<p>mini’s analysis is excellent, and deserves attention, but it’s not quite as simple as he suggests. When people lend to Morgan Stanley on a non-recourse basis, or people lend to Sam Zell’s shell company taking over the Tribune, the risk of default and bankruptcy discharge are built into the pricing of the loans. And in those circumstances, the lenders or their affiliates usually have some significant “equity kicker” that gives them the ability to earn extra return if the project is successful. Furthermore, in those cases, and in the case of consumer mortgage loans, which in theory are not non-recourse, but in practice usually are non-recourse, there are valuable assets pledged as security that limit the potential losses on the loans. Those assets may wind up being less valuable than everybody hoped, but except for occasional cluster[bomb] disasters the lenders usually wind up with some substantial recovery if they foreclose on the security.</p>
<p>With student loans, Congress provided for non-dischargeability in order to keep the cost of the loans down – to borrowers AND to taxpayers. And there’s no repossessable asset for the lender to take once default occurs, and from which the lenders could recover half or more of their loan. Meanwhile, the borrower keeps for him- or herself the human capital acquired thanks to the loan, whether or not the loan gets paid. So the situation isn’t completely equivalent to commercial loans, and the strategic moves of real estate investors and lenders aren’t a great guide for education loan practices.</p>
<p>And what about credit card debt? Consumer loans? </p>
<p>And yes commercial and business loans have collateral, but the value of that collateral can plummet.</p>
<p>I invested in a project with others and we are negotiating with a lender right now. The asset has declined 2/3 in value. If the lender doesn’t agree to a change in terms, the lender is going to own the asset. Investors are going to walk. Investors are going to lose. The lender may not be too happy either.</p>
<p>Yes, the lender will get something. But the lender is going to get less.</p>
<p>JHS, you are the lawyer…</p>
<p>I am waiting for students to sue schools because of a lack of consideration. (I realize consideration does not have to be equal on both sides).</p>
<p>The argument I see is that the student pays the school, and the student does this not because of the education, but because he expects a job when he is finished. The student pays the money…no job? The student did not get what he wanted. </p>
<p>It can be argued that the student received an education, but the student was paying for a lot more than an education. A student can get an
education for a lot less than 200,000. What a student wanted was a career. And the Goucher student …he pays 200,000 and he did not get the career. The school received the money and the student did not
receive what he wanted.</p>
<p>I realize this would be a tough law suit.</p>
<p>" So the situation isn’t completely equivalent to commercial loans, and the strategic moves of real estate investors and lenders aren’t a great guide for education loan practices."</p>
<p>You don’t need complete equivalency to be a great guide.</p>
<p>JHS is right, student loans and other consumer loans are not the same. The lender assumes and factors in the risk of default and bankruptcy when he prices other loans. Not so with student loans. That is how the government wanted them - easy to obtain and relatively cheap for students of all income levels - in order to enable them to go to college. A worthy goal, but with crappy consequences (and well disclosed!) for irresponsible borrowers.</p>
<p>I’ve heard of some colleges that have a policy that they call a student in for some serious financial counseling if they see they are taking out large amounts of private student loans. I understand the colleges can see where that money is coming from. I believe the college receives a notice from the loan company as part of the loan approval process, because the company wants to confirm the student’s attendance. In rare cases, some colleges have encouraged students to consider transferring to a cheaper college in order to avoid excessive debt.</p>
<p>Then again, there are some students who rack up excessive debt by their cost of living. Did they really need their own car? Did they really need to live in that luxury apartment building? Did they really need to live in that trendy ultra-expensive neighborhood? Were they going out to expensive clubs? Were they cooking their own food, or eating every meal at a restaurant? Were they running off on expensive spring break trips? Did they work as many hours as possible over the summer? Had they saved any money that they made during high school?</p>
<p>Also, when you hear about other students who have huge amounts of student loan “debt”, often a large amount of that involves penalties and extra interest because of non-payment.</p>
<hr>
<p>Salary and employment surveys for college graduates can also be skewed. That is because the graduates who are unemployed, underemployed or in low wage jobs are least likely to respond to the surveys.</p>
<p>" So the situation isn’t completely equivalent to commercial loans, and the strategic moves of real estate investors and lenders aren’t a great guide for education loan practices."</p>
<p>It’s true. When the student defaults, s/he still has a degree, and is theoretically marketable. When a company defaults, the assets are often, if not usually, entirely worthless. When the bonds are defaulted upon, there are NO assets backing them. In other major corporate bankruptcies, it is often pennies on the dollars, less than students have paid in before they finally give up.</p>
<p>mini, what “bonds” are you talking about with “NO assets backing them”? Sure, there are unsecured bonds out there in the world, but either they are issued by high-credit companies (and there is a low default rate on them) or they are junk bonds and priced accordingly. And even with complete bottom-of-the-barrel junk bonds, people made billions in the 90s buying them and carefully managing the bankruptcies of the issuers. The ultimate recovery rate was quite high.</p>
<p>More importantly, I think the point here, as many have recognized, is this: Whatever you think of the intelligence or character of the borrowers, it is a real scandal the extent to which colleges have supported themselves (and their faculties) by getting people to borrow irresponsibly. That is going to have to end, with two predictable consequences: First, fewer people will be going to college (although, one hopes, more people will still GRADUATE from college). Maybe trade schools will pick up the slack – but lots of them are worse than colleges in this regard. Second, colleges are going to have to tighten their belts. Some of them aren’t going to survive; others will have to lower prices and find a way to deliver education more efficiently.</p>
<p>mini,
Don’t forget that no one is <em>required</em> to lend or extend credit to a corporation. Lenders do so at their own risk, and on their own terms, with full knowledge of the consequences should a corporation default/file for bankruptcy, and factor those potential costs into the terms. There is no real reason to feel sorry for them if their lending decision goes bad.</p>
<p>Student loan lenders are <em>required</em> to extend these loans to every student who applies, regardless of income or potential. If they were allowed to consider the risks, then very few would be in the business of extending these loans without non-dischargeability and the backing of a government guarantee.</p>
<p>What would you propose for low-income students who want to go to college and don’t have the money?</p>
<p>Making student loans dischargeable and providing grants to low-income students will result in low-income students having the options to go to state school or HYP, and not much in between.</p>
<p>For practical purposes now, students from low income families have mainly these choices, starting at community college, and whatever schools offer sufficient merit scholarships. Most out-of-state public schools and (not-well-endowed) private schools tend to come up short on need-based financial aid. Yes, they may be able to choose such by taking foolish amounts of student loans, but someone more careful about debt will eliminate them as too expensive.</p>
<p>This is true; however, if we are including PLUS loans in the dischargeable pot, then low-income students will lose their parents’ assistance in carrying the debt burden, which will limit options further.</p>
<p>If middle-income students are not eligible for the hypothetical grants, then they may also be in the same, or worse predicament as the poor when it comes to choices. No loans, no grants, not enough savings or income to pay tuition.</p>
<p>And this is a bad public policy? If our goal is to educate our young citizens, why do we need them to attend $60,000 colleges? </p>
<p>In the case of the student who attended Goucher, why not give that same student more money for attending U-Maryland (by eliminating tax payer money to Goucher)? If Goucher wants low income kids to attend its College, why not let Goucher raise the money and pay for it themselves?</p>
<p>bb,
I don’t think it is bad policy at all. However, I think there are a lot of people who will react to the fact that the poor can only go to state schools and the rich go to private schools. It is not a problem from my perspective. Maybe it is not as big a deal for others as I suspect it is.</p>
<ol>
<li><p>For low-income families, public universities are often out of reach, too. Maybe not as far out of reach as a place like Goucher, but far enough so that it doesn’t make a difference. Penn State’s in-state main campus COA is about $32,000, and its maximum need-based grant about $11,000. Basically, it expects students and their families to pay at least $85,000 for a degree. For a family that is truly poor, that might as well be $1 million.</p></li>
<li><p>texaspg – It turns out to be hard – especially since the abolition of indentured servitude and enactment of the 13th Amendment – to “milk the asset dry” when the asset is a human being. Republicans worry that wealthy “job creators” won’t be able to muster the animal spirits to get out of bed in the morning if they think their marginal tax rate may go from 40% to 45%. People paying what amounts to a 90% tax rate often DO have trouble motivating themselves.</p></li>
</ol>
<p>Ultimately, the social policy problem is that a bunch of people with “debts no honest man can pay” is a bunch of people who at best are going to be unproductive, and more likely are going to cause trouble.</p>
<ol>
<li>Beliavsky – I have the impression you think poor people shouldn’t graduate from college, either, unless they have an engineering or nursing credential when they are done.</li>
</ol>
<p>No one is in favor of taking kids who have no chance of succeeding in college, having them borrow to the hilt, taking their money, not educating them effectively, and kicking them out.</p>
<p>In my state, the state universities have stopped automatically taking community college graduates (and have been awarding many of those places to high-paying out-of-state transfers). Many can’t afford them anyway, as it now often takes an extra three years, rather than two years, to graduate. For many, four years at a private college, with some aid, is cheaper that five years at the state university. But both are out of reach. </p>
<p>“then very few would be in the business of extending these loans without non-dischargeability and the backing of a government guarantee.”</p>
<p>Absolutely right. They are in this fantastic no-risk business. Hey, they’re banks, and that’s why government exists. </p>
<p>It should be noted that studies show consistently that there is greater change in earning potential between high school grads and some college v. some college and graduation. Graduation is of significantly less importance, from a pure earnings standpoint.</p>
<p>“**<strong><em>MANHATTAN (CN) - A $200 million class action claims the New York Law School misrepresents post-graduate opportunities for lawyers and subjects “the overwhelming majority” of its graduates to “years of indentured servitude” after “saddling them with tens of thousands of dollars in crushing, non-dischargeable debt that will take literally decades to pay off.” </em></strong><em>Lead plaintiffs Alexandra Gomez-Jimenez, Scott Tiedke and Katherine sued the law school in New York County Court. </em><strong><em>It’s not the first such recent complaint against a law school. A similar class action was filed in May against the Thomas Jefferson School of Law in San Diego.</em></strong>
**<strong><em>And a class action with similar claims was filed Wednesday in Detroit Federal Court against the Thomas M. Cooley Law School.
*</em></strong><em>The plaintiffs in the New York case accuse NY Law of “a systemic, ongoing fraud that is ubiquitous in the legal education industry and threatens to leave a generation of law students in dire financial straits.”
*</em>***The class claims: “New York Law’s dean, Richard Matasar, actually publicly recognized this problem, when, during a program sponsored by the Association of American Law Schools, [he] acknowledged that ‘we (law school deans) should be ashamed of ourselves. We own our students’ outcomes. We took them. We took their money. … And if they don’t have a good outcome in life, we’re exploiting them. It’s our responsibility to own the outcomes of our institutions. If they’re not doing well … it’s gotta be fixed. Or we should shut the damn place down. And that’s a moral responsibility that we bear in the academy.'” (Parentheses in complaint, as brackets.)”</p>