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Student Loan Delinquencies Now Surpass Credit Cards


Parsad
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Looks like it is spiking recently - maybe this is because the first crop of people who graduated during the great recession are starting to run out of extensions.  I wonder what it would be if interest rates were at more normal levels.

 

The loan/expected income ratio for some people is outrageous.  I've heard several people say that they know there is no way they can pay theirs back, so they just ignore it.

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The incentives and economics for higher education, both for-profit and non-profit, are incredibly upside down.  The big losers are the students.

 

Yup, even in 'low-cost' Canada things are wako for some programs.  Many folks would be better off learning a trade.

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The loan/expected income ratio for some people is outrageous.  I've heard several people say that they know there is no way they can pay theirs back, so they just ignore it.

 

Student debt is the worst sort of debt.  Some people flee the U.S. to avoid paying it.  (Largely because they can't.)  It's the modern form of debtors prison.  Albeit with fewer rocks, etc.

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Student loan debt has been increasing as credit card debt has gone down; student loans are now greater than credit card debt.

(see for example http://www.newyorkfed.org/householdcredit/

 

The for-profit higher education sector has been really dubious; they make Anthony Mozilla look like a saint.  (I don't know how much of the debt is due to them however.  The for-profit sector aside; there is an argument for making college education free in the US.  That would cost about 1% of GDP. US funding for public higher education had been declining and the recession really hurt the state schools.  (Too many people would howl I'm sure about free education, so you could say that federal loan repayments would be capped at 2% to 6% per annum per income for 20 years with school teachers and doctors paying less when they work in underserved areas.)

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It kinda baffles me how much the US encourages people to take on debt they cannot afford.

 

I don't think there's that it's too much "encouragement" that is the problem; it's really the lack of basic financial literacy and understanding what those big numbers of dollars owed will mean. 

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Isn't it fairly obvious that student loan debt is going to join the debt of underwater homeowners, Greece and (eventually) California and Illinois in the "they can never pay it back so let's just extend and pretend" category?  For $20-40 bl you could really clean up the problem and as long as the Fed is picking up the tab, who cares?

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There may not be encouragement but there is pressure.  Just think about a good student who is expected to go to college who decides he's not going because he doesn't want to take on the debt.  He's going to be taking a lot of heat from his family, and he knows he can't find a decent job otherwise, so he is going to borrow the money.  On the other side the schools seem to want to charge whatever they can get away with.  I think if they set some maximum limit for each field that is tied to what the reasonable expected income is it would work out better.

 

I have some friends in Brazil and they have told me that their college tuition is paid by the government, but you can only get in if you place high enough on an entrance exam, which can be really tough.  As the school goes up the prestige rankings, the competition gets stiffer and the number of available slots becomes fewer, so the people who get in belong there and it's not a waste of money.  This way there is less preference for those with family connections and it is based more on merit (i am sure there are still rich & powerful folks pulling strings like everywhere else), and a poor kid who wants to be an engineer can spend his nights studying engineering instead of working at Arby's , and he won't be hundreds of thousands in debt when he gets out.  I lean towards the libertarian side on most issues, but I have to admit that if we did it this way it wouldn't be the worst capital allocation decision the government has ever made.

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Most students and parents just don't understand debt/loab. Debt is a tool. It can cut both ways.

 

I graduated about 2 years ago with low 5 figures of student loans.  I went to a small private college. The tution and room/board is more than 55k a year (not including other school expenses and personal fun/spending money). Through an "all of the above" approach, I graduated with minimal debt despite the cost of the school. I took maximum advantage of every opportunity available to me.

 

I made sure I qualified and received all government grants and other "free" money. I applied to a bunch of scholarships and received them from private foundations and the school. I had work-study. I also worked part-time through the school year at a supermarket. I did paid internships during the summer. I only took subsidized Stafford loans because I wanted to my internship/work money to fund my IRA...

 

I guess I'm doing okay. I found a decent job after college and paid off all my loans the first year.

 

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The problem here is the same as the housing boom.  Giving loans to everyone at low rates, and in this case with deferred interest and payments until 6 months after graduation in the case of government subsidized loans, simply causes prices to rise to make up the difference.  Parents can pay $X so schools would have to charge X, but now parents can pay $X and kids can borrow $Y, so schools can charge $X+$Y. Like almost every government program, it certainly doesn't end up helping the people it purports to in the end.

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Don't kids work anymore while going to school?

 

There may be some adverse selection going on. 

 

The private education sector has been pushing students into taking courses that may not be suitable for them.  Many students drop out and/or have difficult finding employment (sometimes the education is not so good, they are unsuitable for what they thought they wanted to do, etc. etc.).  The dropout rate and employment rate of students aren't that important to a private college's financial success... for the private college, it is mostly about volume.  So they have been trying to get marginal students to enroll in their school.

 

The problem here is the same as the housing boom.

The housing boom was caused mostly by low interest rates and cheap financing from the private sector.  Ironically, the private sector was crazier than the US government.  The securitization market was behind most mortgages.

 

Now the FHA is going to become the #1 idiot lender.  3.5% down payment...

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Don't kids work anymore while going to school?

 

Interesting question as one here who is going to law school at night while working full time during the day. At $35,000 per year for tuition I believe that there are two intelligent ways to go about this mess. Either 1.) Don't work and make sure you are a Straight A student as this leads to scholarships to retain you at your current law school (or undergrad), cutting future student loan payments and leading to some probability of a job or 2.) Work full time during the day (as I do) and make sure you make enough that you are covering your room/board and books/and getting healthcare coverage (at least). 

 

In any case, from what I have seen in peers at my mid-tier law school, I wouldn't be suprised that a low double digit percentage of them default. Facing $165,000 (tuition + room and board + accumulated interest on student loan debt while in school) in student loan debt at graduation at a blended rate of 7%+ (stafford loans + plus loans, and, virtually none of this is tax deductible) with job prospects providing a median salary of $65,000 at graduation (only 90% in current economy will get a job coming out to begin with), defaults are going to be very high.

 

If my peers worked through school and were a middling student, maybe they get this $165,000 down by $50k, but still who knows. Massive education cost bubble.

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