How failure to generate income on their degrees is a lender's problem?
Clearly,there is an issue with inflated costs of getting a degree and finding a job with a low-demand degree, but why try solving it at the lender's expense?
And how is it related to the friendly fraud issue?
I never said it was the lenders fault. I’m just saying our bankruptcy system allows people to discharge debt. Whether you took on the debt responsibly or irresponsibly, we have a bankruptcy system that allows you to discharge that debt and get a clean slate, generally speaking. I’m not here to argue the merits of our existing bankruptcy system.
Your comment could apply to any kind of debt that people get discharged in bankruptcy. Credit card debt, judgments from courts. The person or organization on the other side of the dead might not have done anything wrong (indeed, if we are talking about a judgment from a court, the person that you owe that money to might’ve actually been harmed by you). However, these debts are subject to the bankruptcy code. But not student loan lenders. (I know this is an oversimplification, see my * on another comment)
The relationship to the friendly fraud issue is pretty straightforward. Simply put, I believe Visa is over stating the costs and risk of friendly fraud the same way that the industry did with regards to discharge of student loans. We see this in other contexts as well. Government actors are often trying to strip fundamental rights to privacy and from unreasonable searches in the name of protecting us from terrorism or child pornography predators. I’m not denying that those risks exist, the same way that the risk for friendly fraud exists. I’m simply saying that the proponent of the “corrective measure“ is probably over stating the threat.
Why should the lender be completely insulated against a borrower's inability to repay? Why should a lender be able to lend for education without any diligence on borrower's ability to repay, but not in other domains?
All that is being proposed is the cessation of the government providing services to creditors where they chase down some disabled person with student debts from 30 years ago and shake them down for money and garnish their wages. It's simply not nessecary and not in the interests of the government's stakeholders to provide such services to creditors.
If this means that schemes where a debtor lends out so much money that they will go broke unless they end up milking people for decades aren't viable anymore, so be it. If a debtor goes broke due to such regulatory changes, they should not be compensated, as it's not reasonable to expect zero risk given how unpopular the debt bondage is. Normally one wants to only make such changes with compensation, in order to give lenders confidence their contracts will be enforced or at least they will be compensated, but the status quo around student debt is so extreme and exceptional I don't think that's necessary here. Outside of student debt, prison labor is the only other form of legal slavery I can name in the United States.
> How failure to generate income on their degrees is a lender's problem? Clearly,there is an issue with inflated costs of getting a degree and finding a job with a low-demand degree, but why try solving it at the lender's expense?
Yeah, I've never really understood this logic either. If someone lends money from me to, let's say go buy a tow truck, and then is not able to repay the loan because there are too many other folks with tow trucks (or for whatever other reason), why should that be my problem? I gave money with the expectation that it would be paid back. That is by definition what lending is, yet student loans are somehow touted as an exception where repayment shouldn't be seen as compulsory.
The logic isn't that student loans are a special thing that shouldn't have to be paid back. The logic is that under normal circumstances the lenders has an incentive to evaluate the probability that the borrower will actually pay the loan back. They might raise the interest rate on higher risk loans or just refuse to lend. But with federally guaranteed loans that can't possibly be discharged, the lender's new incentive is to saddle all possible borrowers with as much debt as they can, regardless of their ability to pay.
The idea is that the lenders would stop lending to students who are likely to fail or who are studying something they won't be able to get a job in. The new reality would be: either study something with serious job opportunities, or pay out of pocket.
I think everyone agrees repaying money you borrow is the moral and right thing to do, but pragmatically bankruptcy acts as a governor on lending. In every other industry (including someone lending money for you to buy a tow truck) they need to weigh the possibility that you will never pay them back.
However, what does your intuition say when you try to think systemically? There is some percentage of people who get screwed by loans due to unforseen circumstances and no fault of their own. Student loans are universal enough that the stats make this number of people non-insignificant. If it's nobody's fault, who should shoulder how much of the burden?
So, say we make up a number and consider that we know around 10,000 people per year get student loans and eventually end up below the poverty line due to severely bad luck. The situation isn't their fault; it's also not the bank's fault. So what do you do as a policy maker?
What if you knew that, by forgiving student loans, 8,000 of those individuals would bounce back and become productive members of society, while only 1,000 would otherwise? What are negative and positive impacts on forcing banks to shoulder the burden of these defaulting loans? What about forcing individuals to shoulder the burden?
I mean, it sounds like you generally don’t agree with the bankruptcy system in our country then. And that’s a totally valid position. But I think that concern is somewhat irrelevant to the issue of student loans being treated different than other debt. I suppose, if you think that student loans being non-dischargeable is the first step in the right direction, then maybe it’s somewhat relevant, and you hope the rest of debt eventually becomes more difficult to discharge.
For what it’s worth, I would probably agree with that stance. You’re talking to a guy who had more than $100,000 worth of student loans and lived really cheap to pay them off as soon as possible. I’m not going to deny that a part of me cringes when they talk about student loan relief, because I’ll feel like a donkey for paying mine off.
Part of what you charge when you lend someone money is a risk premium, because there's a chance you won't be paid back.
If you lend money to tow-truck operators then it is absolutely possible for them to go bankrupt and for you to fail to recover the entire value of the loan. If you don't like that risk you instead can lend to safer borrowers, the ultimate being the US Government itself - and the quid pro quo is that you can't charge as much for those loans.
The most likely outcome in the tow truck case is that they repossess the tow truck and sell it at auction, only losing a small fraction of the money they loaned you. If someone can't afford a truck they borrowed, you still have a truck.
You can't take back someone's education, which is what makes this type of loan intrinsically riskier. Because you can never get rid of student loans, though, they don't have to do any risk analysis or say "no" to any students. They say "sure", no matter what the data says on the ability to repay for the type of degree that you're applying for. Since nobody is denied funding to go to college, colleges have no economic incentive to price degree programs by expected income. The result is that college becomes more expensive and less accessible to everyone.
Yeah. The dirty/ugly truth is that, economically, the real answer to this problem is not very pretty. Loans would be given out to people with demonstrated academic success, and with a pathway to a job with a proper income to support repayment. You would probably have parents cosigning for loans.
The practical affect would likely make college much more difficult to access for minorities and other individuals low on the socioeconomic status spectrum. It would likely have a net effect of slowing upward mobility and create a college aristocracy.
It really depends on whether the degree is actually relevant to their employability.
If one has a degree in winemaking or philosophy, does rescinding their degree have a significant impact on their employability? If not, then they could just tell the bank to rescind it while still getting the education.
And how is it related to the friendly fraud issue?