Wall St Jo: Student-Loan Debt Tops $1 Trillion

[piezoe]

Quote from Scataphagos:

Student loans which can't be repaid.. just another "redistribution of wealth". Yeah, I know.... student loan debts "can't" be discharged through BK...

Wanna bet the government/Democrats don't find a way to heap that obligation onto the ones who pay taxes, anyway?

It seems this is basically correct, but it may be that the recipients of the "redistribution" you write of are not obvious. As pointed out by Trader56, the for profit "educational" corporations are responsible for 50% or more of the defaults, and they have in aggregate far fewer students than the traditional, non-profit colleges and universities. The students who get those loans use part or all of the loan to pay tuition to the corporations running those sham operations. Furthermore, as an inducement to make such loans to those with no credit history, the taxpayer indemnifies the loan maker against loss. Thus the "redistribution" you write of is mainly from the taxpayer to the sham educational institutions, the banking sector, and possibly to the private student loan industry.

When you consider the depth and magnitude of this and similar subterfuge throughout the U.S. economy, at least part of the wealth redistribution from a shrinking middle class to the top few percent in the country may be explained rather nicely.

 

[trader56]

Here's just one of the many realities of this.

Students are hand-held through the FAFSA process. The school is, of course, paid directly, BUT students are able to borrow much more than they need for tuition and expenses.

So what happens is, these often inner-city, bottom-of-the-barrel students are handed a check each quarter. For-profits usually have 4 quarters yearly as this allows for 4 enrollment and dispersement periods. This check - over and above tuition and expenses - can be several hundred dollars a week!

It doesn't take more than a quarter or so of this for students to become dependant upon this extra money, and they often stay at the school, barely passing and often repeating classes as long as their student aid checks keep coming.

They can now borrow over 55K for an A.A. degree in such things as medical billing and coding, pharmacy tech, and massage "therapy."

Most of them fail to realize this is a loan that will have to paid back. All they see is "free school," and a check every quarter. For them, it's like being paid to go to school! Of course, if they had the financial wherewithal, they'd realize it's absurd to borrow money to buy yourself a $15 per hour job. Any extra they make over the $8-10 an hour they make now (or welfare payment they get now) will be consumed for the next 10 years simply paying off the loan.

Tragic, and the government is just as complicit in this as these so-called "schools" are by allowing this.

 

[etile]

its not so bad when you take the student loan deduction on taxes (limit 2500, im sure this will rise). At the 25% marginal tax rate, that essentially lops off a quarter off your interest rates, assuming your annual interest payments are roughly 2500 a year.

Amortize that over an extended period of time, say 25 years, and assume a steady rate of inflation really aren't that far behind. This is all of course assuming you can service the debt. So for those federal loans, at 6.8%, you're paying an effective 5.1%, which isn't too bad.

 

[denner]

Quote from trader56:

Here's just one of the many realities of this.

Students are hand-held through the FAFSA process. The school is, of course, paid directly, BUT students are able to borrow much more than they need for tuition and expenses.

So what happens is, these often inner-city, bottom-of-the-barrel students are handed a check each quarter. For-profits usually have 4 quarters yearly as this allows for 4 enrollment and dispersement periods. This check - over and above tuition and expenses - can be several hundred dollars a week!

It doesn't take more than a quarter or so of this for students to become dependant upon this extra money, and they often stay at the school, barely passing and often repeating classes as long as their student aid checks keep coming.

They can now borrow over 55K for an A.A. degree in such things as medical billing and coding, pharmacy tech, and massage "therapy."

Most of them fail to realize this is a loan that will have to paid back. All they see is "free school," and a check every quarter. For them, it's like being paid to go to school! Of course, if they had the financial wherewithal, they'd realize it's absurd to borrow money to buy yourself a $15 per hour job. Any extra they make over the $8-10 an hour they make now (or welfare payment they get now) will be consumed for the next 10 years simply paying off the loan.

Tragic, and the government is just as complicit in this as these so-called "schools" are by allowing this.

Really good post. A few blogs have made mention of this as another backdoor type of short term stimulus. It's really all about funding current consumption with no concerns about the piles of debt that accumulate in various programs that will literally kill consumption at some future date.

It's also why each round of this borrow and bust leads to concentrated peaks of market euphoria and the bs "green shoots" that trick the data into something that really isn't there.

It's pretty easy to imagine all of these 18-24 year olds encouraging each other to just take out a bunch of student loans, buying their iPhones, cars, renting apartments, etc...while still remaining in some nebulous "gray" area as far as employment statistics are concerned.

 

[denner]

Quote from etile:

its not so bad when you take the student loan deduction on taxes (limit 2500, im sure this will rise). At the 25% marginal tax rate, that essentially lops off a quarter off your interest rates, assuming your annual interest payments are roughly 2500 a year.

Amortize that over an extended period of time, say 25 years, and assume a steady rate of inflation really aren't that far behind. This is all of course assuming you can service the debt. So for those federal loans, at 6.8%, you're paying an effective 5.1%, which isn't too bad.

IMO, it's analogous to arguments that were made about buying extremely overpriced real estate at teaser rates. Nobody seemed to pay any attention to what that house they were buying in 2006 sold for just 4-6 years prior.

It's the same thing with these college tuition costs. It wasn't THAT long ago that students could work summers and pay for in-state tuition along with some spending money..if need be they could work part time during the school year and cover all costs. The problem nowadays is that those same jobs pay about the same as they did 20 years ago, yet tuition costs have basically tripled.

So pardon me if I call it nonsense that anyone should try to look at the bright side of financing their student loan debt over the same duration as a mortgage and considering it a win-win.

 

[Publicus]

Challenge: name one thing worse for you than college.

You get $100,000 in debt, and worse, the mindset of a lifetime of indentured servitude - that really costs you.

Then, many people don't get anything for their trouble - unless maybe you majored in a hard science.

!! Here's one thing nobody talks about - the hand-picked, cream of the crop people that are touted as college success stories (coming out of Yale, Harvard, Stanford), would have become successes *without college*.

In other words, you take the starting High School quarterback with a 785 SAT, and that kid would have become a success anyway! How much misery did college really save that kid??

 

[denner]

Quote from Publicus:


In other words, you take the starting High School quarterback with a 785 SAT, and that kid would have become a success anyway! How much misery did college really save that kid??

Sort of confused on this point. The 785 SAT kid would be Prop 48.

If the kid is a superstar QB, he pretty much has to go to some powerhouse college to get drafted into the NFL. Then again, these sports programs at universities might as well be separate from the university. Most of the kids who barely meet the minimum academic standards for entrance can't even pass the courses in a defined academic program. Instead, the athletic department pressures the university into creating a bunch of fluff courses outside of the system, that meet with a private tutor that gives them a grade.

Nobody talks about all this sort of bullshit when they "tout" the graduation rate for alot of these athletes. It's a small miracle if you find out one of them graduated in a legit major...say Jeremy Lin, an econ major at Harvard.

 

[etile]

Quote from denner:

IMO, it's analogous to arguments that were made about buying extremely overpriced real estate at teaser rates. Nobody seemed to pay any attention to what that house they were buying in 2006 sold for just 4-6 years prior.

It's the same thing with these college tuition costs. It wasn't THAT long ago that students could work summers and pay for in-state tuition along with some spending money..if need be they could work part time during the school year and cover all costs. The problem nowadays is that those same jobs pay about the same as they did 20 years ago, yet tuition costs have basically tripled.

So pardon me if I call it nonsense that anyone should try to look at the bright side of financing their student loan debt over the same duration as a mortgage and considering it a win-win.

Do I think the student debt situation is outrageous on the aggregate level? Absolutely. However, my point is that on the individual level the situation is still very manageable for the prudent student. Is it a win-win situation, far from it.

Personally I think the spigot on the easy money for student loans needs to get lopped off. Private student loans should be able to be discharged in bankruptcy. Why private finance institutions should be able to charge a premium over federal student loans and receive the same level of default protection is ridiculous.

Public school systems are still relatively affordable. The UC system is still, relatively, cheap. Although I admit the tuition rate hikes are absurd over the last few years.

 

[piezoe]

Quote from etile:

Do I think the student debt situation is outrageous on the aggregate level? Absolutely. However, my point is that on the individual level the situation is still very manageable for the prudent student. Is it a win-win situation, far from it.
...
The UC system is still, relatively, cheap. Although I admit the tuition rate hikes are absurd over the last few years.

I imagine tuition rate hikes in California were especially steep given the States poor financial situation. It is commonly believed that overall tuition hikes have exceeded inflation. In fact there has been many reports on the internet and in the media stating this. But many of these reports are misleading because they use the Fed's core inflation rate for comparison, or they may be reporting anecdotal, isolated instances. This is pretty much nonsense.

How tuition increases in the U.S., on average, compare with inflation depends, of course, on which inflation measure you use. For example using the more realistic consumer inflation rate over the ten year period 1998 to 2008, tuition increased 44 percent from an average of 5200$ to an average of $7800. This is an average annual increase over that period of slightly less than the average consumer inflation rate over the same period, which averaged a little over 5%. This is using the 1980 consumer inflation method. During the same period, State and local higher education appropriations actually declined by about 10%, in spite of inflation. Declining State and local appropriations together with inflation are, naturally, the most important driver of tuition increases.

Other time periods of ten years or more, give similar results.

Thus tuition hikes have, overall, just about kept pace with inflation, but decreases in appropriations over the same periods have left the public institutions underfunded in constant dollars compared with years past. Many of these colleges and universities are really having to scramble to avoid damaging cuts to their academic budgets.

See www.shadowstats.com for various measures of inflation.

 

[denner]

Quote from piezoe:

I imagine tuition rate hikes in California were especially steep given the States poor financial situation. It is commonly believed that overall tuition hikes have exceeded inflation. In fact there has been many reports on the internet and in the media stating this. But many of these reports are misleading because they use the Fed's core inflation rate for comparison, or they may be reporting anecdotal, isolated instances. This is pretty much nonsense.

How tuition increases in the U.S., on average, compare with inflation depends, of course, on which inflation measure you use. For example using the more realistic consumer inflation rate over the ten year period 1998 to 2008, tuition increased 44 percent from an average of 5200$ to an average of $7800. This is an average annual increase over that period of slightly less than the average consumer inflation rate over the same period, which averaged a little over 5%. This is using the 1980 consumer inflation method. During the same period, State and local higher education appropriations actually declined by about 10%, in spite of inflation. Declining State and local appropriations together with inflation are, naturally, the most important driver of tuition increases.

Other time periods of ten years or more, give similar results.

Thus tuition hikes have, overall, just about kept pace with inflation, but decreases in appropriations over the same periods have left the public institutions underfunded in constant dollars compared with years past. Many of these colleges and universities are really having to scramble to avoid damaging cuts to their academic budgets.

See www.shadowstats.com for various measures of inflation.

Let's just say I'm having a REALLY hard time believing the average tuition was $7800 in 2008. I'm sure it makes the numbers "work" to average in every university in the country, but it might be more realistic to average out the top 200 or 300 schools.

Private colleges and universities were charging roughly $40,000-$45,000 per year in tuition alone by 2008.