Day: 2015/06/15

Graduate Student Loan ‘Horror Stories’ Are the Point

Most of what Jordan Weissmann writes in “A Sign That Washington Might Be Charging Too Much Interest on Their Student Loans,” is correct. Okay, the title should use “Its Student Loans,” but that’s trivial.

Weissmann argues that startups targeting high-income graduate student debtors for student loan refinancing probably aren’t much of a threat to the federal loan program’s profitability (assuming there is any). The example he cites from a Bloomberg article isn’t very inspiring. The debtor has an MBA earns $140,000 per year, and has a scant $45,000 of debt. A 31 year old, the debtor’s 6.55 percent interest rate indicates that he probably has only unsubsidized Stafford loans from back when the interest rates were fixed rather than Grad PLUS loans at a floating rate. He is totally ineligible for income-based repayment. Rhetorically speaking, so far so good.

As for that assumption about that the federal loan program’s profitablity, we’ve already been down that road. (In a related article, Weissmann implies that anyone who disagrees with accrual accounting is a conservative—ha.) The government may have lower borrowing costs, but that doesn’t mean it always lends money wisely. Anyone who disagrees is free to argue why we shouldn’t socialize the entire credit system—and not just postal banking, I mean everything.

Where Weissmann gets tangled up is when he writes, “[W]hile there are certainly plenty of horror stories out there from underemployed and overindebted law grads and Ph.D.s, advanced degree holders are generally high earners who rarely default. Their reliable payments help subsidize lending to low-income undergrads, who are generally far less of a solid bet for the government.”

First of all, graduate debtors’ low default rates are probably due to selection bias, not high incomes. Presumably, highly educated people are savvier, more conscientious, and therefore more likely to contact lenders when they start running into financial problems, so they sign up for hardship deferments rather than default. Now they have IBR. In short, not being in default isn’t the same thing as being in full repayment.

More importantly, however, is that the characterization of law debtors and others as “horror stories” is misleading. In the past I’ve estimated that about 30 percent of Grad PLUS loan dollars go to students at private law schools. More go to public law school debtors. Weissmann should know that a sizeable proportion of these debtors will never repay their loans in full. Even if they’re a minority of graduate debtors, they still owe more than the average, but that’s where the profits are supposed to come from! Consequently, that minority matters quite a bit.

What’s needed is a cross-section of Grad PLUS dollars (not debtors) by degree, then repayment status, and then repayment type. If a minority of debtors owes a greater proportion of the debt and is on IBR because it has a low income, then startups poaching a few MBAs will be the least of ED’s problems.