Under our radar

This is Joseph

Mike Konczal has been quietly doing some great analysis about student loans and their implications for financing higher education costs.  One thing that has been quite interesting is how he points out that no such market can be designed without government intervention.  He even points out the main free market solution actually increases government oversight:

You’ll be happy to note that Kelly is against any kind of usury regulation and bankruptcy protections for ISAs. That would interfere with the market. The thing where he describes building a joint government–creditor surveillance state, where the IRS uses its extensive power to consistently feed all of your personal information to debt collectors in real time to assess the earnings they need to collect? That’s just normal for markets.

The exact quote is:

An ISA servicer cannot efficiently verify a recipient’s income, particularly in real time, without the involvement of the recipient’s employer or the involvement of a governmental agency that can withhold wages. The former is difficult because of privacy concerns and confusion with prohibitions on the assignment of wages. With data from the Internal Revenue Service or Social Security Administration, the Department of Education could provide ISA servicers with the information they require. 

This tends to reinforce my view that there is no such thing as a completely unregulated market.  Even a place without formal enforcement mechanisms (e.g. medieval Iceland) had the strength of convention and informal rules of conduct. 

Generally speaking, something has to act to create markets and large markets (with a high potential for fraud) really need that to be something that looks like a government.  So there is no question that the government will be interfering in markets (e.g. to prevent fraud) and the real question is how extensive will this involvement be.

Student Loans and Emergencies

From the Incidental Economist's comment section:

As a resident manager of David’s House , a beautiful private nonprofit home away from home for families of sick children at Dartmouth Hitchcock Hospital , like a Ronald McDonald House, one of the saddest and most frustrating things I saw was student loan collectors that would not work with parents who had run out of forbearance time to reduce or temporarily waive student loan payments despite their medical emergencies. Even the federal government will operate this way when a student loan goes into collections. Will not work with the debtor at all. We had collection agencies tracking down parents at our facility because, of course, parents who were living there temporarily needed to make the phone number known instead of keeping it confidential. The student loan crisis: another problem that you economists should address.

The decision to make student loans immune to bankruptcy is going to be a problem in the long run, at least so long as the totals become so high.  I meet a surprising number of students with > $100,000 in debt.  It's one thing to allow large debt to occur as part of developing human capital.  But the punishment meted out to people when their lives go wrong seems way disproportionate to the decision to borrow.  This is even more true when you look at the employment rate among Americans without a college degree.

It makes education into a high stakes gamble (at for those who are not already wealthy) instead of a public good that we provide to improve human capital.

Student Loans: a continuing series

This is a really depressing story about how devastating referrals are in modern student loans:

Notice anything?

Original balance: $37,099.00

Current balance: $35, 908. 41

I’ve been in repayment since 2006. I had to do one deferral – as to not default. I signed up for a program to minimize my payments that, I was told, was beneficial to someone who is going through financial difficulties – yet I regularly made payments over the minimum payment.

Because Sallie Mae helpfully provides a payment history, I was able to whip out a calculator and count up the exact amount I have paid over these last few years.

That amount is $23, 449.65

The penalties are pretty spectacular for needing to defer the loans. After 5 years of repayment, Ms. Antonova paid 50% of the starting balance of the loans. Presuming that she is being honest, the effective interest rate on this loan beats that of unsecured debt. Is this really a sustainable pattern? Do the "no bankruptcy provisions" not reduce the risk of the debt and suggest more moderate effective interest rates.

If we consider this in light of the "risk-free" borrowing rate (TIPS are now 0.2%) then an inflation adjusted loan at such rates should be 50% gone already. Why are rates not reflecting the new reality of how hard it is to be forgiven your student loans?

Also germane to Mark's recent post, there is an ant/grasshopper dichotomy here as well:

We have a myth of the “deserving poor” in our culture – it’s similar to the myth of the “good rape victim.” But like most people living real lives, I have my financial ups and downs. I’ve all sorts of things these last few years: walking people’s dogs for grocery money, sitting in a cafe in Chelsea, drinking a glass of moderately priced champagne and asking the readers of this blog for Paypal donations.

As a writer and journalist, I supplement my income with freelance writing gigs, much like my director husband supplements his with acting gigs. All of that together makes up our family budget. When the gigs dry up, so does the money going towards my loans. We’ve been chasing more work, but as the economy continues to suffer, and the cost of living goes up while jobs evaporate, people like us end up competing for jobs that barely exist.

Now it is true that some people manage to graduate with degrees and without debts. In many cases, they have families who made huge sacrifices in order to make this happen -- they feel like they avoided a debt trap through virtue. But the plain truth is that a lot of young Americans can pick between college (and bankruptcy proof, high interest debt) or questions about "why didn't you go to college"?

If we walked back and asked if education is a public good, that would be a good step. I don't want to spur a false dichotomy, but we have the highest rate of incarceration in the world in the United States. That isn't free, either. Are we sure that we have our priorities correct?

h/t: Erik Loomis