full = no more issuance.

It simply cannot happen. I work in the industry.

 

[Cozarkian]

It's sad you have so little faith in the ability of your industry to fulfill the needs of a potential profit-driven market. I'm not suggesting this will happen overnight.

The government has economic researchers, and they aren't going to end the student loan program in a day if the financial industry won't be prepared to adjust. There would be a phase-out, probably something over 10-15 years.

The markets would adjust in other ways, as well. PSLs would still have higher rates, so people would demand fewer loans and attend cheaper colleges.

Colleges would respond to the falling demand. Part-time, night and online programs would become more popular so students could work while attending college. Some might slow tuition growth to compete. Other schools might actually raise tuition so they can redistribute money paid by students with high-income families to applicants with low-income families based on need, athletic skill, or academic merit.

Other methods for paying for college would fill some of the gap. The used book market might grow, with more outrage if schools try to change the book every year. More students might attend a local college, reducing room and board expenses. Parents, aware of the smaller availability and higher price of loans might be more diligent about saving for college in Section 529 plans. People might become more diligent about applying for scholarships.

 

[fskimospy]

There was a time before student loans. These things didn't happen.

 

[LegendKiller]

There is absolutely no impetus in the industry to finance unsecured personal loans with low interest rates, none. The only reason why credit cards can get done at any reasonable securitization structure is the high amount of interest rate, that's it. Most of the new personal loan deals coming out, like Springleaf and OneMain have very onerous structures, but still high interest rates.

SLM barely gets done and that's only because student loans are not dischargeable and that's a government giveaway to the lending industry.


What needs to happen is this - the government needs to risk-share with the schools *and* underwrite to major. That will instantly drop tuition by a huge amount, probably 25-50%. Why? Because the schools will have to price tuition by the ability to repay, otherwise they'd take massive losses in the risk-sharing agreement and the majors unable to get loans cannot just pay cash. They'd have to cut tuition costs to those majors and raise it on others, but then those majors only have a certain ability to pay also, most of which is already at or close to exceeding the ability.

You people want to attack the loans. The loans aren't the problem, it is the tuition. The tuition is the problem because the loans are unfettered and unregulated money flowing into the schools. When states provided most of the funding to the schools the schools were beholden to *LOCAL* elected officials who made them justify their expenses. However, now that the states cut higher education budgets the schools shifted to the US Government who doesn't give a shit if they add 30% more administrators, or they build huge new buildings. That's because it is a free-flowing channel. Stop that and you stop tuition increases.

However, that won't work until the US Taxpayer realizes that there is *NO* profit off of student loans and, in fact, the US Taxpayer is getting fucked over by the schools and their administrators that make $1m/yr.

 

[IGBT]

..then don't ask for the "loan". And do a ROI ( return on investment) analysis on your chosen study. Learn the difference between a hobby and a career. Only if you are very lucky will your hobby turn into a career..but betting on it should be your risk. Not the tax payers.

 

[LegendKiller]

..then don't ask for the "loan". And do a ROI ( return on investment) analysis on your chosen study. Learn the difference between a hobby and a career. Only if you are very lucky will your hobby turn into a career..but betting on it should be your risk. Not the tax payers.

I think taxpayers benefit massively from helping to educate the population and providing student loans is a good, and nobel, cause. One that Thomas Jefferson even espoused.

The problem is that the money cannot be lent without underwriting and rationalization of major and the societal benefits of the same.

Further, you cannot destroy the simple equation of lending. A borrower borrows money and takes the risk that he cannot pay it back if something doesn't work out. The lender lends the money taking the risk that the borrower cannot pay. The borrower gets the benefit of current consumption offset by future earnings. The lender gets compensated for delayed consumption by an interest rate. The more risky the borrower, the higher the rate.

However, the current equation doesn't take into account that the lender is only taking payment currency (extension) risk, not credit risk. This is because it's nearly impossible for the borrower to actually get rid of the debt (credit risk).

Thus, you have a situation where there is no penalty to lending infinite amounts to borrowers, thus, offering unlimited amounts of leverage against an unworthy credit.

The balance of the equation must be restored.

 

[CptObvious]

Interesting discussion here. I don't claim to know anything about the finance side of student loans (all I know is a big chunk of my paycheck goes to some Sallie Mae trust fund). I consolidated my loans at a time when rates were relatively low, so I can't complain about my rates, but I've been considering going back to school next year for a career change after I pay off my current loans. I was surprised by the ridiculous increase in cost of tuition and interest rates now - I'd be paying about the same to go back for an undergraduate degree as the law degree I got 10 years ago.

I agree that schools should have some skin in the game and rates should be tied to majors based on employability. I'm in a career that's become increasingly saturated with high employment and I'm just trying to pay off my debt and get out into a better field, but the high cost of education (and financing it) in the U.S. makes it a deterrent for even people with excellent credit. It's only going to become more a problem as more career fields become obsolete.

 

[OverVolt]

Interesting discussion here. I don't claim to know anything about the finance side of student loans (all I know is a big chunk of my paycheck goes to some Sallie Mae trust fund). I consolidated my loans at a time when rates were relatively low, so I can't complain about my rates, but I've been considering going back to school next year for a career change after I pay off my current loans. I was surprised by the ridiculous increase in cost of tuition and interest rates now - I'd be paying about the same to go back for an undergraduate degree as the law degree I got 10 years ago.

I agree that schools should have some skin in the game and rates should be tied to majors based on employability. I'm in a career that's become increasingly saturated with high employment and I'm just trying to pay off my debt and get out into a better field, but the high cost of education (and financing it) in the U.S. makes it a deterrent for even people with excellent credit. It's only going to become more a problem as more career fields become obsolete.

And thats the factor really compounding the problem, a field that was good 10 years ago probably isn't good today. By the time you get a degree and some work experience everything has changed. It takes years to develop the skills and the market changes directions on a whim. Its insane.

The government guarantee portion of student loans is the part making the risk very skewed. Alot of these kids simply won't make enough money to repay the loans, maybe even over their lifetime. That in itself is going to damage their spending power and the economy. Maybe with the 10 year income based repayment but even then the government is going to lose a ton of money backing those loans. The money just isn't there to repay all the wild lending. Unless you could get a degree in university administration in a giant circlejerk of wasted capital.

 

[Atreus21]

No, it wouldn't.

Why not?

 

[Atreus21]

There is absolutely no impetus in the industry to finance unsecured personal loans with low interest rates, none. The only reason why credit cards can get done at any reasonable securitization structure is the high amount of interest rate, that's it. Most of the new personal loan deals coming out, like Springleaf and OneMain have very onerous structures, but still high interest rates.

SLM barely gets done and that's only because student loans are not dischargeable and that's a government giveaway to the lending industry.


What needs to happen is this - the government needs to risk-share with the schools *and* underwrite to major. That will instantly drop tuition by a huge amount, probably 25-50%. Why? Because the schools will have to price tuition by the ability to repay, otherwise they'd take massive losses in the risk-sharing agreement and the majors unable to get loans cannot just pay cash. They'd have to cut tuition costs to those majors and raise it on others, but then those majors only have a certain ability to pay also, most of which is already at or close to exceeding the ability.

You people want to attack the loans. The loans aren't the problem, it is the tuition. The tuition is the problem because the loans are unfettered and unregulated money flowing into the schools. When states provided most of the funding to the schools the schools were beholden to *LOCAL* elected officials who made them justify their expenses. However, now that the states cut higher education budgets the schools shifted to the US Government who doesn't give a shit if they add 30% more administrators, or they build huge new buildings. That's because it is a free-flowing channel. Stop that and you stop tuition increases.

However, that won't work until the US Taxpayer realizes that there is *NO* profit off of student loans and, in fact, the US Taxpayer is getting fucked over by the schools and their administrators that make $1m/yr.

My uninformed opinion: But you're still relying on regulators, local or distant. To me it's more effective to allow schools to grow only insofar as their income merits it. In other words, according to the market.

 

[fskimospy]

My uninformed opinion: But you're still relying on regulators, local or distant. To me it's more effective to allow schools to grow only insofar as their income merits it. In other words, according to the market.

Why do you think that we should educate people only insofar as market forces allow it? Would you want to apply the same dynamics to primary education as well? If not, why are they different?

To me it is a no-brainer that universal advanced education is a huge plus to the country as a whole. The only question is how we should be financing it, not if we should be financing it.

 

[Atreus21]

Why do you think that we should educate people only insofar as market forces allow it? Would you want to apply the same dynamics to primary education as well? If not, why are they different?

Of course I would.

You might also ask why we should house people, or medicate people only insofar as market forces allow. Because these products have prices attached to them. Essentially, that's the whole role of prices: to ration scarce resources. If people want a house, or want medical care, or want an education, it is rightly their responsibility first to pay for these things. In a perfect world they'd be free.

To me it is a no-brainer that universal advanced education is a huge plus to the country as a whole. The only question is how we should be financing it, not if we should be financing it.

So again is universal housing and medicine.

What are the consequences of universal advanced education? Perhaps one is that we have young people going to college for its social purpose (partying, hooking up, relaxing), sort of as a rite of passage. All on the taxpayer dole or at any rate at little immediate cost. Whereas they should be going out of a sincere desire to learn. What do we gain by sending people to places they don't care to go?

 

[OCGuy]

Obviously we need to be teaching more basic financing/investing principal in High School. Ignorance in regards to money is pervasive in society, I have found both professionally and personally.