October 7, 2012

College Loans and Defaults

Patrick Laverty

I had a discussion recently with GoLocalProv.com writer Dan McGowan after his article on college loan debt and we got onto the topic of whether that debt might ever be dischargeable through bankruptcy.

I do think we'll see a time when bankruptcy clears out loan debt and if Obama returns to the White House, he could be the one to do it. But it'd be wrong.

With everything else in bankruptcy there is something tangible to repossess when the payments stop, whether it is a house or a car. One obvious exception is credit card debt. That's the risk that those banks take and they hedge that risk with the ridiculous interest rates on slow payers. That covers the defaults and write-offs from people using plastic.

If someone gets an education and can walk away from the debt through bankruptcy, why would anyone pay for college? You have the diploma, you have the education, you have the knowledge, what can they take away from you? They can't make you "unlearn" those things. Sure, they can deny you ever attended, but a smart employer doesn't care about diplomas. All they should care about is "can you do the job?"

The problem and the fix is on both sides. Students and families need to do a better job thinking about what they're doing and finding the right value. I don't just walk into the Ferrari dealer and sign the note and take the car. I actually think about whether I can
afford the payments on the Ferrari, or do I actually need to get a Chevy? Too many people go for the Ferrari cost of education when all they can afford is the Chevy. At the same time, I want schools and banks to make the student sign something showing what the repayment will be, even from day one.

For example, let's say for fall of freshman year, I need to borrow $10,000. That's pretty small to pay back, maybe $60 a month. No big deal. But what if I need to borrow that for the next seven semesters, or maybe a little more to cover the increased cost that the
school is charging. Maybe when I graduate, my real monthly cost will be $500 or $600 a month. Students need to know that going in. I should probably even know that before I matriculate. If I know what my need is to attend each college and I can calculate what the final monthly payment will be, will I be able to afford that? Can I get a job in the field that will pay me that?

Do I really want to get a bachelor's degree in Medieval Studies and have a $700 a month college loan bill, along with rent, car loan, insurance and some of the other things like an iPhone and the ability to go out on a Friday night? What do those jobs pay? Are there any jobs? That all should be taken into account, but rarely is. When I took out my college loans, I had no idea what my final monthly debt would be.

Lastly, I also see an attitude in some of these articles about the hardship that these college graduates and other former attendees. Some have an attitude that they'll "never" be able to pay back the entire loan. I've even read this kind of attitude from people who owe $20,000 or less. Seriously? That's a car loan. A car loan is normally paid back in five or six years. College loans give at least ten and have a lower interest rate. Anyone with the attitude that it's impossible to pay back a $20,000 college loan really never should have gone in the first place and likely never had any intention to pay it back.

Now that I and most of my friends are in our forties, many of us are finally getting out from under our college loans. Yeah, it's taken about twenty years for some. That's how long it can take. That's the deal we agreed to. It might not look like you're making progress by sending that $500 a month out and the balance seems to never drop, but it does. (Just wait until you get a mortgage if you want that kind of depressing monthly update!)

Presumably, you went to college to get an education that you'll use to make money for forty years or more. To use ten to twenty years to pay for it sounds like a pretty good tradeoff. Things don't just happen overnight.

Comments, although monitored, are not necessarily representative of the views Anchor Rising's contributors or approved by them. We reserve the right to delete or modify comments for any reason.

Although I do not have any figures at hand, student loans were dischargeable prior to 1976,(this was to protect a revolving loan fund created with defense department funds, NDSL, National Defense Student Loans)dischargeability was tightened further in 1984.

As well as I can remember the limitations on dischargeability were preceded by hysteria. The newspapers were full of stories about doctors finishing medical school and immediately filing for bankruptcy. There was always a provision for the forgiveness of loans to teachers. Teacher's colleges had tuition in the range of $1,500. There was some tie in to teaching in "distressed areas". I remember that North Attleboro, MA qualified a friend for forgivness.

It is well to remember that, at the time, private university tuition was in the range of $4-5000. I noted in yesterday's paper that my daughter's alma mater, Dartmouth, had reached $56,000. That was not the most expensive. Since a Liberal Arts degree is frequently the predecessor to a graduate degree, graduating with a loan of $200,000 seems perfectly possible (there may be restrictions that I am unaware of).

I noted an interesting theory on tuition escalation the other day. The top tier schools produce more graduates then there are places for in the top tier schools. Consequently they accept jobs at second tier schools. They then make efforts to create the sort of amenities they are familiar with from attendance at top tier schools. Makes sense to me, although I doubt that this is a full explanation.

Posted by: Warrington Faust at October 7, 2012 12:17 PM

Since credit cards are mentioned in the post, it is well to remember how political bankruptcy protection is.

Protection of credit card debt is a recent phenomenon. Elizabeth Warren made a name for herself by opposing the new restrictions. There was general agreement by experts that the new restrictions were unfair. The Mass Bar sent a delegation to speak with Barney Frank (Banking Committee handles the Bankruptcy laws). He agreed that the new restrictions were unfair, but is reputed to have said "They are bought and paid for, there is nothing I can do". I don't have the figures at hand, but if anyone can find the votes in the House and Senate they are quite lopsided. It was apparent that the credit card companies had purchased the protection.

Posted by: Warrington Faust at October 7, 2012 12:27 PM

There are restrictions on Stafford Loans, but the amounts are so high that they are essentially a non-issue. Most people (especially progressive types) are ignorant of economic principles and miss the obvious, which is that the increased availability of low-interest loans from the Federal government is directly driving up the cost of higher education tuition in a vicious inflationary cycle. It's not the only reason, but it is the central driver. Many economists have noted this and the studies on the subject are largely in agreement. Here is a recent one: papers.nber.org/papers/w17827
It's a lot like rent controls in that 95% of surveyed economists agree they're destructive, but the bad policy persists because politicians can look like they're giving away something for nothing.

The situation that is developing is universal indebtedness (enslavement) to the Federal government, which is exactly what statist politicians want. When you graduate from college or law school with $50,000-$150,000 in debt and no job, you then have no choice but to work for government to take advantage of loan forgiveness or go on public assistance.

Posted by: Dan at October 7, 2012 3:42 PM

Only about 20% of people need a bachelors degree. For the rest it's pure vanity. Pell Grants are now an expanding exponentially entitlement and you KNOW the bulk of the student loan debt is going to be swallowed up by taxpayers in one manner or another.Meanwhile we are creating a system where college graduates wait tables, bartend, drive trucks and staff car rental and hotel registration desks.
Pure lunacy; and who profits? Only the educational-industrial complex.

Posted by: Tommy Cranston at October 7, 2012 3:54 PM

Although I assume that many here will regard this knowledge as innate, I notice that there have been many articles about how the "student loan debacle" will be the next "housing bubble". The numbers are staggering.

As noted above, like the housing bubble, it is being driven by government aid. Removing bankruptcy protection, which had an effect on student lenders, is only part of it.

Since the time when one could "swear the poor debtor's oath", the possibility of bankruptcy has deterred lenders. I think, since lenders will become over zealous, some restraint has to be in effect. (I did little personal bankruptcy work,but I can remember representatives of Sears standing outside the court room doors. They would offer a new Sears card to discharged debtors if they would agree to "affirm" their previous balance, or a portion of it. They would threaten to repossess tires. They were eventually fined $5,000,000.00) By political aid, previously "unsecured loans" such as student loans and credit card debt have been converted to "secured debt" by various revisions of the Bankruptcy Code.

The questions above about the necessity of a college degree brings something to mind. Since Sherman destroyed our farm, most of my family has been engineers; myself excepted. I can remember much older family members referring to "graduate engineers". This implies that there were other methods to becoming an engineer that a college degree. Apprenticeship?(In 1900 Mechanical Engineers were the highest paid professionals in the USA).

Granted, engineering has expanded in the last century. Perhaps what were then known as "engineers" are now "technicians". Still, I wonder how much of college is remedial high school? That was my impression when I looked over the curricula of several community colleges. Having known many older engineers, I noticed that many had been trained by the military in WWII; I believe this was called the "B program". Exams were weekly, with no second chances. Many attended private colleges taking only engineering courses. Since they had attended private colleges, after the war they simply reported that they had graduated from those colleges. As I understand it, this was seldom questioned. This may say a great deal for "technical training".

A final note. With all of the "revisions" of recent years the Bankruptcy Act has given a huge preference in "rights" to corporate citizens which are denied to private citizens. Still, lenders are not stupid. It became standard in commercial loans for borrowers to waive their right to a jury.(There are no juries in the bankruptcy system. A successful demand for a jury takes you out of the bankruptcy system.)

Posted by: Warrington Faust at October 7, 2012 6:38 PM

Posted by Dan:
"It's a lot like rent controls in that 95% of surveyed economists agree they're destructive"

I was only a kid during the Nixon "Wage and price controls", but I had a couple of rental properties. There was some difficulty because most of the tenants were older than I, but relations were generally good. The Nixon "controls" on rent changed all that. I would find the tenants sneering at me and saying things like "we've got you now". Fortunately, they didn't last very long. I would have sold out.

Rent controls in New York, which began in WWII, produced a number of distortions. The one I liked was the necessity to buy the current tenants sofa for $5,000 in order to take over the apartment. In the movie version of "Bonfire of the Vanities", a central device is the landlord bugging the intercom in order to prove that a tenant no longer resided there.(It is usual that Rent Controls "fade away". The existing tenants are protected, but rents can be raised on their departure. Naturally, the tenants never left. They "sublet" the apartments at a profit to themselves.)

Sorry about all these posts, too much time on my hands today.

Posted by: Warrington Faust at October 7, 2012 6:56 PM

Want to halt growing student debt and tuition? Get the USG out of the loan business and make colleges loan money to their students. Colleges that cost too much and can't find their students positions will just go away. Fat chance, however. Responsibility and accountability are an anathema to most progressives...aka liberals.

Posted by: Mike678 at October 7, 2012 8:20 PM

Mike - I agree with you in principle, but such a mandate would create a situation like the one that exists in health care. Colleges would then require assistance to meet the mandate, which the Federal government would provide, and the bubble would start all over again. Get the government out of higher education and leave it at that. The market can correct itself if it isn't being massively distorted through cheap Federal credit. Even with Federal grants and loans cheaper than ever, law school applications are way down. The market is trying to correct but Uncle Sam keeps flushing it with money and keeping the bubble going.

Posted by: Dan at October 7, 2012 8:55 PM

The answer is staggeringly simple:

The federal government collects data on students' income after going through different programs at each school (very simple data to collect). Limit student loans to a number based on that amount.

So students applying for loans to a school that graduates English majors who average $33K a year after would only be able to issue $33K in loans, while an engineering program might allow students to take more out. Also, limit loans based on previous academic performance.

Posted by: mangeek at October 8, 2012 5:55 PM

Thinking of a formula for unforgivable student loans:

(3-year avg. income of program grads) = Max Loan Amount

Max Loan Amount / 4 = max amount that can be awarded in any year

So better schools get students who can pay more, as things go on, and bad schools get 'squeezed'. Also prevents people from digging themselves too deep or using massive loans to buy cars or pay rent (which SO MANY people do now)

Student academic performance = Interest Rate Coefficient

So if your GPA is in the first quartile, you pay '175% of prime', if it's in the second you pay 150%, and if it's in the top quartile you pay just 'prime'. Make the bad students pay the interest for the good ones.

Posted by: mangeek at October 8, 2012 6:08 PM

Mangeek - I know you're big on elegant solutions, but your "staggeringly simple" fix would be anything but in practice. Students double major, triple major, start in one major and switch to another, take semesters off, take a silly major undergrad to get a high GPA and then go on to law school - the list goes on and on. You'd be relying on third-hand self-reported incomes to dole out serious amounts of money. There would be tremendous room for error and overwhelming incentives to commit fraud or engage in creative reporting.

The simple economic reality is that as long as the Federal government is offering low-interest student loans and grants for students to attend college, the colleges are going to jack up tuition to carve out that consumer surplus, necessitating more loans, and so on in an inflationary cycle. Government should get out of it entirely and let the market correct itself. We don't need more debt in this country.

Posted by: Dan at October 8, 2012 6:41 PM

All these plans have ubderlying difficulties. Simply make student loans dischargeable again and lenders will retract. The original idea was that a college degree guaranteed a good job. That is proving no more reliable than "houses will always go up". Adjustment may take a generation, that is only reason to get started. The short is that college tuitions have to come down. If we wait too long, the government will take draconian measures.

The other problem is "qualification creep". I have never forgotten that on my first job, the year before the job qualification was a high school diploma.

Posted by: Warrington Faust at October 8, 2012 8:25 PM
Post a comment

Remember personal info?

Important note: The text "http:" cannot appear anywhere in your comment.