<p>“There is little difference in the macroeconomic effect of someone choosing to save less and someone else choosing to borrow.”</p>
<p>“Someone”?</p>
<p>'You are talking about one individual? '</p>
<p>No, thats why I said “someone else”</p>
<p>Do you want me to get all econ proffy and say “individual X and individual Y”?</p>
<p>“I merely pointed out that student loans do not necessarily harm the economy in the ways some have stated,”</p>
<p>But if enough students take out loans they can not afford…the economy may be harmed, correct?</p>
<p>‘Ethical’? I think that whole concept, poetgirl, is immaterial. As BBD says, it’s truly up to the individual. Almost Ayn Rand-ian…so the potential defaulters would be the ‘looters’–HA! :)</p>
<p>These loans are means to an end. Decisions…and consequences. I told my M1 daughter what she’s in for down the line when the other financial shoe drops. Not saying ‘don’t do it’ or ‘do do it’, just advising. Told her that interest keeps accruing & compounding on these loans even when she’s not paying. And she says, ‘I’m doing it’. OK…</p>
<p>Don’t get me wrong–I’m damn proud of her. But she’s only 23, and I wanted to make sure she understood that her years age 30 to at least 40 will no doubt be under the cloud of a med school loan debt that could possibly be larger than her rent or mortgage. </p>
<p>Ah…she won’t be the first…or last I guess.</p>
<p>Thanks for the information about Brown’s new financial aid policy. It sounds like they are trying to match HYP financial aid. I’m glad to hear it. It will make a great educational experience more affordable for more people. I think Brown is a wonderful school, truly unique and a great place for the right person. In fact, my nephew is a freshman this year and continuing the family tradition into the fourth generation!</p>
<p>Unfortunately HYP (and now Brown)-type aid policies do not help people like my son who is a good student with good grades and scores that aren’t quite good enough to get into the Ivy League and similar top schools. He wants to stay in the Northeast/mid-Atlantic area and doesn’t want an LAC. He has applied to some medium to larger privates and we’ll see what we get in terms of aid. But if not much is forthcoming, then I’ll have to wrestle with the question of whether engineering at Syracuse, for example, is worth close to three times the cost of engineering at UMass Amherst (in state). I expect the answer will be “no”. I really don’t want him to take on a large amount of debt and I don’t want to take on a large amount of debt myself. I had kids somewhat later in life and his sister is a freshman in high school. I don’t have a pension, so my retirement is what I’m able to save myself (no match either). If he goes to UMass, he’ll graduate debt free and we’ll have some money left over for travel and/or a start on grad school. If he goes to an OOS public, depending on the aid awarded, he may have to take out $5,000 a year in loans but no more. If he went to a full-pay private, more than half the cost would have to be in loans, the same with my daughter. The total could end up being more than I paid for my house, but without 30 years to pay it off.</p>
<p>Hmmm–are parent loans for educations dischargable in bankruptcy? Just wondered…I know student loans for students are not.</p>
<p>"As BBD says, it’s truly up to the individual. Almost Ayn Rand-ian…so the potential defaulters would be the ‘looters’–HA! "</p>
<p>Whiskey Tango Foxtrot?</p>
<p>I dislike randianism. I think it is ETHICAL for an individual to try to make our society more just, including by lobbying for policies that would address injustices.</p>
<p>I just quibbled with the phrase ‘an ethical society’. Ethical questions address specific acts - societes per se do not act, but are the result of actions by millions. I thought the question is “is it ethical for society to rely on X” was a question bound to lead to confusion and unclear thought.</p>
<p>A better question would be “should I as a citizen ask the congress for a cap on the size of student loans” or “should I as a banker refuse to make student loans over a certain size conditional on choice of major” </p>
<p>But again, those were NOT the questions I was addressing.</p>
<p>“But if enough students take out loans they can not afford…the economy may be harmed, correct”</p>
<p>if people spend a lot on an investment with no payoff, thats a loss. Like if I spend 200k to write software that only runs on an Tandy Radio Shack computer, for ex. Its a 200k net loss to me, and since I am part of society its a net loss to society. Thats true whether I finance with bank loans, or with cash thats lying around. </p>
<p>Spending more real resources than make sense on college education is a real waste of resources. 200k on an education worth 100k is a net loss to society of 100k. thats true if the 100k is borrowed. Its true if the parents could pay 100k out of pocket. Its true if the school is a state U and the 100k comes from taxpayer as a subsidy to the school. Its also true if the graduate manages to pay off the student loans.</p>
<p>The discussion of student loans ofetn raised is a different discussion. Its a discussion if there are systemic effects on the financial system due to the impact of non-payments of unsustainable loans. That is the big issue from the housing crisis, after all. I mean we MAY have too many resources that went into exurban mcmansions that could have gone into solar panels, but thats not way the economy went into recession. It did so because volume of loan defaults was such as to challenge the liquidity of major financial institutions, whose role in lending is so big that their failure to lend could not easily be made up for elsewhere. I outlined why I think student loans are unlikely to do the same, in my first post on this subject in this thread. </p>
<p>In the case of subprime loans, an irresponsible, unthrifty, personal practice, was ALSO damaging (very damaging) to the economy. Some people seem offended that it is not always the case that irresponsible personal practices are damaging to the economy.</p>
<p>Ok…</p>
<p>“Always” is a tough hurdle…</p>
<p>I think I agree with most of your post…I can’t tell because I think you are nitpicking…</p>
<p>Student loans do not have to have the same magnitude of effect as the housing crisis and all that entailed to affect the economy.</p>
<p>Do I think student loans are going to affect the economy like the housing crisis did? </p>
<p>No.</p>
<p>Do I think it can affect the economy…yes…</p>
<p>Do I think irresponsible personal practices always damage the economy?</p>
<p>No.</p>
<p>Have you read, How Markets Fail . ?</p>
<p>Brooklynborndad…</p>
<p>I am not sure that a loss with loans has the same effect on an economy that a loss without loans has…</p>
<p>In fact, I was sure the effect was different until I read your posts. :)</p>
<p>Why do I think that?</p>
<p>Two scenarios…</p>
<p>I own a stock for $200,000…no margin…</p>
<p>I own a stock for $200,000 with 50% margin…</p>
<p>The stock loses 50% of its value in a day…</p>
<p>Owning the stock without margin…I am down $100,000. I don’t have to do anything except feel bad…</p>
<p>Owning the stock with margin…I am down $100,000 and I have to come up with more margin or I have to sell the stock…</p>
<p>The supply and demand for the stock is different with margin and without…</p>
<p>When “society” has too much margin and the stock market starts selling off the characteristics of the market are quite a bit different and does affect the economy.</p>
<p>“Student loans do not have to have the same magnitude of effect as the housing crisis and all that entailed to affect the economy.”</p>
<p>but magnitude is a key to the argument. Banks make loans. Some always fail. Sometimes particular bank loan products fail more than others, cause the bank was stupid. Thats a loss to the bank and, if it finances net negative economic activity (where costs exceed benefits), a loss to society. It is NOT the kind of systemic loss involved in the RE crisis UNTIL it is large enough to endanger major financial institutions. </p>
<p>"Have you read, How Markets Fail . ? ".</p>
<p>No but without knowing everything in it, I think I have read articles by a number of economists (de Long, Krugman, Simon Just, etc) who essentially agree with him about the causes of the financial crisis and proposed remedies. I tend to agree. I have not above argued that all economic actors are rational, that markets never fail, or that bankers are never stupid. I have simply made some particular arguments about the student loan issue and how different it is from the housing issue. Some of these are differences in sheer magnitude (which matters!) some are about the quality of average loans (people sometime speak as if MOST recipients of student loans are borrowing 200k and going off to earn 50k a year or less, which is manifestly not the case).</p>
<p>And to some degree its simply an assertion based on actual empirical evidence. Housing was a classic bubble - people bought, on the assumption they could sell the houses for more. All the market had to to was to stop INCREASING, which made many folks position unsustainable, forcing disorderly, paniced selling, causing a snowball (which in many markets has already reversed to some degree) Students are not buying degrees to resell them - they are buying degrees expecting to repay out of salaries. To the extent they either earn to little or earn nothing at all (due to UE) they will fail to repay (call that what yuo will) The extremes of UE and low incomes in this business cycle APPEAR to have occured in 2009. Ergo the extreme point of any Student loan “Crisis” should have occured then. If there is a reason to expect more defaults in 2011 than in 2009, I have not seen anyone giving it. signficantly higher student debt loads in 2011 than 2009? higher college grad UE in 2011 than in 2009?</p>
<p>"When “society” has too much margin and the stock market starts selling off the characteristics of the market is quite a bit different and does affect the economy. "</p>
<p>thats debatable. I havent taken a course on analysis of stock market pricing since the Reagan recession, and its not really my area, but its pretty complex, and I dont think everyone at all is agreed that margins really effect stock market volatility the way people used to think. </p>
<p>And even it it did, one would have to evaluate the social impact of stock market volatility, and see if there is ANYTHING in the case of an individual investment in a business asset or education that is comparable to the effect of stock market volatility. I am dubious on both counts.</p>
<p>Well…it is my area. ;)</p>
<p>so do you think stocks are often inefficiently priced? Do you think a stock falling due to margin calls below its “correct price” will not draw in investors with deeper pockets? Why not? Do you think non-beta (beta as defined in CAPM) price volatility impacts returns?</p>
<p>Blue Horseshoe loves Anacott Steel</p>
<p>belay those questions.</p>
<p>Robert Shiller believes margin reqs reduce volatility, and thats socially desirable. I have not read the article, but I will go on trust on this one.</p>
<p>I am still dubious the reasons thats so extend beyond financial markets.</p>
<p>I don’t know what a correct price is…</p>
<p>Debt (margin) affects asset prices…both on the way up and the way down…</p>
<p>Robert Shiller is correct…</p>
<p>Hey guys-- can you dumb it down a little for those of us that aren’t as knowledgeable about all the investment stuff? I am trying to follow but a lot of this is over my head.</p>
<p>I think they are saying that tuition prices are not rational . . . or that the federal government is going to bail out former students who barrowed to much money is student loans . . . or that the market value of your bachelor’s degree is about to halve . . . or not.</p>
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<p>Wow, does Brown really have HYP-financial aid? (esp. in regards to the upper middle class)</p>