Two Links on the Student Debt Bubble and Debt Reform

(1) Justin Pope, “Student Loans: The Next Bubble?” in the Huffington Post

“The hard part, of course, is that a bubble is never apparent until it bursts.”

Boy I hope Dean Baker never reads this one. I good indicator of a bubble is if borrowing for the asset increases faster than the economy. Unless the borrowing is for something that will provide a return a long time from now, then it’s probably not going to pay off.

The top line is all non-revolving debt, the next line is mortgage debt (right axis), the third line is credit card debt, and the bottom line is government-held non-revolving debt. It’s grown very rapidly in the last couple of years due to the Direct Loan Program. Here’s what we’ll see going forward.



(Sources)

That’s bad, and Pope is right that it’s not going to be as big as the housing bubble, which I’ve never argued, but come 2020 it won’t be a minor issue. Additionally, it will impede growth.

College affordability is a serious issue, but it’s a different one. Borrowing for college and borrowing for, say, a house, are fundamentally different in important ways … College enrollment has surged one-third in a decade. With rising demand, college tuition and fees have more than doubled over that time, outstripping inflation in every other major sector of the economy.

The money students borrow goes to tuition. If tuition were fifty bucks, then there would be very little problem if everyone were borrowing for it. If tuition were high and no one borrowed, then it’d be more like a fad like those slap bracelets we had in the third grade: it may not be a good purchase, but it doesn’t cause a societal maldistribution of debt. This is why I characterized the problem as a tuition bubble. No one said high stock or housing prices were different problems for those bubbles; I fail to see why it’s different for education.

Next, Pope’s supply/demand argument isn’t fully fleshed out. One thing sellers do in good times is find ways to minimize costs to capture more market share, and in this case, that means more distance learning due to better information technology. Yet that hasn’t really happened, mainly because accreditation authorities don’t like it, and the prestige of one’s education is a proxy for quality in a glutted market.

[I]t’s important to remember what actually causes a bubble to burst. It’s not simply a run-up in prices. What bursts the bubble is a liquidity crisis, when borrowers suddenly can’t get the money they need. Even during the depths of the 2008 financial crisis, when private student loans dried up, the government’s dominant role kept student loans flowing.

Yes, the government always has money—even if it needs to mint a bunch of platinum coins—but that makes the situation worse in a moral sense because government is nationalizing a credit market and taking the profits to pay for everything else regardless of graduates’ debt levels. It’s more like legalized Stalinism with a hardship program than engineering the repeal of Glass-Steagall.

Where Pope loses me is his discussion of the college wage premium.

All [measures] show the wage premium is substantial, though after rising steadily for years it appears to have slipped some lately. Wages for the median bachelor’s degree recipient are roughly $55,292, compared to $34,813 for those with only high school, according to the latest data from Georgetown University’s Center on Education and the Workforce.

The problem is that high school degrees have lost considerable value because the U.S. is run by people who think we’ll all create the next Twitter by the end of the decade.

(Source: Krugman)

Wages for college-degree holders has stayed flat in the 21st century, so Pope hedges this by saying:

Particular degrees may prove bad bets, but to imagine the premium on education itself dropping off a cliff is to imagine a world where things have gone so wrong that job skills no longer matter.

Actually that’s an easy world to imagine (Krugman says he did fifteen years ago), say, one in which there are fewer jobs for white collar workers or more people trained for those jobs than are necessary.

That suggests there isn’t one big bubble, but many smaller but significant ones stretching across different sectors – certain liberal arts grads, artists, lawyers who borrow six figures for law school and can’t find a job [we know them…], and students at for-profit colleges.

These “mini-bubbles” have the same origin, so why not address them as one big problem?

(2) Mike Konczal, “Two Steps Toward Tackling Our Current Student Loan Problems,” in Rortybomb

Konczal discusses our student debt problem and thinks it should be solved by bankruptcy reform and government subsidized refinancing.

Why not just undo the rules from the 1990s and 2000s? … We can keep nondischargeability for 5 years if people are very concerned about moral hazard. A lot of these concerns from the 1970s started with stories of doctors declaring bankruptcy the day after they graduated medical school. This will at least stabilize and formalize the system of indenture that is required for people to fully develop their talents and abilities in our country, instead of the system that currently keeps people for life.

I’d say lower it to three or two years if the government stays in the market, which is shouldn’t. I still don’t get why we’re worried about moral hazard for student loans when we’re not for impulse shoppers and gamblers. If banks are worried people will discharge their loans, then they can require cosigners on the debts. Moreover, Chapter 7 bankruptcies are now means tested, so doctors who have cushy jobs lined up won’t be able to discharge the loans. If graduate debt-levels drop, they may even be ineligible for Chapter 13. Thus, I think the safeguards against moral hazard are still excessive and deny people who’d need bankruptcy protection the most.

Next up, refinancing student debt at below-market rates.

[W]hy not symbolically declare regular Americans a bank too? Why not also do a “deathbed conversion” on those who are suffering under the burden of heavy student debts and low incomes and let them immediately refinance all their student loan rates at the current ultra-low discount window rate? Mass refinance all student loans into the current low rates the financial sector enjoys. This would give the 99% of Americans just a hint of the kind of total government support places like Goldman Sachs have gotten.

For federal loans, this would mean lowering the typical 6.8 percent interest rate to the 0.75 percent rate for primary credit. For those with $50,000 of debt at 6.8 percent, this lowers monthly payments on a twenty-five-year plan from $347.04 to $182.83. This would lower total interest paid from $54,110.82 to $4,849.48. Really. Now, I’m not sure if the rate would be fixed to the primary credit rate (otherwise inflation will wipe it out) or if it’s adjustable, but these are big savings. The problem, though, is that like refinancing as a solution for underwater homeowners, it only makes it easier to pay the existing debt off while the bank (i.e. ED) takes a loss, which vitiates the whole point of student loans as an income source for the government. If student debtors owe massive amounts (e.g. $250,000), then it won’t help a whole lot without a principal cram-down. If they lose their jobs, then they’re still going to face collection agents. Moreover, IBR would affect this greatly, so I’m guessing that if we enacted this, the actual savings would go to the capitalized interest for low-income high-debtors, and even then it’d only manifest itself in the income tax they’d pay on the forgiven loans.

I like these ideas, though.

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One Response

  1. […] While this, again, sound promising, there are some problems with, as Matt Leichter at the LSTB notes: […]

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