US Using Its Youth as a Credit Card? (Another Student Loan Thread)

[Atreus21]

Interesting article.

On the one hand, it tells us that the CBO projects a $127 billion profit.

On the other hand, it tells us that the Institute for Higher Education Policy study shows that 41 percent of student loan borrowers couldn't make loan payments at all..

Anyway, what is your opinion?

Is it good for the government to take $127 billion dollars in profit from student loans and put it in their 'general' fund?

Or, is that $127 billion projected profit just an illusion?

Or do you have a different insight?

Uno

I consider it a miracle that loans at such low interest rates return much of a profit at all. And if the government is going to use it to pay down debts, GOOD. It's a responsible course of action.

 

[werepossum]

If you think about it, it is quite ingenious by the government to come up with such a revenue source.

They key here is that government student loans can't be discharged in bankruptcy. This allows the government to offer cheaper rates than anyone else.

Because of these cheap rates, colleges can overcharge for their services since they know that the government will be there to front the payment. Growth of education expenses will keep feeding on itself until it reaches a limit. At that point, the system will either explode, gradually decline, or remain constant.

There is only one way to fix this. That is to allow all new government loans to students to be discharged in bankruptcy.

Legendkiller makes a strong case that there is no actual profit. The federal government has the unique ability to not charge itself interest, which can turn a money losing program into an apparently money making program via accounting.

As for dischargeable loans, the only way that works is at a much higher interest rate, and increases in the interest rate directly lead to more bankruptcies which must lead to further increases in the interest rate . . . I don't think it's in our interests to set up a situation where large numbers of young people start their working life with bankruptcy. The only solution I can see is breaking the curve, so that somehow increasing the number of people able to afford a college education does not increase the cost of that education. That's a fundamental law of economics and we are not historically good at defeating those. That's why I am so interested in what a professional like Legendkiller says about it, as sometimes what is absolutely true in principle is not at all absolutely true in practice.

 

[Fern]

-snip-
Anyway, what is your opinion?

Is it good for the government to take $127 billion dollars in profit from student loans and put it in their 'general' fund?

No, the fed govt should NOT be profiting on student loans. The should set it up as break even.

Or, is that $127 billion projected profit just an illusion?

It would seem so. I can't see a profit given the expected (high) default rate.

Fern

 

[Fern]

Remember when people paid for college by being a waiter over the summer. Yea me either it was 20 years before I was born. Those same people however won't shut up with the "it worked for me" bias but couldn't even rattle off the current interest rate on undergrad/graduate loans. Then some rambling about high interest rates in the 70's as if that matters when people rack up huge principles.

Remember that article about the lawyer who paid off his student loans with his first paycheck? Me either you'd need a time machine and dial it back two decades. I'm sick of advice that is about two decades past its expiration.

Don't get me wrong I'm doing okay for myself but the average person is completely screwed.

Yeah, I remember when tuition was reasonable and a Summer job could likely pay it.

But I think the current situation is insane. Tuition is obscenely high and interest rates on govt student loans are way too high also.

Yeah, the average person is screwed, or at least forced to accept an instate institution (instate tuition) and/or maybe go to JUCO for their first two yrs.

Fern

 

[xeemzor]

Again, from a deployment of risky capital *and* match funding the asset it is massively unprofitable.

To take a step backward, you have to look at the performance data and the current default information.

Only about 50-70% of students are actually paying their loans. Thus, any delinquency or default data you use has to be measured against the *paying* population. Current delinquencies run in the 11-15% area, overall severe delinquencies are ~11% of the population, or more than 22% of paying loans. Default rates, estimated by the DoE, run in the 16-17% area, but that number has been increasing by ~1-2% per year as the problem is gaining momentum. Remember that this problem has gained speed quickly over the past decade and students are in school at least 4 of those years, thus, our data is at least 4 years stale.

The only way this has been kept this low is non-dischargability. Default rates were roughly double what they were for a seasoned cohort prior to non-dischargability. They were 12-15% IIRC, pre-crisis they were ~6%. Thus, you could estimate that default rates currently, with dischargability would be 20-30%, not 16-17%. As I said before, this is gaining momentum.

The data we see sucks. I spent a lot of time look at FFELP loan pools since they are the ones private parties could "purchase" through securitization. The data is horrible. Usually 20%+ of the pools are in forbearance or deferment, if not 30-40%. The default data we have is understated due to them using the entire population, not the paying population, and the prepayment data is worse. This is for loans that are now ~4 years seasoned since they got rid of the FFELP program.

Now the biggest thing being blown around is "loan affordability". Why? Because they know the loans are unsustainable for a "normal" person. Thus they end up putting people on income based repayment where they pay ~10% of their disposable income and then get the loan forgiven in 20-25 years. The problem with this is that the 10% payment is almost always a negative amortizing loan.

Think of it this way. A person making 30k with 60k in loans will have a monthly loan payment of $673/mo. Under Pay as you earn the payment would be ~110/mo, which results in a underpayment of $573/mo and a neg-am of more than $220, but the government doesn't capitalize that interest. That is key, more than 2/3 of their "excess spread" (interest rate - funding cost - default rate - servicing fee) is gone. That is huge.

Furthermore, as loan pools pay down the payment statistics worsen, resulting in a pretty large extension as prepayments drop, defaults slow and forbearance/deferments increase.

As more borrowers are stuck on PYE/IBR and debt loans increase, the worse the situation becomes. It only builds on itself as debt loads increase significantly.

Whats worse is that for-profit loans actually default much higher, like 20-30%, and they cost the most while completion rates are the lowest and degree value is horrible.

I could go on and on and on about this. The economics of degrees is being destroyed, quickly, it is something I speak about professionally.

So what's the end game to all of this? Do we see a crash in the number of students and people getting degrees?

I can only imagine the impact to the middle class.

 

[Mai72]

Remember when people paid for college by being a waiter over the summer. Yea me either it was 20 years before I was born. Those same people however won't shut up with the "it worked for me" bias but couldn't even rattle off the current interest rate on undergrad/graduate loans. Then some rambling about high interest rates in the 70's as if that matters when people rack up huge principles.

Remember that article about the lawyer who paid off his student loans with his first paycheck? Me either you'd need a time machine and dial it back two decades. I'm sick of advice that is about two decades past its expiration.

Don't get me wrong I'm doing okay for myself but the average person is completely screwed.

Great point. Every Time a middle aged person states "I worked and I was able to pay for school" drives me up a wall. They are literally living in the past. You would have to make $30 of more a hour to avoid today's tuition.

The average person is screwed and it's going to be a nagging issue for many years unless we do something about it.

 

[Mai72]

So what's the end game to all of this? Do we see a crash in the number of students and people getting degrees?

I can only imagine the impact to the middle class.

The impact is going to be HUGE for the middle class. We are going to have a large percentage of people who are never going to be able to contribute to the American economy. These people are going to live with their parents into their 40's and beyond. They are in debt for life. They are going to slide right into poverty, which means higher taxes. People who are working and making a decent living are going to be taxed even more. You are going to have to support these people.

IMO, this is just the beginning.

 

[drebo]

So what's the end game to all of this? Do we see a crash in the number of students and people getting degrees?

I can only imagine the impact to the middle class.

The answer is vocational training, trade schools, and loans conditional on major.

The problem is that the Education system in the US has brainwashed everyone that they need a college degree--any college degree--to avoid having to go on welfare. They don't explain, of course, that a degree in English is mostly useless unless you want to be a teacher. So students end up spending 6-8 years in school instead of 4. Not only are they spending more, but they're losing income. Double whammy.

If, instead, they were taught in high school the basics of living (home ec) and exposed to trades (auto shop, wood shop, cooking, etc) and encouraged to find something they enjoyed instead of studying medieval Europe and World Religions, it might make for a more productive workforce and a stronger middle class that doesn't start out their adult life in huge debt.

We need to rethink our education system. Unfortunately, there's too much money and too many politics invested in it. They need the students getting useless degrees.

 

[Mai72]

The answer is vocational training, trade schools, and loans conditional on major.

The problem is that the Education system in the US has brainwashed everyone that they need a college degree--any college degree--to avoid having to go on welfare. They don't explain, of course, that a degree in English is mostly useless unless you want to be a teacher. So students end up spending 6-8 years in school instead of 4. Not only are they spending more, but they're losing income. Double whammy.

If, instead, they were taught in high school the basics of living (home ec) and exposed to trades (auto shop, wood shop, cooking, etc) and encouraged to find something they enjoyed instead of studying medieval Europe and World Religions, it might make for a more productive workforce and a stronger middle class that doesn't start out their adult life in huge debt.

We need to rethink our education system. Unfortunately, there's too much money and too many politics invested in it. They need the students getting useless degrees.

My brother works for the Post Office. He's been with them for 16 years now. He makes $27 an hour, $60k a year with overtime. He has a 401k that the PO matches, and excellent health care/dental. Plus, he gets time off when needed, and it's fully paid.

Compare that to someone who graduates from college w/ degree in social work. They are probably carrying $40 in loan debt and they are making $25-29k a year. They don't have medical and no matching 401k. Plus, being a social worker can be a very stressful job.

Who made out in the end?

 

[Mai72]

We need to rethink our education system. Unfortunately, there's too much money and too many politics invested in it. They need the students getting useless degrees.

I can see the student loan situation changing only when we reach crisis level, and we're forced to change. The banks make out even if the student defaults on their loan.

 

[LegendKiller]

http://www.zerohedge.com/news/2014-...n-forgiveness-forces-administration-backtrack


Lol. I saw this shit a mile away. The debt burden is too large and these government fuckups don't even know it. Too many are qualifying foe the programs because even conservative estimates show the problem.

Just throw out more loans, that'll solve the problem you fucking morons.


I said this would happen at a professional conference 3 months ago.

14bn a year. Thats because the negative amortization proble I mentioned above.


I am laughing my ass off that a single person believes this program will actually make a profit.

 

[werepossum]

http://www.zerohedge.com/news/2014-...n-forgiveness-forces-administration-backtrack


Lol. I saw this shit a mile away. The debt burden is too large and these government fuckups don't even know it. Too many are qualifying foe the programs because even conservative estimates show the problem.

Just throw out more loans, that'll solve the problem you fucking morons.


I said this would happen at a professional conference 3 months ago.

14bn a year. Thats because the negative amortization proble I mentioned above.


I am laughing my ass off that a single person believes this program will actually make a profit.

Holy crap. This makes it hard to believe he's not following the Saul Alinsky formula of overloading the system and crashing it to bring on the revolution.

 

[Fern]

Great point. Every Time a middle aged person states "I worked and I was able to pay for school" drives me up a wall. They are literally living in the past. You would have to make $30 of more a hour to avoid today's tuition.

The average person is screwed and it's going to be a nagging issue for many years unless we do something about it.

Any "middle age" person speaking like that has no college age kids, or none near college age.

Fern

 

[LegendKiller]

Holy crap. This makes it hard to believe he's not following the Saul Alinsky formula of overloading the system and crashing it to bring on the revolution.

No more so than Bush was doing it with the "ownership society".

 

[xeemzor]

Even if some of the sources are good, since when has zerohedge been a credible source?

 

[soccerballtux]

Even if some of the sources are good, since when has zerohedge been a credible source?

What? They post plenty of legitimate articles. Attack the data if you can, don't poison the well by attacking zero hedge. We have several serious problems on our hands and ZH is about the only site tracking all of them.

 

[LegendKiller]

Even if some of the sources are good, since when has zerohedge been a credible source?

If you toss out the chicken little stuff, get rid of 80% of the Ron Paul puffery, and most of the gloom-and-doom-ism and actually keep to facts rather than opinions, the stuff they post is actually decent vs most other sites. I know a lot of people in finance that read them.

 

[Fenixgoon]

http://www.zerohedge.com/news/2014-...n-forgiveness-forces-administration-backtrack


Lol. I saw this shit a mile away. The debt burden is too large and these government fuckups don't even know it. Too many are qualifying foe the programs because even conservative estimates show the problem.

Just throw out more loans, that'll solve the problem you fucking morons.


I said this would happen at a professional conference 3 months ago.

14bn a year. Thats because the negative amortization proble I mentioned above.


I am laughing my ass off that a single person believes this program will actually make a profit.

i remember one person on my facebook said "sign this petition to keep stupid loan interest at 3.4%"

and i thought to myself "that means that i'm subsidizing you, because my loans are at 6.8% and i already paid them off. hell no."

 

[LegendKiller]

i remember one person on my facebook said "sign this petition to keep stupid loan interest at 3.4%"

and i thought to myself "that means that i'm subsidizing you, because my loans are at 6.8% and i already paid them off. hell no."

The comparisons aren't great. The cost is astronomical compared to what it was. My school has doubled in 13 years. If these people had those types of rates defaults would be much higher. As it likely works out the present value is probably the same.


But ultimately the problem is principal balance, not interest rate. There is an asymmetrical lending relationship.

Usually both parties are taking risks. In this case one party is becoming a debt slave while the other is taking no credit risk at all. Why? Because you can't get rid of the debt. Since they take no credit risk they don't underwrite. Since they dont underwrite they give loans to anybody, even those who cannot afford it. Because all students have to go to school and parents tell them to "follow their dreams" they don't think of repayment.

This is a gordian knot.

 

[Attic]

If we can use common sense, yes government involvement is significantly pushing up tuition prices through both loan forgiveness and non-dischargable easily attainable loan money that goes towards one main thing.

The comparisons aren't great. The cost is astronomical compared to what it was. My school has doubled in 13 years. If these people had those types of rates defaults would be much higher. As it likely works out the present value is probably the same.


But ultimately the problem is principal balance, not interest rate. There is an asymmetrical lending relationship.

Usually both parties are taking risks. In this case one party is becoming a debt slave while the other is taking no credit risk at all. Why? Because you can't get rid of the debt. Since they take no credit risk they don't underwrite. Since they dont underwrite they give loans to anybody, even those who cannot afford it. Because all students have to go to school and parents tell them to "follow their dreams" they don't think of repayment.

This is a gordian knot.

We could let the debt be dischargable in a traditional sense.

Government is involved and the debt is being nationalized to a certain degree and it's costing taxpayers 14 billion a year.



Student-Debt Forgiveness Plans Skyrocket, Raising Fears Over Costs, Higher Tuition - from WSJ

Government officials are trying to rein in increasingly popular federal programs that forgive some student debt, amid rising concerns over the plans' costs and the possibility they could encourage colleges to push tuition even higher. [No Shit, let's not bastardize common sense further and ignore this clear outcome - Attic]

Enrollment in the plans—which allow students to rack up big debts and then forgive the unpaid balance after a set period—has surged nearly 40% in just six months, to include at least 1.3 million...



The government has offered some form of income-based repayment since the early 1990s, but few students found the terms enticing. But in 2007, Congress allowed borrowers working in nonprofit and government jobs to have unpaid debt forgiven after 10 years, and cut monthly payments for new borrowers to 15% of discretionary income.

In 2010, it cut those payments to 10% for borrowers who took out loans from 2014. A year later, Mr. Obama, through executive action, moved up the date when borrowers could qualify for the new terms, creating a program for those who took out loans from 2011. The White House this year has proposed making the program available to all student borrowers, regardless of when they signed their loans.

The popularity of the programs surged after the Obama administration began to promote them, starting in 2012, on the Internet and later through email to borrowers.
...

Cliffs: The costs of the government loan forgiveness program have massively crushed and blown past estimates and fueled tuition increases. Another case of government good intent vs unexpected outcome that begs a reigning in of power grabs that government is increasingly taking in more and more areas of American's lives. Just ask middle class families trying to put 1 or more kids through college at todays price.

Full Story behind Pay wall

 

[Fenixgoon]

The comparisons aren't great. The cost is astronomical compared to what it was. My school has doubled in 13 years. If these people had those types of rates defaults would be much higher. As it likely works out the present value is probably the same.


But ultimately the problem is principal balance, not interest rate. There is an asymmetrical lending relationship.

Usually both parties are taking risks. In this case one party is becoming a debt slave while the other is taking no credit risk at all. Why? Because you can't get rid of the debt. Since they take no credit risk they don't underwrite. Since they dont underwrite they give loans to anybody, even those who cannot afford it. Because all students have to go to school and parents tell them to "follow their dreams" they don't think of repayment.

This is a gordian knot.

this was ~3 years ago after i graduated.

part of it is people need to simply not take out that much in loans. the only reason i went to college was because i had a 75% scholarship. no way i could have afforded it otherwise.

i paid my loans of ~2 years.

 

[LegendKiller]

this was ~3 years ago after i graduated.

part of it is people need to simply not take out that much in loans. the only reason i went to college was because i had a 75% scholarship. no way i could have afforded it otherwise.

i paid my loans of ~2 years.

It's easy to say "not take out that much in loans", but how is it actually supposed to happen?

The public school I went to cost ~10-12k in the 4 years I went from 1997-2001. Now it is ~23k. When I went to school I was able to work summer/winter break at the USPS, making decent money and then I got a job on-campus doing IT work. This, combined with a small scholarship, meant I exited school with only $10k in loans.

Now that USPS job doesn't exist any more and the IT job has been outsourced. Unemployment rates for that age bracket is much higher than it was before.

Even if you were to make what I did, you'd still leave school with 50k in loans vs 10k. That means your 10yr amortized loan payment would be $561 vs $110 per month. That $451/mo is a *massive* difference. That's over $5k/yr that the student would have to make over what he would have made 13 years ago, cash. In actual income, with all taxes and COL included, that's more like $10k.

What degree do you know of that pays $10k/yr *MORE* than it did a decade ago?

None.

What this really means is that Johnny or Jane lives at home with their parents, puts off buying a new car, has no hope of buying a house in the next decade, and is effectively fucked if their Psychology degree doesn't lead to something that pays decently.

What happens they go to grad school? No time to work, so now your debt load is $90k, or worse.


This is starting to show up in many aspects of the economy, household formation, marriage, cars, small business formation, house purchases...etc.

People in my industry laugh about the problem, mainly because they think that it's not that big of a deal. But it is a *huge* deal. I talk to subprime auto lenders that are getting increasingly worried about being screwed over in bankruptcy because SLs aren't dischargable, they are seeing those borrowers default on other debt with greater frequency. This means that they are pushed into higher interest rate loans, not just car loans, but also credit cards, if they can get one, or personal loans. All because they cannot get out of the student loan debt.

People see this as another "chicken little" episode. I started warning about a housing bubble back in 2004. While this won't be as huge since the Gov't owns 90% of the risk, it has other far-reaching issues and I have been warning about it for the last 2 years.

 

[werepossum]

No more so than Bush was doing it with the "ownership society".

Disagree. Even if one cynically assumes that Bush pushed ownership (something to which Dems also pay lip service, especially in the form of HUD) in order to make people lose houses, there are still severe consequences associated with default. Lose your house, screw your credit. By contrast, with Obama's program there are only mild consequences, namely 10% of your disposable income for a period of time with no major hit to your credit score. With Obama's program one has all the benefit (a college education) with little down side. With home ownership, one loses one's investment, one's home, and one's credit. Not at all comparable.

If we can use common sense, yes government involvement is significantly pushing up tuition prices through both loan forgiveness and non-dischargable easily attainable loan money that goes towards one main thing.

We could let the debt be dischargable in a traditional sense.

Government is involved and the debt is being nationalized to a certain degree and it's costing taxpayers 14 billion a year.

Student-Debt Forgiveness Plans Skyrocket, Raising Fears Over Costs, Higher Tuition - from WSJ

Cliffs: The costs of the government loan forgiveness program have massively crushed and blown past estimates and fueled tuition increases. Another case of government good intent vs unexpected outcome that begs a reigning in of power grabs that government is increasingly taking in more and more areas of American's lives. Just ask middle class families trying to put 1 or more kids through college at todays price.

Full Story behind Pay wall

One small correction - Obama's program WILL cost taxpayers 14 billion a year IF Obama expands it to all students as he has indicated. Right now it's only for government employees (and don't they deserve some special compensation for enduring better pay, more benefits, and fantastic job security?) and community organizers and other non-profit employees, and as such costs considerably less.

 

[LegendKiller]

Disagree. Even if one cynically assumes that Bush pushed ownership (something to which Dems also pay lip service, especially in the form of HUD) in order to make people lose houses, there are still severe consequences associated with default. Lose your house, screw your credit. By contrast, with Obama's program there are only mild consequences, namely 10% of your disposable income for a period of time with no major hit to your credit score. With Obama's program one has all the benefit (a college education) with little down side. With home ownership, one loses one's investment, one's home, and one's credit. Not at all comparable.

You don't think that pushing that *all* kids need to go to college and *all* can see it as "affordable" by taking out more "flexible" paying government guaranteed loans, is pushing the same thing as the "ownership society" through wide payment terms and government guaranteed loans?

Furthermore, a student loan default doesn't offer "mild consequences", as you do take a major hit to your credit score, they are fully reported by the servicers, just like any other loan. In fact, there is a government rehab program which offers a credit rehab if the loan is rehabed. Naturally they layer on even more fees to the balance to "make a profit" on this program. The re-default rate for those loans is very high. Sure, the 10% program *may* not result in a default first (they usually do) but the implications are still major for debt-to-income ratios.

*IF* students get access to the program they only have to pay 10%, which is the heart of the problem here, a huge portion of students can only afford the 10%, which will result in huge losses to the Direct Loan program.

Hell, they could turn 100% of SL borrowers into IBR/PYE and it would only result in millions being debt slaves for 25 years.

 

[unokitty]

The Next Massive Bailout: Student Loans

Another new initiative may be backfiring–at least at it relates to keeping college costs contained. Since 2011, student borrowers have been able to choose a plan that limits their amount due to 10% of discretionary income, which is defined as 150% above the poverty level—now at $15,730 a year for a two-member household. That means such a household would owe based on income beyond $23,595. If this household earned, say, $35,000 a year, it would make payments of about $100 a month.

For public employees and those working for a nonprofit, so long as they made regular payments the debt would be considered settled after 10 years regardless of how much was owed or paid back. For private sector employees the debt would be settled after 20 years. This payment plan, which is really more of a debt forgiveness plan, has proved so popular that enrollment is up 40% in six months and now includes 1.3 million Americans owing $72 billion.

And it gets worse. In this popular new arrangement, taxpayers get stuck with the tab. Already the future cost of the forgiveness feature is pegged at $14 billion. To keep students and colleges from running up too big a bill, President Obama is pushing to add a lifetime forgiveness cap of $57,500. That would help. But make no mistake: the next bailout is happening now.

Next bailout is happening now?

Anyone familiar enough with the 10 yr, 10% forgiveness program to talk about it?

The article above, from Time, seems to imply that many loans will be forgiven rather than paid off...

Though, it doesn't seem to give any firm costs...

Uno