Student loan bankruptcy

[chucky2]

the lending institution doesn't deem them to be a risk because the loans are guaranteed by the Federal Government.

The government bares the risk, the student gets the loan, and the bank gets the risk-free interest payments

Just to be clear, the "risk free interest payments" aren't all that high, no more high than what you'd expect from having *some* risk, including payment variability, liquidity, some credit risk, and some servicer risk.

This isn't "risk free" paper. They aren't as good as treasuries when it comes down to trying to sell the bonds in an illiquid market.

I guess I'm not really understanding why the Fed Gov is guaranteeing a loan made by a private lending institution to a private citizen? I get we do that for home loans, but, why would we have the Gov do that for college loans? The entire point of letting private enterprise make the loan is it gets the Gov off the hook for the loan, lets the private enterprise correctly assess ability of borrower to repay, and given the risk, charge whatever interest rate they deem acceptable.

Maybe they need to also remove the Gov backing, as well as make the loan dischargable for non-Gov lending institutions? Seems like that'd go a long way into limiting what students have available to them and thus, go a long way into bringing down ridiculous costs, i.e. You're a straight A student with a 32 ACT and are accepted into UofI Urbana for an EE program? Sure, here is your loan at 5.0%. Next! You're a low C student with a 20 ACT and want to go to UofI Urbana to study expressionist dance? Sure, here is $2000 at 10% interest. No? Too bad kid, go do something real with your life. Next!

 

[OverVolt]

I guess I'm not really understanding why the Fed Gov is guaranteeing a loan made by a private lending institution to a private citizen? I get we do that for home loans, but, why would we have the Gov do that for college loans? The entire point of letting private enterprise make the loan is it gets the Gov off the hook for the loan, lets the private enterprise correctly assess ability of borrower to repay, and given the risk, charge whatever interest rate they deem acceptable.

Maybe they need to also remove the Gov backing, as well as make the loan dischargable for non-Gov lending institutions? Seems like that'd go a long way into limiting what students have available to them and thus, go a long way into bringing down ridiculous costs, i.e. You're a straight A student with a 32 ACT and are accepted into UofI Urbana for an EE program? Sure, here is your loan at 5.0%. Next! You're a low C student with a 20 ACT and want to go to UofI Urbana to study expressionist dance? Sure, here is $2000 at 10% interest. No? Too bad kid, go do something real with your life. Next!

Because going to college is universally good. You'll make an extra 1 million dollars over your lifetime. The logic is infallible.

 

[realibrad]

Because going to college is universally good. You'll make an extra 1 million dollars over your lifetime. The logic is infallible.

Well, that is avg. You may be one of the 50+% who do not finish school. Or, you may be one of the people who get a degree that is more expensive than the expected return.

 

[OverVolt]

Well, that is avg. You may be one of the 50+% who do not finish school. Or, you may be one of the people who get a degree that is more expensive than the expected return.

Nah just throw a trillion at it and see what sticks to the wall.

 

[realibrad]

Nah just throw a trillion at it and see what sticks to the wall.

Pshhhh

If a trillion works, why not 2 or 9? Compounded benefit means infinity money will give infinity return right?

 

[Wreckem]

Wow, thanks for that information. With the sheer amount of dollars involved I never would have guessed that it could possibly be majorly a payroll issue. Perhaps since I am construction and work on a ton of school projects I was biased.

At all levels of the education industry a majority of a budget goes towards salary and benefits. Public school districts are in the ~70% of their budget range when it comes to salary and benefits. After salary and benefits the next biggest line item is utilities.

 

[Wreckem]

The spending increases at the top universities are more commonly associated with research, facility and support costs than administration. The opposite is largely true for your for profit schools

Tuition hikes are mainly caused by pull back in state funding or lower returns/gifts for private school endowments. That is the VAST MAJORITY of the rapid increase in tuition.

Yes there was a building boom spurred by historically low interest rates. Yes there are some over leveraged universities out there(they tend to be the small shitty ones anyways), but the cost to service that debt is not as expensive as you are trying to make it out to be. Not to mention in many states, building projects are financed at the state level(state bonds or outright legislation) paid for by taxpayers and not students.

The doubling of administrative personnel costs has one of the largest impacts, but maybe not the largest, after the decrease in state funding(for state schools) and lower returns on endowments/less gifts(private schools). Right now, state higher education funding is 20-40% lower than pre-recession(that range covers ~40 states). Yeah that isn't the single biggest factor in the rise in tuition costs over the last 7 years. Going out more. State funding of higher education has pretty much been decreasing on a per capita basis since the 80s.

Another example. The law school at my alma mater raised tuition by 29% in a year after the state massively cut its budget in 2011. The class of 2014 at that school got bent over before stepping foot on campus. Insult to injury was it was after the final seat deposit.

The bottom line is, education funding(public and higher) is almost always the first to get cut in a recession and the last to get fully restored during booms. When that happens, public education(public school districts) use RIFs and Universities pass on the budget cuts to the students in the form of tuition hikes. Debt servicing, increased admin costs, at one time increased utility costs, etc have contributed to tuition increases but they all PALE in comparison to state budget cuts to higher education.

 

[Belegost]

Well, that is avg. You may be one of the 50+% who do not finish school. Or, you may be one of the people who get a degree that is more expensive than the expected return.

Even "some college" people have a median income 9k/year higher than just HS completion, that still works out to a $360k advantage over 40 years of work - or $90k over the standard 10 year student loan repayment period.

So even for someone who fails out they are likely to do better than those who didn't try at all even during the repayment period, provided they kept their loans down to <65k (assuming 6.5% interest.) Plus the extra earnings later in life.

As for those who finish an associate's degree, the advantage is 14k/year. So even someone who spent a ridiculous $100k on getting an associate's would tend to come out ahead in the 10 year repayment period.

Finishing the bachelor's - $22k/year advantage over HS only. This suggests that completing a bachelor's would be worthwhile (only considering the 10 year repayment period and discounting the roughly 30 more years available for earning) if the loans were around $160k, or $40k/year on a 4 year degree.

Also, I realize the data in that chart is a little old - it's the only one I've found so far showing some college and AA. The truth is that as of 2011 the separation for bachelor's had widened:


Given that disparity, the average bachelor's holder would be looking at an advantage of $38k/year - or $275k paid off at 6.5% over 10 years.

Admittedly this analysis is a bit simplistic as the median values are not controlled for experience and wage growth over time, nor is there an accounting for the large variance in earnings based on field entered. However, even then I would argue that the advantage over a 40 year work lifetime would generally favor degree earners, and even some college, even including the high costs of universities today.

 

[rpanic]

Government trying to help and causing unintended consequences. I think a lot of colleges especially for profit ones just raise prices with the increase of government grants and loans. Student loans should be almost interest free if the bankruptcy rules are not going to change and there should be caps depending on the degree that is being work towards. Some of the amounts that people are loaned for useless degrees are nothing but ridiculous.

 

[Attic]

Yeah, cheap credit hasn't driven up costs enough. Let's add direct subsidies to make the problem worse!

Agree with the results of cheap credit and college tuition. Not a simple answer here IMO. First step is to keep kids from coming out of college with a debt hangover that breaks down their housing and marriage/family prospects.

We shouldn't be sticking young kids (stupid, easily swindled) with a bill bought on irresponsible and short sighted government just because we can. These young kids are being asked/forced to pick up the tab for underfunded colleges.

 

[werepossum]

Agree with the results of cheap credit and college tuition. Not a simple answer here IMO. First step is to keep kids from coming out of college with a debt hangover that breaks down their housing and marriage/family prospects.

We shouldn't be sticking young kids (stupid, easily swindled) with a bill bought on irresponsible and short sighted government just because we can. These young kids are being asked/forced to pick up the tab for underfunded colleges.

I don't really see the difference here. Say government massively increases its support for universities. Now you've eliminated any reason to be responsible with the money, not to mention eliminating any competition since you've decoupled the payday from the product. Beyond that, who's going to pay all that money back, the tooth fairy? It's the same kids who are borrowing money now. All you'd be doing is shifting the burden away from those who dropped out or degreed in psychology/philosophy/anthropology/ women's and minorities' studies and onto the doctors, engineers, programmers, business majors, etc. Not to mention those in the trades, who work hard and have a good income without racking up student loans. How is that desirable?

 

[unokitty]

Even "some college" people have a median income 9k/year higher than just HS completion, that still works out to a $360k advantage over 40 years of work - or $90k over the standard 10 year student loan repayment period.

So even for someone who fails out they are likely to do better than those who didn't try at all even during the repayment period, provided they kept their loans down to <65k (assuming 6.5% interest.) Plus the extra earnings later in life....

Given that disparity, the average bachelor's holder would be looking at an advantage of $38k/year - or $275k paid off at 6.5% over 10 years...

If the earnings advantage is between $90K and $275K over ten years, why is there a demand to be allowed to declare bankruptcy?

Seems incongruent to say on one hand that these people need to be allowed to declare bankruptcy because they can't make enough money to pay their loans and on the other hand to say isn't it wonderful that they make so much more money than other people...

Or, are you arguing that, since they make so much money, bankruptcy shouldn't be allowed?

Uno

 

[Belegost]

If the earnings advantage is between $90K and $275K over ten years, why is there a demand to be allowed to declare bankruptcy?

Seems incongruent to say on one hand that these people need to be allowed to declare bankruptcy because they can't make enough money to pay their loans and on the other hand to say isn't it wonderful that they make so much more money than other people...

Or, are you arguing that, since they make so much money, bankruptcy shouldn't be allowed?

Uno

Why are there people who want to bankrupt out of their loans? Because there are always those that fail, that end up on the lower half of the earnings curve. Such is the way of life.

It was not an argument for or against dischargability - though I think private loans should be dischargeable, as they were prior to 2005. I think the rather low limits on government backed loans keeps them from being an issue.

My argument was that a university education is not overpriced, even at current high rates, when amortized over the working lifetime of an individual, or even more specifically over the repayment period for the loan, for the average degree earner. And it is even financially reasonable for the average failure student. So long as the earning potential outstrips the capital risked, it makes sense for students to take the loans.

As for those who dump piles of money into low value degrees - there are always idiots; though I do believe that allowing the debt to be cleared in bankruptcy would put a pressure on the financing institutions to play more conservatively, and loan less money for students pursuing low value majors.

Long term, I think a reasonable solution would be to have a larger federal loan limit for the first year(say up to 25-30k), and then small limits for the following years (perhaps around current limits, or even lower) This would use government funds to encourage education (a benefit to society overall) to start, and then private loans will be needed cover the further years, after a student has given a clear indication of their risk level based on coursework completed in the first year. Those who do poorly in their first year will find a poor situation for them in further years, which would encourage them to explore alternatives that may be more rewarding for them in the long run. Those who excel in their first year will find it easier to get lending, and will be those who are more likely to succeed in their field post-degree.

 

[LegendKiller]

If the earnings advantage is between $90K and $275K over ten years, why is there a demand to be allowed to declare bankruptcy?

Seems incongruent to say on one hand that these people need to be allowed to declare bankruptcy because they can't make enough money to pay their loans and on the other hand to say isn't it wonderful that they make so much more money than other people...

Or, are you arguing that, since they make so much money, bankruptcy shouldn't be allowed?

Uno

People who will make a lot of money won't get a discharge.

 

[LegendKiller]

Tuition hikes are mainly caused by pull back in state funding or lower returns/gifts for private school endowments. That is the VAST MAJORITY of the rapid increase in tuition.

Yes there was a building boom spurred by historically low interest rates. Yes there are some over leveraged universities out there(they tend to be the small shitty ones anyways), but the cost to service that debt is not as expensive as you are trying to make it out to be. Not to mention in many states, building projects are financed at the state level(state bonds or outright legislation) paid for by taxpayers and not students.

The doubling of administrative personnel costs has one of the largest impacts, but maybe not the largest, after the decrease in state funding(for state schools) and lower returns on endowments/less gifts(private schools). Right now, state higher education funding is 20-40% lower than pre-recession(that range covers ~40 states). Yeah that isn't the single biggest factor in the rise in tuition costs over the last 7 years. Going out more. State funding of higher education has pretty much been decreasing on a per capita basis since the 80s.

Another example. The law school at my alma mater raised tuition by 29% in a year after the state massively cut its budget in 2011. The class of 2014 at that school got bent over before stepping foot on campus. Insult to injury was it was after the final seat deposit.

The bottom line is, education funding(public and higher) is almost always the first to get cut in a recession and the last to get fully restored during booms. When that happens, public education(public school districts) use RIFs and Universities pass on the budget cuts to the students in the form of tuition hikes. Debt servicing, increased admin costs, at one time increased utility costs, etc have contributed to tuition increases but they all PALE in comparison to state budget cuts to higher education.

This may be correct for some schools, but not all. Take, for example, Clemson. I looked at it for somebody else. IIRC the budget has doubled in the last 10 years while state funding was cut by ~20%.

I agree that state funding has dropped but school budgets have bulged.

 

[LegendKiller]

I guess I'm not really understanding why the Fed Gov is guaranteeing a loan made by a private lending institution to a private citizen? I get we do that for home loans, but, why would we have the Gov do that for college loans? The entire point of letting private enterprise make the loan is it gets the Gov off the hook for the loan, lets the private enterprise correctly assess ability of borrower to repay, and given the risk, charge whatever interest rate they deem acceptable.

Maybe they need to also remove the Gov backing, as well as make the loan dischargable for non-Gov lending institutions? Seems like that'd go a long way into limiting what students have available to them and thus, go a long way into bringing down ridiculous costs, i.e. You're a straight A student with a 32 ACT and are accepted into UofI Urbana for an EE program? Sure, here is your loan at 5.0%. Next! You're a low C student with a 20 ACT and want to go to UofI Urbana to study expressionist dance? Sure, here is $2000 at 10% interest. No? Too bad kid, go do something real with your life. Next!

The government was guaranteeing loans made by private institutions because they were acting as middle-men for the government. They originated the loans, serviced the loans, and financed the loans. For that the banks collected a very small fee. Investors in those loans collected a small fee that was commensurate with the risks, which I have mentioned above. Now, instead of financing those externally the government is just financing it through US Treasuries. Eventually they'll have to finance it into the securitization market.

I think there should be government financing, but it needs to be done rationally, like you have mentioned. It will force schools to be rational in their economics also.

 

[Belegost]

Further I think some regulatory requirements need to be levied on lenders/universities.

Lenders:
Mortgage lending has rather strict debt/earnings requirements for the monthly payments. I think educational loans need to be restricted similarly based on expected earnings for graduates with the desired degree compared to the monthly debt service for the amount needed to complete the degree.

Universities:
As soon as that happens the response from schools will be to set tuition/fees based on major. To avoid having 20 million art majors and 20 engineers, universities would need to be forced to ensure that the required tuition/fees needed to complete any given degree level is within some small percentage in cost between the cheapest and most expensive. I.e. A degree in nuclear engineering can only cost 10% more than a degree in history of ground squirrels.

I am mostly anti-regulation, however an educated population is valuable to the nation, and one that free market forces can drive into poor outcomes. I think regulation in the vein of that above could serve to limit the educational cost inflation by damping demand.

 

[DCal430]

I guess I'm not really understanding why the Fed Gov is guaranteeing a loan made by a private lending institution to a private citizen? I get we do that for home loans, but, why would we have the Gov do that for college loans? The entire point of letting private enterprise make the loan is it gets the Gov off the hook for the loan, lets the private enterprise correctly assess ability of borrower to repay, and given the risk, charge whatever interest rate they deem acceptable.

Maybe they need to also remove the Gov backing, as well as make the loan dischargable for non-Gov lending institutions? Seems like that'd go a long way into limiting what students have available to them and thus, go a long way into bringing down ridiculous costs, i.e. You're a straight A student with a 32 ACT and are accepted into UofI Urbana for an EE program? Sure, here is your loan at 5.0%. Next! You're a low C student with a 20 ACT and want to go to UofI Urbana to study expressionist dance? Sure, here is $2000 at 10% interest. No? Too bad kid, go do something real with your life. Next!

You do know the federal government stop backing private student loans over 5 years ago.

 

[LegendKiller]

You do know the federal government stop backing private student loans over 5 years ago.

....


They did not stop backing private student loans. There were always government loans. They were either made by the FFEL program, or by DirectLoans. I had both when I went through undergrad and grad. They removed the FFEL program in 2010 because they wanted to realize a "cost savings". However, the savings was mythical. Nobody made much money off of FFELP securitized bonds and they are not "risk free" by any stretch of the imagination.

 

[DCal430]

The government was guaranteeing loans made by private institutions because they were acting as middle-men for the government. They originated the loans, serviced the loans, and financed the loans. For that the banks collected a very small fee. Investors in those loans collected a small fee that was commensurate with the risks, which I have mentioned above. Now, instead of financing those externally the government is just financing it through US Treasuries. Eventually they'll have to finance it into the securitization market.

I think there should be government financing, but it needs to be done rationally, like you have mentioned. It will force schools to be rational in their economics also.

The federal government has always done direct loans, they just use to do some indirect loans too with private banks. There is also the program where the federal government give money to schools, who act as lender to the students. The Perkins loan program.

 

[OverVolt]

Pshhhh

If a trillion works, why not 2 or 9? Compounded benefit means infinity money will give infinity return right?

This guy gets it

No point in arguing about it anymore IMO. Its screwed.

 

[OverVolt]

Further I think some regulatory requirements need to be levied on lenders/universities.

Lenders:
Mortgage lending has rather strict debt/earnings requirements for the monthly payments. I think educational loans need to be restricted similarly based on expected earnings for graduates with the desired degree compared to the monthly debt service for the amount needed to complete the degree.

Universities:
As soon as that happens the response from schools will be to set tuition/fees based on major. To avoid having 20 million art majors and 20 engineers, universities would need to be forced to ensure that the required tuition/fees needed to complete any given degree level is within some small percentage in cost between the cheapest and most expensive. I.e. A degree in nuclear engineering can only cost 10% more than a degree in history of ground squirrels.

I am mostly anti-regulation, however an educated population is valuable to the nation, and one that free market forces can drive into poor outcomes. I think regulation in the vein of that above could serve to limit the educational cost inflation by damping demand.

How about administrators and universities ride the gravy train for as long as possible? How about that idea?

 

[LegendKiller]

The federal government has always done direct loans, they just use to do some indirect loans too with private banks. There is also the program where the federal government give money to schools, who act as lender to the students. The Perkins loan program.

No shit sherlock. The loans weren't "private loans". They may have been privately funded through 401ks, mutual funds and the like, but overall, the program was 100% directed by the government. The Servicers are overseen by the Dept. of Education. The loan terms are dictated by the government.

Nobody made a ton of money on FFELP loans, at least not the primary purchasers/servicers. Hell, servicing them is getting to be a pain in the ass and that's why you have so much consolidation.

 

[Belegost]

How about administrators and universities ride the gravy train for as long as possible? How about that idea?

The issue with administrator pay pivots on the issue with executive pay. The responsibilities of the top administrators of a large university are similar in scope and nature to those of the top executives of medium-large corporations. Thus to keep good administrators it is necessary to compensate them sufficiently to keep them from jumping to industry.

Given that executive level compensation has been growing like Jack's beanstalk, it's no surprise that administrator compensation has been rising fast as well. Even as it is, I would say that administrator comp is insufficient to keep the really good talent - hence the really shitty leadership at most universities.

 

[Zorkorist]

Of course this is all fucked up...

But, may I say, we have Department of Education, and have had one for a long time.

Have they done an ounce of good?

Seriously?

This is the first department you hear conservatives say "we can eliminate this!" from the federal government.

In truth, education is a lot more fucked up today than ever.

-John