Federal & state education loans: is the government 'doing it wrong'?

[KingNothing]

I recently had a friend pop up on my news feed with a link to a promo video, with the video saying that the US should forgive student debt on the basis that the (former) students won't be able to pay it back without basically crushing them financially.

It kind of got me thinking about how little discretion our government uses in giving out loans. They regularly lend $40K for people to get degrees in "elective studies" with 2.3 GPA's. I think this is financially irresponsible when you consider that the taxpayers are footing the bill. If I went to the bank and asked for a loan so I could start a new business making a single shade of orange nail polish, and I have no other income, I doubt they'd lend the money.

In short, I think the government should use more discretion when it acts as a lending agency. Thoughts?

 

[Hepth]

The current default rate on student loans is 8.8% (highest its ever been I believe)

http://www.ed.gov/news/press-releases/default-rates-rise-federal-student-loans"

The current annular rate is 3.4% for subsidized loans. (6.8% for graduate)

http://studentaid.ed.gov/PORTALSWebApp/students/english/studentloans.jsp"

edit: changed.

 

[Vanadium 50]

What is the current default rate on student loans?

8.8% overall. 4.6% for private schools, 7.2% for public schools and 15% for for-profit schools.

Forgiving the loans punishes those who prudently chose a school within their means.

 

[BobG]

The government gives out Pell Grants, but I don't think they give out loans. What they do is guarantee student loans. (Edit: actually, the Department of Education does make direct loans in the form of direct Stafford loans - they would net the profit on the interest for those loans.)

If the student fails to pay back the loan, the government pays the bank to cover the loan. Given the government guarantee, the interest rate should be lower since there's less risk to the bank giving out the loan.

The bank gets the profits from the interest on the loans while the government suffers the losses from defaulted loans.

The government will try to recover the money by various means. Since the government will also presumably send out social security checks to the person that took out the loans, the government does usually have a means of getting at least some of their money back even if the student never pays during their working career.

But, no, the government shouldn't foot the bill except in the few cases it benefits the people to do so (I think the government does forgive student loans for people who teach science and math in public schools for a certain amount of time, basically providing a salary subsidy for those that could probably earn more in the private sector than as a public school teacher).

 

[Evo]

I don't know how many people are aware that if you do not repay your student loans that they will garnish your wages and/or keep any tax refunds until your loan and all associated debts are paid off.

Here is an example

Administrative Wage Garnishment

If you do not voluntarily make arrangements to pay back your student loan(s), money to repay your debt could be deducted directly from your paycheck, without your consent. Federal regulations require guarantors, like TG, to collect payment on a student loan debt through a deduction from a borrower's wages, known as Administrative Wage Garnishment.

You could have up to 15 percent of your disposable income* garnished, or withheld, from your paycheck each pay period to make payments on your student loan debt. If you have multiple loans held by multiple guarantors or the Department of Education (ED), you could have up to 25 percent of your disposable income garnished.

http://www.tgslc.org/borrowers/default/consequences.cfm

 

[Hepth]

Forgiving the loans punishes those who prudently chose a school within their means.

I assume by punishment you mean increased interest rates and more strict loan need requirements.

I can't speak for anyone but myself but I would gladly take a greater interest rate if it meant those in need could be forgiven (or at least SOME of the burden cleared) and the program can be left in place. I'm sure its just a balancing act on how efficient it is to go after people who owe on their loans. Does it cost more to have a $80k/yr employee hounding down some student who owes 30k (on a loan you don't see the interest on), and probably can't pay? Or just let it go. I call it cutting your losses and move on. The banks don't care to get their money as its federally subsidized, and the feds will lose more by trying to get it back. Seems like an easy choice.

 

[Evo]

I assume by punishment you mean increased interest rates and more strict loan need requirements.

I can't speak for anyone but myself but I would gladly take a greater interest rate if it meant those in need could be forgiven (or at least SOME of the burden cleared) and the program can be left in place. I'm sure its just a balancing act on how efficient it is to go after people who owe on their loans. Does it cost more to have a $80k/yr employee hounding down some student who owes 30k (on a loan you don't see the interest on), and probably can't pay? Or just let it go. I call it cutting your losses and move on. The banks don't care to get their money as its federally subsidized, and the feds will lose more by trying to get it back. Seems like an easy choice.

See above. They have the student's soc security number, as soon as wages appear, they've got them.

 

[Vanadium 50]

I assume by punishment you mean increased interest rates and more strict loan need requirements.

No. Consider the following scenario with Joe and Bob. Both are accepted to Ivy U. Joe goes to Ivy U. and ends up $100,000 in debt. Bob goes to State Tech and ends up $10,000 in debt. Both loans are then erased.

Isn't Bob a schmuck for not having gone to Ivy U.?

 

[WhoWee]

No. Consider the following scenario with Joe and Bob. Both are accepted to Ivy U. Joe goes to Ivy U. and ends up $100,000 in debt. Bob goes to State Tech and ends up $10,000 in debt. Both loans are then erased.

Isn't Bob a schmuck for not having gone to Ivy U.?

If Ivy U Joe is hired first and at a higher compensation (perhaps 10 x more) than State U Bob - it's really unfair.

 

[Hepth]

Yes, Bob is a schmuck for not going to Ivy U. If he had the academics to get in, he should do whatever he could have to attend. As WhoWee points out, assuming both PLANNED on paying off their loans some day, going to that Ivy U. would have given him a huge advantage in the job market, and most likely a better education (arguable).
It just means Bob didn't consider his education to be as important as Joe did. Right? I guess that's just how I see it. You only get this one life, if you don't go for broke what's the point. Obviously you should intend on paying your debts, even if that means garnished wages for the rest of your life, but you'll, on average, be beyond normal pay for jobs that are more suited to your interest.

And remember, the loans aren't ERASED as has been pointed out. So that's not even an argument, right?

 

[Vanadium 50]

Before we get too far off the track, this was all in response to "Forgiving the loans punishes those who prudently chose a school within their means."

 

[DoggerDan]

I recently had a friend pop up on my news feed with a link to a promo video, with the video saying that the US should forgive student debt on the basis that the (former) students won't be able to pay it back without basically crushing them financially.

Talk about rewarding a lack of responsibility! Who would pay for this measure? The taxpayers, most of whom either couldn't afford college so didn't go or the ones who paid for it either up front or afterwards. Now they're being asked to pay for someone else's education as well?

In a word: No. I wouldn't stand for this, and I doubt many others will, either.

Some bills are floated with zero hope of actually getting passed, but they're floated anyway so that the representative can later claim they support this or that group of people, thereby getting a few more votes.

It kind of got me thinking about how little discretion our government uses in giving out loans.

The government isn't very picky about how they spend money in general, either.

In short, I think the government should use more discretion when it acts as a lending agency. Thoughts?

I think the government should use far more discretion in all areas of fiscal policy. Just because it can pay for something doesn't mean that it should. The merits of many of it's financial drains are questionable, at best.

 

[Pengwuino]

If the US decided "Hey, you know all that debt you gathered for school? Yah, don't worry about it, we're going to pay for it", I would go out right this second and grab as many loans as possible without any plans on paying it off.

Actually I wouldn't because I'm not immature like that. It's too bad MOST students are though.

Let's reframe this ridiculous idea another way. What if the government decided "Hey, everyone who refinanced and bought houses at unsustainable rates. We're going to pay off your mortgages. Cool?". Personally, as cold-hearted as it sounds, some people need to be sacrificed to maintain any sense of responsibility in a society. And hell, why am I saying sacrificed? They brought this 100% on themselves.

On a side-note, why is financial aid given out so willy nilly? When I request a few hundred dollars from an award I won to travel to a conference, I have to use a certain type of rental car from a certain agency, stay at a motel that only costs X amount of money, and bring back receipts for everything that I do. With financial aid, they just give you money. No questions asked. I know a guy who was getting $5k a semester for living expenses, except he lived at home. This type of scam is so widespread. I've never seen corruption on a more widespread scale than what happens with financial aid.

 

[Jack21222]

Before we get too far off the track, this was all in response to "Forgiving the loans punishes those who prudently chose a school within their means."

Is one person getting a financial windfall a punishment to a stranger who did not get the windfall? Not to veer too far off track, but is a tax cut to one set of citizens a "punishment" to the rest of the citizenry?

Or, to use your example, do you think the person receiving 10,000 in loan forgiveness is going to feel punished, or overjoyed?

I'm not saying loan forgiveness is a good idea, or if it's morally right, I'm just a bit confused about your use of the word "punishment."

 

[Vanadium 50]

I said what I think. If you think I should be thinking something else, well, I can't stop you.

 

[Jack21222]

I said what I think. If you think I should be thinking something else, well, I can't stop you.

In my opinion, you didn't make clear what you think. I just think we have different definitions of the word "punishment."

 

[KingNothing]

See above. They have the student's soc security number, as soon as wages appear, they've got them.

Even with that, it's still no guarantee. If the person doesn't make much money, or if they don't have a job at all, the government may never get their money back.

 

[KingNothing]

Yes, Bob is a schmuck for not going to Ivy U. If he had the academics to get in, he should do whatever he could have to attend. As WhoWee points out, assuming both PLANNED on paying off their loans some day, going to that Ivy U. would have given him a huge advantage in the job market, and most likely a better education (arguable)

No, these are all assumptions. You are assuming that Ivy U was a better initial investment. Maybe Ivy U and State U were equal investments - Ivy U would give enough of a higher salary to justify the added cost, but not much more.

The point is, you can't say that forgiving all debt is fair on the basis that those who are affected most negatively should have (for totally different reasons) made a different decision to begin with.

 

[Proton Soup]

i'm seeing a lot of onus being placed on the borrower (individual) here. but let's not forget that these loans are also being given out without applying due diligence. this is a lot like the housing bubble. you've got too many dollars available to chase too many shoddy educations. overall price is going up, while quality goes down, because there is no incentive to do otherwise.

 

[WhoWee]

i'm seeing a lot of onus being placed on the borrower (individual) here. but let's not forget that these loans are also being given out without applying due diligence. this is a lot like the housing bubble. you've got too many dollars available to chase too many shoddy educations. overall price is going up, while quality goes down, because there is no incentive to do otherwise.

I guess a predatory lender is a predatory lender? I have 3 kids receiving college loan offers - about 10 to 12 pieces of mail per week. I save them for the fire pit - it's a reliable source of kindling.

 

[Vanadium 50]

but let's not forget that these loans are also being given out without applying due diligence.

That's the point. The government guarantees the loan so the bank can't say, "Sorry...you're dumb as a stump - there's no way we're loaning you money". That way college is accessible to everyone.

 

[WhoWee]

i'm seeing a lot of onus being placed on the borrower (individual) here. but let's not forget that these loans are also being given out without applying due diligence. this is a lot like the housing bubble. you've got too many dollars available to chase too many shoddy educations. overall price is going up, while quality goes down, because there is no incentive to do otherwise.

Back to the bubble - don't blame the student who selects a smart strategy - the program is designed to lose money.

http://studentaid.ed.gov/PORTALSWebApp/students/english/PSF.jsp

 

[BobG]

Yes, Bob is a schmuck for not going to Ivy U. If he had the academics to get in, he should do whatever he could have to attend. As WhoWee points out, assuming both PLANNED on paying off their loans some day, going to that Ivy U. would have given him a huge advantage in the job market, and most likely a better education (arguable).
It just means Bob didn't consider his education to be as important as Joe did. Right? I guess that's just how I see it. You only get this one life, if you don't go for broke what's the point. Obviously you should intend on paying your debts, even if that means garnished wages for the rest of your life, but you'll, on average, be beyond normal pay for jobs that are more suited to your interest.

And remember, the loans aren't ERASED as has been pointed out. So that's not even an argument, right?

No, these are all assumptions. You are assuming that Ivy U was a better initial investment. Maybe Ivy U and State U were equal investments - Ivy U would give enough of a higher salary to justify the added cost, but not much more.

The point is, you can't say that forgiving all debt is fair on the basis that those who are affected most negatively should have (for totally different reasons) made a different decision to begin with.

If the two were pursuing a law degree, then Bob was schmuck for not going to Ivy U. The person with the law degree from State Tech might get a job with a small town law firm, but he's pretty much excluded from the elite law firms right off the bat. In fact, it's not a given the State Tech graduate will find a job practicing any kind of law.

But it is a big assumption that Ivy U was a better investment. If Joe and Bob are Philosophy Majors, both will be break dancing on a street corner for spare change and neither will pay off their loans. Being a graduate of Ivy U, maybe Joe will be able to break dance on street corners on the campus of Ivy U, where rich students will toss in a little more extra change than Bob gets break dancing downtown. (You can trust me on this since my name is Bob!)

The similarity to the housing bubble is a good one. If you're tossing money at students so they can attend college, then colleges can charge higher tuition - just the same as tossing money at home buyers helped fuel the housing bubble.

Government backed student loans should be targeted the same as any government subsidy. The money should go to the state/district with the most powerful Senators/Representatives. Okay, not really. They should go towards encouraging students to pursue the degrees we most need, as a country. If we already have too many lawyers, then there's no sense in taxpayers helping to develop more of them. If we don't have enough engineers and we're having to import them from other countries, then it is in the taxpayers interest to target money towards encouraging American students to pursue engineering degrees.