Is The So-Called Student Loan Crisis One Big Exaggeration?

[BCEagle91]

> Other than that, this article doesn't give one single reason why we are not in a student
> loan crisis.

I think that the recent FRBNY article and the paper supporting it show that we are not in a student loan crisis. There have been many media reports showing the total size of the student loan market but actual loan amounts for the vast majority (close to 90%) look manageable. There is a 10-11% group that I'd say has is in a loan crisis.

[eastcoascrazy]

We are absolutely in a college bubble. How do I know that? Common sense.

In 2002-2006, I was continually astounded at the price people were not only willing, but eager to pay for homes that, looked at objectively weren't worth it. I was continually astounded by the complete kitchen renovations, the knocked out walls to expand, the basement dedicated movie rooms, the 6 figure pool/landscaping/outdoor kitchens, the 5000 square foot McMansions populated by families of four who could seemingly go days without ever seeing each other.

The run up on real estate prices was irrational, and people, at least in this area, pulled equity that didn't really exist to fund a lot of froth.

It was during those years that I also remember first reading (Wall Street Journal) about people using home equity to fund college tuition. The day my neighbors told me that they had done that exact thing was the day i knew, absolutely, that college is the next bubble.

The first neighbors who told me about using a home equity line of credit to fund college were absolutely thrilled to discover that they could use their home as a bank. At that point, their home had (on paper) increased in value by $300K since it had been built. They pulled out equity to pay for two kids' private college educations before the housing bubble crashed, he lost his job, they are nearing retirement age, and their home couldn't sell for what they now owe.

I believe there is are a lot more college debt like that, that doesn't show up on any statistic or government study.

They didnt take out "student loans", but the debt is there, and it exists as a result of college tuitions.

[BCEagle91]

> We are absolutely in a college bubble. How do I know that? Common sense.

I prefer numbers and charts.

> In 2002-2006, I was continually astounded at the price people were
> not only willing, but eager to pay for homes that, looked at
> objectively weren't worth it. I was continually astounded by the
> complete kitchen renovations, the knocked out walls to expand, the
> basement dedicated movie rooms, the 6 figure pool/landscaping/outdoor
> kitchens, the 5000 square foot McMansions populated by families of
> four who could seemingly go days without ever seeing each other.

> The run up on real estate prices was irrational, and people, at
> least in this area, pulled equity that didn't really exist to fund a
> lot of froth.

The run up was rational given the set of facts and assumptions that
participants had. The system wasn't rational which resulted in
collapse.

> It was during those years that I also remember first reading (Wall
> Street Journal) about people using home equity to fund college
> tuition. The day my neighbors told me that they had done that exact
> thing was the day i knew, absolutely, that college is the next
> bubble.

> That people can't use home equity to fund college tuition anymore
> (to the extent that they could do it in a housing bubble) should
> result in lower college costs as this claimed college bubble should
> have collapsed with the housing market. Has this happened? Are
> college prices going down? I personally see prices continuing to
> rise.

> I believe there is are a lot more college debt like that, that doesn't
> show up on any statistic or government study.

There may be a lot of this but this isn't student loan debt - it's
parental debt and presumably, the students aren't contractually
obligated to pay it down. I think that it's already counted as housing
debt which is appropriate as it could have paid for anything else too
and it would be difficult to get statistics without making some pretty
broad assumptions.

The amount of that, though, should decline given tighter lending standards
today.

------

So, three guys, an engineer, a biologist, and an economist, find themselves stranded on a desert island, with no food. As they search around the island, the come upon a can of beans that has washed ashore. Realizing their dilemma, the engineer suggests they bash it open with a rock. The biologist suggests they put it back in the ocean and let nature take its course and have the seawater degrade the can. The economist says "Let's assume we have a can opener."

[eastcoascrazy]

It isn't "student loan debt", but it is debt that was taken on to pay for college.

Believing in the gospel of numbers and charts as preached by economists is what got us into the national economic mess we are in now.

Common sense has been in short supply in this country for quite some time.

Common sense tells me that there is more "hidden" student/ parent college debt in this country than the charts and numbers show.

[BCEagle91]

> Believing in the gospel of numbers and charts as preached by
> economists is what got us into the national economic mess we are in
> now.

That's untrue. We had a confluence of people doing what was in their
own, perceived best interests, even if it didn't work out that way or
it damaged the organizations that they were working for.

Economists aren't a homogeneous group. They have widely differing
beliefs and philosophies. I'm sure that the Austrian school disagrees
on a lot of issues with more conventional economists.

Numbers and charts give us science and engineering and there is a lot
in science and engineering that is counterintuitive.

> Common sense has been in short supply in this country for quite some
> time.

If a mortgage broker makes a $20,000 commission on the loan even though
it is a bad loan, is he using common sense in making the loan or not?
It may make for common sense for him personally but not for his company.

If the company then takes the loan and sells the loan to another
company, is making the loan common sense or not? They make their fees
and pass the liability on to someone else. Maybe a bank, insurance
company, bond holder or Government Sponsored Enterprise.

If a Government Sponsored Enterprise buys a loan and they are backstopped
by the US Government, are they using common sense?

> Common sense tells me that there is more "hidden" student/ parent
> college debt in this country than the charts and numbers show.

There may be parents holding debt in paying for their children's
education but that's parental debt; not student debt. The debt isn't
on the student contractually.

We're discussing a student debt crisis as to how it affects students;
not their parents. From a contractual perspective, the parents' debt
is mortgage debt. Different issue.

[bluebayou]

If a Government Sponsored Enterprise buys a loan and they are backstopped
by the US Government, are they using common sense?

The GSE, yes, the Government, no.

[eastcoascrazy]

Have you taken a look at how many current threads on this forum alone address the issues of money?

You are subdividing debt into neat little packages and saying that, because you have labeled one package "mortgage" and another package "credit card" and another package "student loans", they are different.

I am saying that they are all tied up together in one huge knot of debt, and that particular labels don't really matter. Too many people (parents, grandparents and students) have used debt of one kind or another to pay for college, or to help pay for college, in the last couple of decades. Some of that debt is easily identified as "student loan" debt, but there is more debt than that which was labeled "student loan". All of it is a huge plug on the economic recovery, and a continuing source of anxiety for more people than most of us want to admit. Whether you label it as "parent" or "student" debt is beside the point.


And, "a confluence of people doing what was in their own, perceived best interests".... Is a perfect description of what torpedoed the economy.

[BCEagle91]

> Have you taken a look at how many current threads on this forum alone
> address the issues of money?

Not very many. I hang out in trading forums where all the threads are
about money.

> You are subdividing debt into neat little packages and saying that,
> because you have labeled one package "mortgage" and another package
> "credit card" and another package "student loans", they are
> different.

They are different. Not too hard to enumerate the differences either.

> I am saying that they are all tied up together in one huge knot of
> debt, and that particular labels don't really matter. Too many
> people (parents, grandparents and students) have used debt of one
> kind or another to pay for college, or to help pay for college, in
> the last couple of decades. Some of that debt is easily identified
> as "student loan" debt, but there is more debt than that which was
> labeled "student loan". All of it is a huge plug on the economic
> recovery, and a continuing source of anxiety for more people than
> most of us want to admit. Whether you label it as "parent" or
> "student" debt is beside the point.

1/3rd own their homes free and clear, 1/3rd have mortgages, 1/3rd
rent. So you're talking about some fraction of 1/3rd of households.
Do you understand why there isn't a lot of support for mortgage
relief? There are some out there that complain loudly about it but
most people don't have the problem. Same with student loans - about
10 or 11 percent have severe problems. The vast majority doesn't.

The main argument over student loans is the debt burden on students;
not parents.

> And, "a confluence of people doing what was in their own, perceived
> best interests".... Is a perfect description of what torpedoed the
> economy.

I guess you're becoming an economist.

[smorgasbord]

Of course they can pay them back. Over a lifetime, and some will probably have their kids paying for their parents' French feminist/religion double major at a 60k/year-before-interest-dream-school loans. But no matter -- as long as it can be done.

And, "a confluence of people doing what was in their own, perceived best interests".... Is a perfect description of what torpedoed the economy.

The key word here is 'perceived.' What eighteen year old you thinks is a great idea ("OMG, I have to go to school XYZ over school ABC because XYZ is ranked higher by two spots!!!11 I'll go fully into debt for a the better program if I have to!") is probably different from what forty year old you thinks ("I wish I could put away some savings for retirement, but I still have to pay back my student loans.")

It's attitudes like those of Mr. Kantorwitz, that everything is rosy and that everything will be OK, that contribute to a false sense of security in social mood. As soon as something looks a little brighter than the day before, people go out, make grand predictions, and splurge, not thinking that everything might go under tomorrow.

[MiamiDAP]

I do not know "Exaggeration" or whatever, but government made sure that future proffesionals are paying great interest. Interest went up considerably this year. There is no point of taking student loans IMO, they are NOT cheap at all. The interest is also in addition to original fees that are charged for loans. It makes much much more sense to take equity loans, considerably cheaper and much less controlled.

[BCEagle91]

> It's attitudes like those of Mr. Kantorwitz, that everything is rosy and that everything
> will be OK,

Could you quote where he said that from the original article? I just reread it and I don't see him saying that. In fact, he posts various facts.

[poetgrl]

The main implications in the student-loan debt are long term and will effect us all.

We are a consumer-driven economy. But this pre-career debt removes consumers from the economy.

It effects the real estate market, the car market, the appliance market, the manufacturing market, every market is effected, going forward. The government has overborrowed and can no longer spend enough to stimulate and the echo-boomers are going to be in a great deal of debt, both paying off their parents government debt and paying off their student loan debts, from which the schools benefit, mostly, and they will remain a non-factor in the economic engine for a lot longer than any generation before them ever has. They will also begin to resent paying social security and medicare and they are a bigger generation than any other. Look for a generational entitlement war on the horizon. If we do not take care of our children, we should not automatically assume they will take care of us.

More importantly, this student loan debt continues to drive the have-have not catergories further apart, to the point where those whose parents can afford the education start with a massive advantage over those whose parents cannot. And, all of this is presented by the colleges as if they are "giving everyone an equal opportunity." But, it isn't the case, and it is contributing to the "two America's" situation we are beginning to see, now. A generation who everyone agrees is facing a less prosperous future than thier parents generation being asked to take out debt before they even get started, is not going to have the same "social program" narrative that those who went to college cheaply and are now retiring have. If we do not invest in our children's future, we are fools to believe they will continue to invest in us.

If economists don't have a model for this? They will eventually. They will put it in the books alongside the models for irrational human actions. The ones where people are people and not equations.

[kayf]

I am not even certain what BC's chart shows. Yes, many kids seem to have lower amount of debts. BC seems to think that is kids with wealthy parents. I think it could also be kids who only went to one semester of local CC. Or one semester of for-profit schoo. The 5K of student debt they are saddled with is a problem to them. And I agree, many kids who do not understand money well take out credit card debt.

[BCEagle91]

> We are a consumer-driven economy. But this pre-career debt removes
> consumers from the economy.

Does it? The money gets spent earlier and then circulates through the
economy. College spending pays a lot of salaries and these salaries are
then spent down the road.

> It effects the real estate market, the car market, the appliance
> market, the manufacturing market, every market is effected, going
> forward.

Professors by houses, cars, appliances, etc.

Companies that create textbooks employ people that buy houses, cars
and stuff.

Computer companies sell gear to college students.

Food vendors like Sysco sell services consumed by students and employ
people that buy houses, cars and stuff.

> More importantly, this student loan debt continues to drive the
> have-have not catergories further apart, to the point where those
> whose parents can afford the education start with a massive
> advantage over those whose parents cannot. And, all of this is
> presented by the colleges as if they are "giving everyone an equal
> opportunity."

Those with more resources will always have a big advantage but a lot
of colleges do redistribute resources and charge full-fare customers
additional amounts to subsidize those with need.

> If economists don't have a model for this? They will eventually. They
> will put it in the books alongside the models for irrational human
> actions. The ones where people are people and not equations.

Rational and irrational depend on your perspective.

> BC seems to think that is kids with wealthy parents.

Could you quote where I said this? It is not my belief that the lower
amounts are for kids with wealthy parents.

> I think it could also be kids who only went to one semester of local CC.

The American Opportunity Tax Credit should take care of expenses for one
semester of local CC.

> Or one semester of for-profit schoo.

I don't think that those should exist.

> And I agree, many kids who do not understand money well take out
> credit card debt.

I think that this is much harder to do today. Lending standards
tightened up a few years ago so we are in a tighter lending
environment overall. I think that allowing student loans to be
discharged in BK or some other kind of forgiveness will result in
better lending practices in the student loan marketplace. Perhaps
students will actually have to talk to a loan officer to get financial
aid - at the moment, the interview is on the back end to remind the
student of their responsibilities.

> I am not even certain what BC's chart shows.

Did you read the blog entry and the paper from the FRBNY?

[MiamiDAP]

Everybody should strive to have only goods and services that they can afford. This includes education. If one can afford loans for the rest of their lives, why not? If another decided to live free of loans, so be it. No discussion will change that. It is a personal choice.