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Friday, November 27, 2015

'Student Debt in America: Lend With a Smile, Collect With a Fist'

On student loans:

Student Debt in America: Lend With a Smile, Collect With a Fist: ... Borrowing is risky, financial decisions are not always rational, and people often do a poor job of properly weighing the interests of their present and future selves.
The private enterprise system is built to limit overborrowing by sharing risk between lenders and borrowers. ... They charge more interest when they take on more risk. Because most loans can be discharged in bankruptcy, lenders share the cost of default. ...
But the federal student loan program doesn’t work that way. Those ads that run on bus stop signs and on late-night television — “No Cash? No Credit? No Problem!” — are essentially the Department of Education’s official policy on student loans.
On the front end, the department is the world’s nicest, most accommodating lender. Interest rates ... are lower than banks charge... Borrowing for college is essentially an entitlement...
When the loan bill finally comes due, the federal government transforms into a heartless loan collector. You don’t need burly men with brass knuckles to enforce debts when you have the Internal Revenue Service..., which can and will follow you as long as you live.
The government acts this way because the federal student loan program has been removed from the norms and values of prudent lending. Because the Department of Education doesn’t consider risk, it takes no responsibility. If life, luck and bad choices leave you ... in the hole, it’s all on you. ...
Most college students ... pay back their loans and enjoy the fruits of their degrees. But most pack-a-day smokers don’t die of lung cancer. And most people who bought cars with Takata airbags from 2002 to 2008 weren’t killed by shrapnel from explosions. Nevertheless, we still regard small risks of catastrophic outcomes as problems to be solved. ...

Just one quick comment. We need to solve the student loan problem for existing loans, but I wish talk about how to address this problem going forward was more about how to provide adequate funding for colleges so that large loans aren't needed in the first place rather than focusing on how to change the loan program itself.

    Posted by on Friday, November 27, 2015 at 11:28 AM in Economics, Education, Universities | Permalink  Comments (50)


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