A Student-Loan Payment Pause Led Borrowers to Take on More Debt

https://marginalrevolution.com/marginalrevolution/2023/05/the-student-loan-payment-pause-led-borrowers-to-take-on-more-debt.html

by mennaali • 3 years ago

33 120 3 years ago

marginalrevolution.com

chiefalchemist2• 3 years ago

Where is there a source - is there a source - for less aggregated student loan data?

For example, not everyone gets the same amount loaned. What does that distribution look like? Map it to higher edu schools? Map it to tuition? Map it to high schools? Etc.

The point is, there are a lot of students and therefore a lot of debt. Naturally, such a big pool is going to have outliers. When the media parades a student loan "victim" is that (e.g.) $100k of debt typical or atypical?

anonymouskimmer18• 3 years ago

When the media parades a student loan "victim" is that (e.g.) $100k of debt typical or atypical?

It's atypical. Only 10% owe $100k or more: https://www.federalreserve.gov/publications/2022-economic-we...

Most student loan borrowers owe less than $25,000 on their loans. The median amount of education debt in 2021 among those with any outstanding debt for their own education was between $20,000 and $24,999. One-quarter of student loan borrowers had less than $10,000 in outstanding student debt (figure 40). Student debt balances vary across different demographic groups. Borrowers with an income of less than $50,000 a year were more likely to carry lower balances of student loan debt.

359972794• 3 years ago

This is what has always confused me about the student debt conversation. $25,000 is not a lot of debt. That's about what it cost to get a brand new Toyota Corolla. On top of which, the terms of this debt is very favorable. PAYE, low interest rates (mind were 6.8%, which was outrageous at the time but now we're entering a more inflationary / normal interest rate world), and are termed for 20+ years.

There is also a lot of debt taken on by graduate students. To be clear, only around 30% of Americans overall have even a bachelor's degree. The need to take on graduate school debt just simply isn't there in the way the taking on debt for undergraduate is. So I think these numbers should break out graduate students, especially those who went into high-earning professions with credential gatekeepers, like medicine (law is debatable -- we've minted way too many lawyers).

agloe_dreams• 3 years ago

This is a firm misunderstanding of the issue at hand. The real problem is less the large universities but the area under the curve. Notably...community colleges. These ask for only ~$20k for a degree but the degree is sold to be worth more than it is (virtually valueless) and the Finance departments basically shovel students in, have them fill out a form, and tell them "you were approved" and the student never sees the interest rates, payments, or rough estimated profit of the degree. A large college has to answer to regulatory pressure..the little ones though are the real evils.

everybodyknows2• 3 years ago

Not doubting this, but -- sources?

chiefalchemist2• 3 years ago

The Higher Edu Industrial Complex and the society has created the perception of a need (for a four year degree) and has stigmatized alternatives (i.e., trades).

It's been a collective effort.

The fact that so many of the students taking on the loans have no concept of debt, compound interest, costs of living, etc. boggles the mind. And sacrafic? And adversity? Not even on their radar.

0zemp2c2• 3 years ago

loan forgiveness is tantamount to asking me to participate in buying out someone else's loan

a loan used to buy a degree

a degree which isn't generating enough income to pay off the loan

if you buy out other underperforming assets like foreclosed homes, there is a discount...where is the discount on these underperforming degrees?

why do I want your underperforming asset? I already have a degree, but thanks!

mempko2• 3 years ago

That is not how money works. Your income is other people going into debt. Your salary rise means more money in the system. Loan forgiveness means more income to you.

amadeuspagel• 3 years ago

Woah, we should just forgive all loans then.

jallen_dot_dev2• 3 years ago

Loan forgiveness means more income to you.

But is it more in real or nominal terms?

EatingWithForks• 3 years ago

Frankly I think the problem of student debt is so large and so burdensome on the younger population that I don't really care if they're considered "underperforming assets" or whatever. The more money this generation spends on debt the less they have to buy houses and have children, and I personally will benefit from them being able to buy my house when I'm old and want to downsize and them having children so that there will be income into social security when I'm retired. All in all I would consider it an investment into my future retirement by ensuring the younger generation can support me.

anonymouskimmer18• 3 years ago

Hey man. Some of us are GenX who took significant opportunity costs to pay down our student loan debt. Don't make us compete for our first house with jubileed Millennials and GenZers. We can't afford to do that and save for retirement as is (though at this point I can't afford to do either. Glad I have a pension).

Aunche• 3 years ago

Student debt is so large and burdensome because the government has been handing out unconditional money to colleges. Student loan forgiveness increases people's willingness to pay for college, which means even more unconditional money for colleges. It's like putting out a fire by smothering it with gasoline.

This is different from say EV subsidies (which I also think lived passed their usefulness) because car makers are incentivized to serve more customers to make more profit. Colleges don't gain anything from increasing their enrollment and would rather raise their tuition to hire administrators and build shiny buildings that boost their rankings.

searine2• 3 years ago

Education is investment in community, not a profit generating vehicle.

I will gladly invest in my communities knowledge base any day of the week. Tax me. Please. Pay the teachers what they're worth and make the NIMBYs and FYGMs cry.

0zemp2c2• 3 years ago

bailing out student loans is about paying banks, not schools or teachers...they already got paid (and socializing the loan debt just subtracts from capital available to raise public school teacher salaries)

sushid• 3 years ago

This is not about your local elementary/middle/high schools, this is about higher education and their costs for both private/public universities. These costs have been increasing YoY at a much higher rate than inflation and for what?

More administrators? More useless degrees?

The entire premise of student loans is everyone is eligible for them, regardless of their potential future financial ability to pay them off. They're also not ever allowed to default on these loans.

These loans should be dictated by the free market for a multitude of reasons. One, it prevents the sociology student from incurring a 200k student debt that they'll not be able to repay because loan issuers will in fact realize that these students will never repay these bills. Two, if students cannot afford these outrageous loans, they'll have to cut back on their overpriced degree fees.

slg2• 3 years ago

Why should I pay for the fire department when my house has never caught on fire? Why don't we instead have the fire department directly bill the property owners after they put out a fire?

jallen_dot_dev2• 3 years ago

If people willingly burned down their houses, that analogy might begin to apply.

chasd002• 3 years ago

That analogy doesn’t make a lot of sense unless you have some people choosing to live ankle deep in gasoline. If that were the case then, yes, they should foot the bill to put out their perpetual fires.

ouid2• 3 years ago

800 billion dollars in PPP loan forgiveness seems more palatable to you, maybe?

purpleblue5• 3 years ago

"Whataboutism" is not a proper argument.

dragonwriter• 3 years ago

loan forgiveness is tantamount to asking me to participate in buying out someone else's loan

So do government loan guarantees in the first place, though.

DesiLurker3• 3 years ago

Yes loan forgiveness is not ideal but its a makeshift solution to a really bad situation government has created by federally backing student loans and making them non-dischargable in bankruptcy. IMO the ideal solution is to remove the non-dischargebility condition and let the market take its course but that needs congress to act & pass law, loan forgiveness does not!

IMO the subtle reason why republicans hate it is because loan forgiveness effectively signals (to borrowers) that no need to pay this loan, just wait around for a Dem president to show up defer/cancel etc it. which is a step towards discharging the loan in 'special circumstances'.

The basic economics politicians dont seem to get about education cost is that if you dont increase supply and just increase demand pool by making loan cheaper/federally backed all you will get is price inflation & thats been happening at rate way outpacing inflation.

idiotsecant• 3 years ago

An alternate headline for this story might be 'Students temporarily relieved of crushing lifelong debt slavery actually able to get mortgages and achieve a basic level of human dignity that would have been commonplace 50 years ago'.

The education system needs a stupendous amount of reform, not the least of which is the ridiculous debt load we put on young adults in what should be the years they're laying the foundation for a productive, happy life.

j_walter6• 3 years ago

To be fair this is debt they take on willingly. Now if the government should be letting 18-year olds take on huge amounts of debt without understanding the long term consequences...thats a different story.

willis936• 3 years ago

This seems like a result of Sallie Mae going private. Can someone explain the reason why Sallie Mae is no longer a GSE?

mikestew• 3 years ago

To be fair this is debt they take on willingly.

How "willing" are the debtors when the whole system seems to built around the idea that a student will take out a loan to pay for the education, an education which is priced around the idea that anyone that isn't wealthy takes out a loan? I mean, yeah, I guess they willingly went to college...

1shooner• 3 years ago

I'd encourage looking at actual average student loan debt, which in my reading is significantly different than the typical online narrative. According to the DoE[1], in 2018 the average debt of a public university Bachelor's degree completer was $26,100. That's not 'lifelong debt slavery', that's a Toyota Corolla.

1. https://nces.ed.gov/fastfacts/display.asp?id=900

EA-3167• 3 years ago

It's also beyond nuts to compare debt that people voluntarily took on with slavery. The desire for people to avoid the consequences of their own actions as a political stance is a non-starter.

secabeen• 3 years ago

Yep, the nameplate tuition number is paid by a vanishingly small number of students, and average Tuition and Fees net of aid for the 75% of students attending public four-year institution is $2,500.

https://research.collegeboard.org/media/pdf/trends-college-p... (pg 18)

There are lots of influential professional students (doctors and lawyers) who want $100k+ handouts, but they are a loud minority.

ProfessorLayton2• 3 years ago

2021 numbers [1]:

Average Student Loan Debt: $39,351

Median Student Loan Debt: $19,281

Average Student Loan Payment: $393

Median Student Loan Payment: $222

Half of student loans are $222/mo or less. I'd also like to mention that if student loans became a lot harder to come by, people like myself could not have afforded college.

[1] https://thecollegeinvestor.com/32031/average-student-loan-de...

rootusrootus3• 3 years ago

would have been commonplace 50 years ago

50 years ago was a pretty special time, if we're being honest. The ratio of home prices to income was an all time low. Go back to the 50s and it was the more typical 4x ratio. Clearly the 6x and 8x bubbles we've recently experienced aren't sustainable, but we're also probably not going back to the relative utopia that was 1970s house prices.

908B64B1972• 3 years ago

we're also probably not going back to the relative utopia that was 1970s house prices.

What did the people in the 70's do differently?

thx-27182• 3 years ago

Universities are part of the problem in my opinion.

With enrollment trending down many colleges appear to focus on making up the loss through raising tuition.

To attract students the universities invest in prettier buildings and more "college experiences" to attract students.

Meanwhile information is cheaper and more easier to replicate than ever in human history.

Books ought to included in tuition, a good professor can note any updates needed.

Lectures ought to be digital. Let classroom time be for students to work or ask questions or discuss. Saves both students and professors money.

Integrate and use/teach open source software. This would lower costs to students and long term lower the technology costs to the university (especially if universities are aiding each other in development).

That's three core parts of modern college that can and ought to be reduced in costs.

There's no (good) excuse for academia to not do this in my opinion and if they (universities) fail to keep up with the rate of opportunity sadly I believe we'll see a lot of knowledge lost.

Turing_Machine3• 3 years ago

> Lectures ought to be digital.

We shouldn't have lectures at all, IMO. They arose in medieval times before the printing press, when the lector (which means "reader" in Latin) would read a book, very slowly, while the students copied it down verbatim. At the end of the course, you'd have your own copy of the book. Of course, this actually made sense at the time. You couldn't pop down to Barnes and Noble and get your own copy of Aristotle, after all.

The fact that we're still doing this in the 21st Century has more to do with the ego of academics who like to hear themselves talk than it does with any bona fide educational purpose.

We already have technology that can help tailor instruction to individual students, and that capability is only going to get better with time. The university as we know it is doomed, IMO. The corpse just hasn't stopped twitching yet.

surgical_fire• 3 years ago

ridiculous debt load

This debt load is also voluntary, is it not?

I mean, when I went to college, I went to one that I could afford.

WirelessGigabit• 3 years ago

I'm not going to argue with your alternate headline. Whether its yours, or the one in the article, or something somewhere in between doesn't change from the fact that we have people who took on debt because another debt is paused.

And that's where I have a problem. If I pay $613 per month for the next 10 years (https://www.forbes.com/advisor/student-loans/average-student...), and all of the sudden that gets paused, I will not go out and think: oh let me get a new car with on a 5 year, $400 / month note.

germamme• 3 years ago

Loan forgiveness is not a workable solution, it rewards one generation of students at the expense of the older folk who have paid and the younger folk who are not in college yet.

rootusrootus3• 3 years ago

It's especially not workable if it doesn't involve a correction to the system that let the debt accumulate to begin with. It just becomes an expectation for future generations. If anything it'll drive the debt higher, faster.

Ekaros• 3 years ago

Game theory would be to leverage to max with student loans and then invest the money you would have spend on tuition... Sounds like an other transfer to wealthy from poor.

hikingsimulator• 3 years ago

The former is a sunk cost fallacy, and the latter is solved by changing how education is financed -- making public universities free like most of the developped world.

I took up debt to study at the graduate level, I won't use that past painpoint to defend forcing people to enter into debt now.

HDThoreaun• 3 years ago

Forgiving the loans destroys the incentive to fix the system. Who's advocating for that now? Certainly no serious politician.

rocqua5• 3 years ago

It doesn't need to be free, just manageable. Cap it to 3000 a year, and things are much better. That's how the dutch system works.

panzagl2• 3 years ago

The older generation didn't pay- parents' ability to pay is factored into student aid decisions. Instead the older generation enjoyed lower tax rates by not funding the colleges and grants that they enjoyed.

Turing_Machine3• 3 years ago

it rewards one generation of students at the expense of the older folk who have paid

Hmm... by that reasoning, wouldn't people who default on SBA business loans or FHA/VA home mortgages be doing so "at the expense of those who have paid"?

And yet they're allowed to file bankruptcy. What's different?

As I observed before, in the case of a small business there often aren't any recoverable assets, or only a small amount. In the case of real estate... I saw a story the other day where a San Francisco office building changed hands for only 25% of its price the last time it was sold, and I don't think we've seen the bottom there by any means.

jryan49• 3 years ago

Probably took on more debt cause of the pandemic not cause their student loans were paused...

rufus_foreman• 3 years ago

Borrowers with government owned loans had those loans paused during the pandemic, and took on more debt. Borrowers with loans that were not government owned did not have those loans paused during the pandemic, and did not take on more debt.

endisneigh6• 3 years ago

I don't know how anyone can support student loan forgiveness. it's simply a fact that college graduates and people who even partially completed college make more money than those who never attended. there's really no argument that would justify forgiving peoples' loans vs giving the same amount of money to the poorest people in reverse order (poorest getting richer). if for some odd reason the poorest people also happened to be college participants (though to be clear, this is not true) then fine; still no broad student loan forgiveness required. I've asked people who support student loan forgiveness for their response and I get blank stares.

and yes, we shouldn't give the rich tax breaks either.

skinnymuch5• 3 years ago

Everyone could get the same tax credit that is also itself taxed. Forgive the loans of people and get poor people crucial money.

No one has said that to you?

endisneigh6• 3 years ago

no because it is nonsensical. you still could give even more money to poor people if you didn't forgive the loans of college participants. what you are saying isn't really a response, it's an ambiguation of the issue.

D13Fd3• 3 years ago

Why not just give people money directly? Why should people who chose to take on debt get money when others don't? That is unfair.

rocqua5• 3 years ago

What about interest rate deduction? I have dutch student debt, 44000 originally. But the interest rate is 0% which makes paying back decently doable. Besides that, there are hardship clauses which can yield partial debt forgiveness if my income were to fall.

These measures make the debt easily manageable. At 7% interest the debt would suck.

The final goal behind this is to get more people into higher education, not incone distribution.

anonymouskimmer18• 3 years ago

That "partially completed college" statistic includes people who received certificates (without graduating with a degree).

I believe parents who took out loans for since deceased children should be forgiven. Not for economic reasons, but because every single month they pay the bill they are gut-punched anew.

I believe students (and parents of) who became disabled, such that they could not work in the field they went to school for, should have their loans forgiven, as debt has a particular psychological toll on the disabled compared to the abled.

When it comes to giving money to poor people circumstances matter. Some of the poorest people will be members of cults that provide for all of their needs, for instance.

endisneigh6• 3 years ago

I couldn’t disagree more. First of all college participants get more money, period:

https://www.aplu.org/our-work/4-policy-and-advocacy/publicuv...

Second of all, your emotional plea around students being disabled is salient but irrelevant. If they’re that poor they would get money through a straight “give poor people money scheme.”

No matter how you slice it there will be poor people who fit any scenario you can conceive who also did not participant in college. Any sort of prioritizing or preference on college participation is regressive.

purpleblue5• 3 years ago

Loan forgiveness is a temporary solution to appease voters with debt. It doesn't solve the root cause because in 10 years, the number of people with crushing student debt will be back to up to the same levels.

You solve the problem by re-allowing student debt to be dischargeable through bankruptcy again. This is the root cause of the problem. The fact Clinton and Bush allowed this to happen is disgusting. All it did was allow banks to give loans to EVERYONE without any fears. Then schools could raise rates knowing kids would still pay the predatory prices, and that's how we get into the mess we are in now.

By allowing student debt to be dischargeable, banks are now taking a risk of losing their money, which means that they won't give loans to people who frankly are wasting their money. A parent at my workplace was asking how she could afford to pay her daughter's $80k/yr tuition for a sociology degree. The fact that this completely stupid idea was even being considered shows the depths to which society is fucked up.

rocqua5• 3 years ago

That would cause a massive interest rate hike, no?

purpleblue5• 3 years ago

No, why?

D13Fd3• 3 years ago

You solve the problem by cutting back the availability of student loans.

Freely available student loans have pumped enormous amounts of money into the system, and tuition prices increased accordingly, driving the need for yet more loans.

In the end what we have is young people taking on unthinkable amounts of debt to get the same level of education that they did 40 years ago, but now with nicer student centers and bigger stadiums (and, somehow, instructors who are paid less than before).

If we cut off the endless supply of loans, and instead use limited grants to continue to foster diversity, we can reverse the cycle. Schools will once again have to compete on cost.

Then we can talk about loan forgiveness for those who were victimized by the current system. But doing the forgiveness before fixing the system only makes the problem worse.

purpleblue5• 3 years ago

Yes, sounds like we are in agreement.

anonymouskimmer18• 3 years ago

The availability of student loans also gave governments an excuse to cut back on school funding. https://www.pbs.org/newshour/education/most-americans-dont-r...

Many state schools have their tuition controlled by the state government.

everybodyknows2• 3 years ago

Banks have made no new loans since 2010, and apparently carried none of the credit risk even before then -- so there's never been any private-risk based discipline to granting of loans.

Initially, private banks provided capital for students loans, with parameters set by the government under the FFEL Program. These loans were owned by lenders and guaranteed by the government; in the case of default, lenders were reimbursed. In 1992, the DL program was created under which loans were directly made by the US Treasury. For many years, both the FFEL and DL programs existed side by side, and colleges could choose the source of funds. Despite the different source of funds and ownership, FFEL and DL loans were otherwise identical in terms of limits, interest rates, and repayment plans available, and many students likely were unaware of the different source of funds when taking loans through their schools’ financial aid offices. In 2010, following analysis and a bribery scandal of college administrators, the Health Care and Education Reconciliation Act of 2010 eliminated new loans under the FFEL program. Since 2010, all federal student loans have been made under the DL program.

https://www.nber.org/system/files/working_papers/w31247/w312...

anonymouskimmer18• 3 years ago

Those are federal student loans. Private student loans continue to be available[1], and important, as GP states, non-dischargeable[2] (until some recent court cases[2, 2nd]).

[1] https://www.forbes.com/advisor/student-loans/best-private-st...

Private student loans are best used to pay college costs after you’ve borrowed the maximum you qualify for in both subsidized and unsubsidized federal student loans. Private student loans come from banks, credit unions and online lenders, and unlike federal student loans for undergraduates, they require a credit check. That means most undergrads will need a co-signer in order to qualify. Private loans also are more expensive than federal loans and typically don’t offer the flexible repayment options their federal counterparts do.

[2] https://www.bankrate.com/loans/student-loans/private-student...

Before 1976, borrowers could discharge private and federal student loans in a bankruptcy, just like credit card debt or medical debt. But the introduction of the U.S. Bankruptcy Code in 1978 caused a major shift with regard to student debt.
At the time, the intent of Congress was to protect educational loans from bankruptcy abuse. The amended bankruptcy code stated that funds received as an educational benefit would no longer be discharged unless the borrower could demonstrate undue hardship, which is no easy feat.

[2, 2nd]

One notable case came to the U.S. Court of Appeals for the 2nd Circuit from the U.S. Bankruptcy Court for the Eastern District of New York. In the original case, U.S. Bankruptcy Judge Elizabeth S. Stong concluded that private student loans were not part of the Bankruptcy Code Section 523(a)(8)(A)(ii), which states that any “obligation to repay funds received as an educational benefit, scholarship or stipend” is typically not eligible for discharge.
She maintained that the section of code did not define student loans or educational benefit, and that referring to a loan as an educational benefit would be “an unconventional way to discuss a loan.” The appeals court affirmed the lower court’s ruling, arguing the U.S. Bankruptcy Code did not prohibit the discharge of a private student loan in bankruptcy.
Some see the 2nd Circuit decision as hope for a loosening of the criteria in private student loan bankruptcy discharge. However, in June 2021, the U.S. Supreme Court refused to hear the case of a Texas woman who sought to have her private student loans discharged under a different standard — so it appears that the undue hardship requirement may still be in effect.

anonymouskimmer18• 3 years ago

The fact Clinton and Bush allowed this to happen is disgusting.

It actually happened under Carter. https://www.bankrate.com/loans/student-loans/private-student...

But the introduction of the U.S. Bankruptcy Code in 1978 caused a major shift with regard to student debt.
At the time, the intent of Congress was to protect educational loans from bankruptcy abuse. The amended bankruptcy code stated that funds received as an educational benefit would no longer be discharged unless the borrower could demonstrate undue hardship, which is no easy feat.

panzagl2• 3 years ago

As someone who has is currently enjoying the pause (on PLUS loans for my daughters' college- on a side note whatever happened to college being the parents' responsibility) the ideal solution to me is to resume payments with either no interest or relatively low interest (the rate was 7-8% even when credit was cheap). That way the loans are being paid back, but the students are not immediately burdened with crushing debt payments (basically the equivalent of a pretty low car payment).

This seems so blindingly obvious to me that I'm really worried I've become totally disconnected from reality that no one else has floated the idea.

D13Fd3• 3 years ago

That's just partial loan forgiveness - forgiving the interest but not the underlying debt.

beej71• 3 years ago

This might be true for some or even most, but I know someone who was able to pay off a pile of horrid credit card debt due to the pause.

A Student-Loan Payment Pause Led Borrowers to Take on More Debt

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