The lenders are taking no risks since these loans cannot be discharged through bankruptcy. There are also very large late fees and penalties that can triple (or more) the amount owed.
Now I read that Wall Street is creating CDO's based on these loans, like they (continue to) do on mortgages. Some people die "early" without paying back these loans, and sometimes, they will owe more than they took out. Given the mounting problems with the numbers here, it seems a whole generation of people in the middle of this bubble are going to go to the grave while still owing on these loans. What happens to these CDO's? Are we headed for a smaller "meltdown?"
I went to school from 87-91. I could already see the problem starting. I was hoping this bubble would burst before my own children went to school. Two of three have gone to public schools so far, and we've paid through the nose for it. We are pushing our third towards some sort of trade school.
We learned that people like to gamble and that it’s easy to push things forwards.
Also, better jump on the loan band wagon, or you’ll be left out. Anyone without a mortgage + houw which appreciated has basically been robbed by people who do
This is why I’m 100% sure we’re headed towards another real estate meltdown sooner or later. Real estate prices and rates have skyrocketed. The number of people who could afford 500k mortgages at 3% is much higher than people who can afford 750k mortgages at 7%.
But lenders aren’t going to suddenly go from approving 100 loans a month to just 10 a month. The incentive structures are designed to weasel and lie to pump out flattering bottomlines every quarter.
You can trot out the statistics but you can’t change human behavior without changing the incentives.
Looked at this a bit ago and share the sentiment. Vancouver, BC was an excellent case study. House prices average: ~$1.1M. Loan rate average: ~5%. Month payment: $5900. Yearly: $71k. Avg Salary: $60k (before tax). After tax: Maybe $48k or less. Result: No normal worker can afford the loan, and the bank won't give you the loan. You pay everything you can each year, and you owe more. This isn't even with property taxes, utilities, other basic Maslow's heirarchy stuff taken out.
Wonder what percentage of this demand is organic home owners vs. investors (including foreign investors).
There’s been massive capital movement across the globe. Money moving out of China and Russia in particular. And the gulf countries with a surplus of cash thanks to multiple years of expensive oil.
There might be something to that. Russia has become a bad place to invest money, while china’s real estate bubble looks to finally be popping. It could be that Russians and Chinese are accelerating on capital flight from their own countries due to current circumstances.
But it’s really just speculation. I haven’t noticed an influx of ore Chinese buyers into my market.
You can track political developments in China, Russia, and Saudi by the price of BTC and foreign housing (esp. places like Vancouver, Canada, or London, England).
Effectively a stealth tax for most graduates, if they can't ever hope to repay it. But regressive if you're rich enough to pay it off… or never have need for it to begin with.
One of the core elements of the 2008 meltdown was when someone abandoned a house, all the other houses in the neighborhood would see a substantial drop in their value. This made it more likely that other people would go underwater on their mortgage and also walk away.
Education doesn’t have this kind of contagion. If you stop paying your student loans it has very little impact on the value on my education.
It's never been more true that education is overpriced and underdelivers.
The contagion may not be "house goes bust and my house value goes down"... but there is a contagion: My degree is now no better than the degrees for the mills pumping out idiots while lowering standards and full of soft degrees filling the markets with "educated" people that aren't qualified to fill a coffee cup at starbucks.
If you don't see a market flooded with lower value results as devaluing the worth of higher education then you're not looking closely enough.
It doesn't need to be contagious to create a crisis, just correlated, e.g. if there is a big macroeconomic shock that makes many students unable to pay their loans all at once.
US community colleges (usually 2-year) tend to have low tuition and may offer flexible scheduling so you can pay as you go and/or work through school. Housing can still be expensive though.
US public universities may have lower fees for in-state students. UC Berkeley costs some $41K+ per year (including on-campus housing, food, etc.) for CA residents - not particularly affordable to begin with - but charges an extortionate $33K "nonresident tuition fee" on top of that for non-resident students (including any students under 24 whose parents live out of state.)
Public in what sense? Elementary through Secondary aka K-12 is, but is mandatory for students unless they take extra-ordinary measures to not be there, e.g. homeschooling, or dropping out at 16. Funding through this is usually handled on the state and local level, often by local property taxes.
Public Universities are ones funded by the state, to varying degrees.
Private Unis have their own funding, usually through a mix of tuition and large endowments.
K-12 are "free" (funded in large part by property taxes, as I understand it). Higher Education is not, though public colleges tend to be cheaper, from what I've seen.
It's a combination of loans. The idea is let's say I have 100 identical loans I made (in reality, there are averages). Further, we agree 5-15% are likely to default. I'm going to get paid 85-95% of the interest + principle. But I want that money now. You want to invest in future cashflow, so I want to sell you a loan. Buying one from me is kinda risky, you may get back 100% or 0% of the interest + principle you expect. So instead I sell all 100 as a lump sum, and you and 99 other people each get 1%.
But, CDOs go a step further. You may have more or less risk tolerance. So we chop it up. You can buy something that gets paid back if 70% of the loans are good, or only if over 70% or over 80%, or even over 90%. The less likely you are to get paid back, the more you make.
So the person who absolutely wants to get paid back gets a small interest rate. The person who only gets paid back if literally every loan pays off gets a much higher rate.
In 2008, what happened is all those people buying the "very safe" 75-85% failure rate sections also were getting wiped out.
Collateralized Debt Obligation, sort of like a bond that's composed from many loans on something you can repossess, like houses or boats. They're notorious because they were involved in the 2008 financial crisis.
The Big Short also has an earlier explanation of a non-synthetic CDO ("we just repackage it [low-quality risky debt] along with a bunch of other shit that didn't sell and put it into a CDO"):
You take a bunch of loans and bundle them together and securitize the bundle to sell to the public. Mortgage CDOs crashed the global economy in 2007-8.
Seems wrong to influence your son's decision based on your financial situation rather than his desires/passions. Of course if he's naturally interested in the trades then sure.
One has to think the ROI for any financial investment in someone <25 YO towards things like education pays off more than similarly-sized investments later in life.
Regardless of whether the parent can support that tuition cost or the kid has to take on loans themselves, it should be up to the individual whether they take on that risk irrespective of the parent's financial situation, which is I think where this heavily-downvoted reply was going.
As somebody who's education was way less supported than the rest of my family, who came out with a better job than all of those others in spite of that, there's a decent chance your kid will resent being "held back" by such a choice for a very long time if you give them trade school as their only option in life.
Lots of people find ways to be successful in the arts by eventually finding something cross-disciplinary, and with the direction most non-white-collar jobs in the US are heading I wouldn't bet my kid's life on trade school. What made sense as a sentiment on Mike Rowe's "Dirty Jobs" 10+ years ago doesn't quite hold up as well today, and those projects were funded by the Koch brothers and the whole "trade school is just as good" thing should be taken with a mountain of salt. I'd love to see more data proving trade school proves better today, especially for young adults with educational backgrounds and access to learning and job opportunities whose parents are in the economic class to be browsing HN
Passion doesn't pay the bills. It's good to be passionate about something, but many passions are not marketable.
Many have drowned in student debt following their passions, but this wouldn't be so in many countries that have university education fully covered or significantly subsidized by taxes.
The countries that have "free" university education also steer young people into career paths starting in middle school. If you're not the sort of person who will succeed at university, you get directed into vocational or trade school or apprenticeships, etc.
If passion doesn't pay the bills, it certainly can't pay taxes. Why should engineers and plumbers and garbagemen pay taxes to send someone to art school for years?
Once something is paid for with tax money, then the people paying the taxes want a say in how it's spent -- which is not just reasonable, it's a requirement of a liberal democracy.
Of course, countries with tax-funded higher education ration degrees. There are limited slots, and art courses are usually at the bottom of funding considerations.
Exactly! Passions are good hobbies. Many people who take their passion and turn it to make it their source of income regret the decision because it sours the passion —it become a job.
There are a lot of ways to make money. Picking a job based on money is a good way to be absolutely miserable. My parents pushed me towards making money my entire life and there is nothing I regret more than following that advice. Every day I wake up dreading going to work and it seeps into every aspect of my life.
Presumably you have enough money now to switch to something that makes you happy?
Personally, if you’re going to be miserable anyway (as most Americans are these days), it’s probably better to be miserable with money than without money, lol
I'm 29 and have 500k saved up (live in Santa Monica which is quite expensive), but yes I think I will quit my next stock vest which is Friday.
And idk. My best friend from high school moved out here with me and he's a waiter making 40k a year and seems totally happy. Works like 30 hours a week, no mental stress, able to work out and work on himself. I think money is highly overrated.
Making 40K a year is only sustainable while you're in good health and don't have a family to support. I remember my carefree twenties as well, but things can change as you get older. There is no retirement plan on that kind of income other than waiting tables till you die. At least you should recognize that your relationship to money is very different than theirs. Having half a mil in savings is a completely different ballgame.
I think both situations are unsustainable. I'm not financially stable because I hate my job and might quit at any time and he doesn't make enough money.
But I think my main point is both of us have a way of becoming sustainable so you might as well do what makes you happy instead of working a job you hate for 8 years. Being a waiter making 40k isn't enough long term, but working your way into a higher end establishment or management is. A girl I dated started out as barista, became a store manager, and is now the regional manager and makes ~125k a year and more importantly she is a perfect fit for the job and enjoyed it the entire time.
All I'm trying to say is there are a lot of paths to a sustainable life even when following your natural inclinations.
But anyway OP responded his son's not super interested in college anyway so his plan sounds good to me anyway.
The world is cruel and wants to see us all ground to dust. The typical HN denizen might know this at an intellectual level, but few of us have the lived experience. I sincerely hope you never have to learn how much of a privileged perspective you have.
If you don't want to be poor, don't go to university.
Academia should be a place for people who run away from money, because it's the last thing upon the list of interests for them. Academia should be a place for joy in learning concepts, and in some circumstances, which strive to be useless. Mathematics is one of the most exemplary fields for this, which is summed up quite nicely with the following quote:
"The mathematician does not study pure mathematics because it is useful. He studies it because he delights in it, and he delights in it because it is beautiful."
Never go to a university expecting to improve your wealth status, because it very likely won't happen. Turn elsewhere to find wealth.
Meanwhile in the real world, large companies and public jobs all have practically mandatory education requirements. Your pay as a public employee in Germany is literally determined based on whether you have a BSC or MSC or none.
> Following passion is for rich people (or people who get unlimited student loans).
I think this is a truism that people want to be false.
But in any developed country, most poor people are pretty rich when compared to the world, and it offers them lots of freedom to choose what field they want to work in, where they want to work (both city and company), etc. There isn't the expectations that sons take their fathers' jobs and that daughters take their mothers' (often being a homemaker).
It still sucks to be relatively poor in a developed country, but most are rich enough that they can follow their passions in ways their grandparents never could and half the world can't today.
Giving the benefit of the doubt here, I assumed the push toward trade school is because that makes the most sense for the child in question. College is not for everyone, including a lot of people pushed into attending.
It really baffles me sometimes how readily we assume our conclusions apply to others. Most serious decisions in life require balancing multiple difficult trade-offs. To think that our particular biases, experiences, resources and difficulties are anywhere close to another's is a huge leap.
It's fine to speak from one's experience, but to say that someone else should make the decision one thinks is wise based on a single comment is either ignorant, arrogant or both.
Edit: I replied to you @allenrb, but I'm not directing these thoughts toward you. I'm just pointing out a general behavior I see (but wish I didn't) on the internet and HN.
Seems like if we don't think 18 year olds are not legally responsible enough to drink alcohol, then perhaps we shouldn't allow them to take on life-destroying amounts of debt.
Well the CDOs are probably tranched, so there will be some portions that are safe. But in general, you'd think the student loans would only be in trouble if there's a large increase in the unemployment rate. You'd get a meltdown if the government were to announce a change in the laws.
Sort of. They took the shitty bottom tranches from the mortgage CDOs and repackaged them as new CDOs. The credulous ratings agencies gave these new CDOs the same rating as the old ones but it took only a modest market downturn to wipe out even the top tier of these second level CDOs. Even this might not have been a problem if the whole thing hadn't been massively leveraged. The fact that mortgages were involved was nearly irrelevant. This shitshow could have been built on anything. The regulatory reforms that tackled the mortgage market were missing the point.
> But in general, you'd think the student loans would only be in trouble if there's a large increase in the unemployment rate.
I thought the government guarantees these loans, but maybe I mis-read that, mis-understood, or something changed. I think the borrower is still on the hook and accrues fees if they don't pay but I also thought the federal government literally paid to keep the bank whole.
Even if you can't discharge the loan in bankruptcy, if someone can't pay, you as the lender have a problem. The balance in your favour might keep increasing with the borrower totally screwed, but that doesn't really help you if nothing is being paid.
Have to wonder how this interacts with the US healthcare system. As people get older they are more likely to have health problems that prevent them from working and cost a bunch of money.
>The balance in your favour might keep increasing with the borrower totally screwed, but that doesn't really help you if nothing is being paid.
The secret is to lend money and then make people spend it on something worthless. You know, the easiest way is to lend someone money so they can gamble the money away. You might now argue that this is terrible for the lender, but only if the lender doesn't own the casino. Then the gambler ends up in massive debt for no benefit. It doesn't matter if the borrower repays the loan or not because the lender didn't lose a single penny and every payment results in profit.
This is just a hypothesis because I am not aware of any banks or financial institutions operating an educational institution, except maybe lambda school which was heavily incentivized to get people to sign up for income sharing agreements but then only deliver some low quality MOOCs with the only source of support being TAs who themselves are former lambda school graduates.
This is why I'm asking. If that's the case, then I think even I would want to invest heavily in them. As long as the US government continues to make the money printer go BRRRR, this is an investment vehicle that simply cannot fail. (Until it does, in which case it will do so in a most-spectacular fashion.)
There are some loans the government guarantees and other loans that the government merely makes immune to bankruptcy. Obviously, they have different risk profiles.
I'd love to see numbers on how many are actually discharged. My understanding is this is almost as akin to saying that the lottery does, in fact, pay out.
There's more paths to discharging than bankruptcy.
Somebody I know had a medical emergency while in their repayment period. They were unable to work and went on to disability insurance, and eventually had their loans forgiven. I think they had to be on disability for a certain period of time (measured in years, iirc) before they were discharged.
Eventually, they recovered sufficiently to be able to return to the work force debt-free. I'm not sure if the hurdle for loan forgiveness ought to be "you have to basically die", but it's at least that high for now.
There's also the well-known "public servant" path. I'm sure there's some ironic joke to be made comparing the two.
I totally agree, I think most level-headed people do.
It's a tricky problem. We want people to have equal opportunity to pursue college, even if their parents can't afford it. But at the same time, we don't want to subsidize cost creep.
Clearly the current solution doesn't work. Alas, we're deeply invested in it (literally), and each passing year the entanglement grows.
I think you can make a strong case for govt-funded tuition at public universities. But I don't know how to get to there from here without making a handful of people very unhappy.
> I think they had to be on disability for a certain period of time (measured in years, iirc) before they were discharged.
In other words, basically borderline poverty for years before people realized it was never going to happen, and got lucky enough to get out of disability -- cuz a lot of people don't.
I don't have numbers but I've read enough stories about it that I think it's far more likely than winning the lottery.
The bigger problem is that people _think_ it won't work and they don't bother trying. How many folks could have met the hardship burden but didn't apply?
We need to stop repeating the falsehood and instead be truthful: Student loans CAN be discharged via bankruptcy, if the applicant meets a hardship threshold.
To be fair, I was unfair to compare it to the lottery. That is clearly not paying out often. Such that, if you are comparing to that, you had best be favorable.
I'm assuming it pays out at 100x lottery numbers. But, again, that is still basically zero. Is why I don't regularly buy 100 lottery tickets.
Do we have any numbers for how many applicants get their debt forgiven? The requirements seem pretty wishy-washy and easy for courts to just deny out of hand if they want. And while that could go both ways for someone, Americans in general are pretty obsessed with people paying debts in full regardless of how fair or not or manipulative or scammy the deal originally was or the circumstances that brought it about.
Every other debt having your bankruptcy approved is proof enough that you were under undue hardship and couldn't crawl your way back out. But student loans are special and need further proof, which means they are definitely not that easy to get out from.
My mom’s “City College” MBA student loans were somehow discharged when she went on medical disability. It is totally possible, but she was really not in a good spot after 50 health wise.
Which I find really weird, they take this stance against education but businesses don’t have to deal with such predatory loans - in fact govt loans for businesses tend to have low interest rates, or forgiven like the PPP loans.
Why do we take anti-individual stances, but pro-business stances? Is that a byproduct of capitalism, or am I misreading the world?
PPP loans weren't really loans. It was known they would be forgiven before taking them out. If that had not been the case, most businesses would not of participated. I believe they were structured as loans providing a mechanism for congress to pass the aid immediately.
Actual business loans require assets/collateral, even those from the SBA. At least this has been my personal experience with my businesses. You can't get a loan with no credit or assets (like a student can).
That’s the part that doesn’t make sense to me. Businesses make way more money than an individual, so why charge the individual more APR?
And PPP really should not have been forgivable - if you run a business, then it’s your responsibility to have enough money in the coffers to survive any economic downturns. Individuals get punished way more harshly than businesses when things go south.
That's not really true imho. If we are going to be pedantic and talk about the pandemic, almost all taxpayers received individual stimulus checks in the thousands. On top of that those with children received a lot more. The vast majority of PPP loans went to small business and it was to make up for the government shutting down parts of the economy (it wasn't simply an economic downturn). I don't agree with how hastily and sloppy it was administered, you'd think we would have plans in place beforehand. But hey it's the government.
As far as interest rates, I had six figures of student loans and they were at 2.88%. Rates today are higher, but that's because they very loosely follow the federal funds rate. This is no different for business loans. But loosely speaking, interest rates on federal student loans are pretty low compared to other types of loans.
In fact, the reason the stock market reacts so badly to interest rate increases is precisely because it increases the cost of borrowing for business.
I would kill for such a low interest rate. I graduated soon after the financial crisis and the cheapest loan I had was 4.88%, with the average being 6%, and some were even 8%. I can (could have?) finance a car for cheaper, which is a bit ridiculous to me. Personally, there should be a cap or a set interest rate for education loans but I understand that it’s a contentious statement.
Yeah there were stimulus checks, and I saw a lot of people say something like “wow look at all these handouts people are getting, they don’t deserve it all!” but then they turn around and say the PPP was the greatest thing ever and businesses deserved them.
I think we are too critical of individual choices nowadays, but not critical enough of the terrible choices that businesses make. That’s probably the gist of my discontent.
> And PPP really should not have been forgivable - if you run a business, then it’s your responsibility to have enough money in the coffers to survive any economic downturns. Individuals get punished way more harshly than businesses when things go south.
If that business goes under, how many individuals are out of a job?
The PPP loans were intended to keep _individuals_ employed.
Where are we taking anti-individual stances? I'm pretty sure you are misreading the world here. Nobody mentioned individuals at all - the question is just how much you blame businesses vs lawmakers.
I claim that the blame here really rests on big government for creating this fucked up system, not the businesses that work within it. By the way, I blame the government for the PPP fiasco too.
None of this is particularly pro-business, but a lot of people are apologists for big government and need to be disabused of that notion.
you are right basically -- with the caveat that "business has shown the ability to be responsible with money" while individuals fail at this for a large variety of reasons. However, in many societies past and elsewhere, not every single individual adult has to manage money like a business. Zoom out a bit and you might imagine that government now treats corporations as a person, and persons like they have to behave like a business.
> Why do we take anti-individual stances, but pro-business stances?
You're presuming a fact that's not in evidence. I know it's the flavor of the month whataboutism to point to PPP as an excuse to forgive student debt, but PPP was wildly unpopular amongst people who didn't directly benefit from it as well. I have full faith the SBA makes terrible loans as well.
Also, anti-student loan isn't exactly an anti-individual stance. It can also be interpreted as anti-University subsidy. And when you look at the absurd wages professors and administrators can command at these places, I wouldn't blame someone for thinking these loans are distorting the market so badly that it harms consumers/taxpayers while enriching professors and administrators.
I 100% agree that universities are not incentivized to keep their costs low, and there are so many that could run on a much leaner funding.
> You're presuming a fact that's not in evidence.
I’m not so sure about that. How many executives get paid remarkably well, even though they fail miserably? Sometimes even with tax payer money.
Comically, the government is the direct lender and is charging “predatory” rates. My loans are all through DEd. At time of issuance, they were double the 30 year mortgage and many multiples of prime. My payments go directly to the governments payment processor (AidVantage/Navient) and on to DEd.
And yet, some lenders (Navient is the big one) have now lost so much money due to COVID forbearance that they've exited that industry entirely.
There's inherent risk to everything, everywhere. Making the loans undischargable in bankruptcy doesn't negate the risk of non-repayment; it just hides it. Until, eventually, all the band-aids fall off, reality bares its ugly head, and we all wish we hadn't-a done that. Yet, in thirty years we'll forget about it and do it all over again, in some new, crazy, way.
Since there is pretty much no social safety net, people are probably going to find some sort of work even if they have a lot of student loan debt. And, the debt servicer can garnish those wages. You are essentially selling yourself into slavery if you take a student loan! (And the reasoning is so weird to me; I went to a state school and tuition was $750/semester. Why are people paying more unless they are extremely gifted and they want to go into a highly regulated field like civil engineering or medicine?)
Student loans not being dischargeable through bankruptcy creates a moral hazard, much like bailing out banks. Banks will lend an infinite amount of money for student loans, because there is no risk to them. Creating free money always devalues it; if you have to work for your money, an education is priced $X because that's the maximum people will pay. If everyone gets unearned money to pay for education, it becomes worth $X + $Y. This is just the SaaS model for people. (Consider AWS; "oh you want to make money selling a SaaS service? we'll take 10% of your revenue for servers." Student loans are the same thing, "oh, you want to go into a high-earning field? we'll take 30% of your income for the next 10 years.")
Compare this to things where banks could lose money, like mortgages. If you bid $1,000,000 on a property that's worth $200,000, the bank will simply require a down payment of $840,000. They have no interest in your starry-eyed games. If you walk away, they can close out your loan by selling the property at the appraised value, and they're happy. Banks have the right amount of paranoia about lending for this kind of purchase; their goal is to never lose money. Student loans should be no different; current grades and expected job prospects should play heavily into the decision as to whether or not to lend money. This will reduce the cost of education because selling a $600,000 art history degree to straight-C students won't be viable in the market anymore. (Universities will fight hard against this, because the degrees are cheap and everyone pretends they have some value. If people realize degrees don't have much value, the cash cow dries up. But we have to kind of look at the effect on society as a whole and realize that work experience is actually what we value. After the first 4 years of your career, nobody cares about your GPA or where you went to school anymore. And incidentally, 4 years is exactly how long college takes!)
You're entirely right, but if I have $200K in debt for my useless undergrad degree, and I can only find a job at Starbucks, garnishment or not the bank is not getting their money back. The court will order some kind of payment, sure, but they'll prioritize me paying for rent and food.
I agree with that. Having that money taken out of your paycheck just makes you extra miserable; you're in debt, you get yelled at for not making Karen's coffee right for 8 hours in a row, and you don't even have enough spending money to go see a movie or whatever. It's just miserable and I don't like it; if you have to take a shitty job to feed yourself, you shouldn't have to live a completely miserable life 24/7. That just doesn't seem right to me.
Hopefully for you the court's prioritizing will actually allow enough $$$ for your rent and food and medical expenses and transportation and clothing and etc. And adjust that when inflation hits the costs of those things.
As I have written in another comment. This scheme only works if the college is owned by the bank and the college is spending a tiny fraction of the tuition on the student.
I believe that was the posters original point, because the lenders have no more risk it means that the market solution has been put out of balance, and the current situation is arguably a logical consequence of that imbalance.
I can see that read. I meant that we should not have built a situation where lending money is risk free. It is a perverse incentive to do more lending, and ignores the actual risks that people will be unable to repay.
Just because the loan cannot be discharged doesn't mean there are no risks. The money doesn't just appear out of nowhere if the borrower doesn't already have the money.
The lenders are taking no risks since these loans cannot be discharged through bankruptcy. There are also very large late fees and penalties that can triple (or more) the amount owed.