Student Debt Malinvestment

Student debt levels continue to soar. In 2012 they hit $1 trillion for the first time ever.

But college education isn’t reaping the rewards it once did.

According to the Associated Press:

About 1.5 million, or 53.6 percent, of bachelor’s degree-holders under the age of 25 last year were jobless or underemployed, the highest share in at least 11 years.

And real wages have fallen for recent college graduates — although this has been part of a broader trend of falling real wages in the general population:

So why is student debt still soaring?

The crucial factor is that student debt isn’t like other debt — it cannot be discharged simply through bankruptcy.

There’s no incentive for private lenders to be particularly careful in who they lend money to, becuase they know that there’s no way that whoever they lend the money to will ever be able to get rid of the debt short of dying.

But just because a loan is nondischargeable doesn’t mean that the loanee will be able to repay. With labour conditions for recent graduates still quite awful, student debt defaults have climbed. The Washington Times notes:

The number of borrowers defaulting on federal student loans has risen substantially, highlighting concerns that rising college costs, low graduation rates and poor job prospects are getting more and more students over their heads in debt.

The national two-year cohort default rate rose to 8.8 percent last year, from 7 percent in fiscal 2008, according to figures released Monday by the Department of Education.

That means that more unemployed former students will end up being hounded for debts that they cannot afford to repay, yet cannot discharge through bankruptcy. If those debts had been accrued at the roulette wheel, though, they could.

It wasn’t always this way.  Until 1976, all student loans could be discharged in bankruptcy. Until 1998, student loans could be discharged after a waiting period of five years.  In 1998, Congress made federal student loans nondischargeable in bankruptcy, and, in 2005, it similarly extended nodischargeability to private student loans.  Since 2000, student loan debt has exploded, and private student loans have grown even faster.

This presents a bigger problem than simply sending people to college who end up unemployed or underemployed. It means that capital is being misallocated. If debt for education cannot simply be discharged through bankruptcy, as other debt can be, private lenders will tend toward offering much more of the nondischargeable debt, and less of dischargeable debt. This means that there is less capital available for other uses — like starting or expanding a business. If the government’s regulatory framework leans toward sending more people to college, more people will go (the number of Americans under the age of 25 with at least a bachelor’s degree has grown 38 percent since 2000) — but the money and resources that they are loaned to do so is money and resources made unavailable for other purposes.

The efficient allocation of capital demands that lending is undertaken based on the real underlying market conditions. To ensure that this is the case, the bankruptcy rules for debt should be universal so that loan applications are considered on merit. This should mean that student loan debt should be dischargeable under the same bankruptcy conditions as other debt. More discerning lenders would likely mean less student lending — but would also mean that potential students would have to think harder about the decision to study, and be able to justify to themselves and to a lender why they are choosing to study (or why they are choosing to study a particular subject), instead of choosing to work, or choosing to start a business.

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44 thoughts on “Student Debt Malinvestment

  1. Bonded Serfs!

    In Australia the same thing is happening. I did the Tax Returns of a few clients who had student debt and they are looking at $40,000 plus when I did my degree. I paid $12,000. I hear in the USA it is more like $100,000. I feel for these students.

    Yet Trade schools are underfunded (Expensive equipment-lathes, car hoists, diagnostic tools and materials, wood, metal, plastic, paint), so we have less Technical specialists. Masters won’t take on Apprentices because they don’t know how to use a hammer or screwdriver. But they can use Facebook.

    In Australia, you can’t get a job working as a low level assistant, because labour laws are too tight. Old Masters would rather do the job themselves without the risk of complying with onerous regulations, finding it difficult to fire a slacker or checking work. When these old guys retire we are in big trouble.

    Not only do I love economics, but today I fixed my chainsaw. I learnt these skills in Trades School. I could build my own house if the Local Government allowed me.

    Trades schools are important. They give yo a fundamental practical education. If you want to do a fancy degree, you save up and pay for it, or get your employer to pay as you deserve the funding that goes along with the promotion. Not obtain a loan. The schools just put up prices as there is too much money chasing too few quality schools.

    For the poor there is always the Library and internet if you want to get access to knowledge. You only get promoted if you are rich and “Connected”. The education “dream large” scam is a travesty for the poor who thought the investment would pay off.

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  3. Another angle on the misallocation of capital is the type of degrees people are getting. We simply produce too many liberal arts degrees. We do not produce enough STEM degrees. The job openings in the US are predominately in medical and manufacturing, two quintessential STEM fields. I’m hopeful the kids are waking up and realizing that a college degree is an investment in future career skills rather than “something you do after high school.” I think they’re starting to get it, at least based on the younger folks I’ve talked to about it.

    I think the excess of liberal arts degrees and the shortage of STEM degrees, combined with the the weak economy and the fact that older workers are staying employed longer (which disrupts the natural promotion/advancement cycle within companies), are all driving youth unemployment at all education levels so much higher than other age groups.

      • Sorry about my “late call”, but I find it stunning that an English major has found has way through so many parts of the Economics and Mathematics mazes — plus informed and supportive of the Scientific Method, peer review, repeatability, etc. Congratulations!

        A nit-pik: to my old-fashioned taste, your political thinking may still be a little contaminated by the left-wing infiltration/invasion of parts of academia. For example, my alma mater, Northwestern, how sanctions a “sex-week” and gives former Black Panther Bernadette Dorne (sp.?) a high position (but not in science or math!).

    • There is a place for Liberal Arts and associated degrees. It is what rich cultured people do, because they have inheritance and trust funds to fall back on. .. For the rest of us it is STEM degrees as you suggest. I chose Commerce, especially Taxes, as I was doing high school during a recession and accountant jobs were the only ones that seemed to be still hiring during 91-92.

      I do think that Universities/Colleges unfairly advertise the opportunities in life that doing their courses will provide. This has unfairly skewed the career aspirations of many, especially ones who are just not “Cut out” for the higher learning field degrees. Career counselors are not tough enough. They tell everybody to “chase their dreams” You need more than a degree. You need natural ability, exemplary communication skills, connections and family business work experience, and possibly a crony relative/friend to help you get into the big league.

  4. I believe that the indebting of young people by the education/banking/government coalition might be the worst legacy of this despicable era.

    Taking advantage of young people is a pretty good indication that your society is [fill in the blank].

  5. Aziz, Buddy, Tim: You guys are really frustrating! I can’t find anything to correct or add except to spell out STEM — Science, Technology, Engineering, Mathematics.

    But I would point out that, on other Azizonomics thread(s?), you and other non-STEM scholars ended up acknowledging that both inductive and deductive processes are necessary to find/understand (the latest, specifically applicable) truth. Would I be forgiven if I (an engineer) remind you that the “Scientific Method” — alternating hypothesis (deductive) and analysis (inductive) — has been around for centuries (millennia?) and surely is a major contributor to the superiority of progress in “technology” compared to politics, economics, etc.

    • In an era of more Engineers and LESS Lawyers we had progress!

      I think the world would be a better place if we had enterprises that are based on Partnerships (Personal Liability of the Partners) which employ scientists and engineers and mathematicians to build better products without the need to regulate and manage the economy (Politicians, Economists) Leave Liberal Arts to true Artists like John Aziz, who write wonderful pieces because it is their artistic passion.

      I got an old kerosene fridge to work (100 years old) by applying a alternative heat source (Fire) to produce a freezing of the refrigerant system (Thanks to Technical School and Science) When you are off the grid, it pays to know how to make things work. Thankfully it was so over engineered it still works well today!

    • ” Would I be forgiven if I (an engineer) remind you that the “Scientific Method” — alternating hypothesis (deductive) and analysis (inductive) — has been around for centuries (millennia?) and surely is a major contributor to the superiority of progress in “technology” compared to politics, economics, etc.”

      DG, that’s like saying that its better to be bludgeoned by a sledge hammer than a pick axe.

      Who made up the word, “progress,” anyway, and what exactly does it infer?

      • Imp (Sep 03 @22:32:54): “Progress” — my dictionary provides 8 definitions that would seem to pretty well cover all usages, including science, technology, sociology, biology; each of the 8 includes POSITIVE words, including, “to a higher stage, promotion of material well-being, advancement, continuous improvement, more beneficial, superior, increasing perfection, forward”. I can’t find any mention of “bludgeoning’.

        And, sorry, I can’t claim that I made up the word “progress” — it’s Latin.

      • Well, Imp, I shouldn’t have flown so close “(with the word progress”) to the despicable “Progressive” contemporary label for the ancient cult of tyranny.
        I meant that the internet is better than smoke signals, antibiotics better than bleeding.

  6. A big problem is that a degree (any degree) has almost become a pre-requisite for just about any job worth having.

    This is particularly true in the States. When I was working there a few years back, it was damn near impossible for us to even advertise for – let alone hire – anyone without a degree even for simple jobs like IT helpdesk. Note that in these cases of low-end positions the degree usually didn’t have to be relevant to the job, applicants just had to have one.

    • It is an insurance policy for the hiring Manager. Blame the Uni if the student hiree is not performing. “But He had a degree!”

      Same said for Politicians requiring trained Economists (Keynesians with data aggregation and interpretation predilections) to advise them on “Policy Change”

      Blame the Economist! But he had a PhD and a Nobel Prize!

        • Try filing a Business Interruption and Loss of Profits Insurance claim! A nightmare. Loss adjusters take weeks to assess the claim. Ask tedious questions, then offer half of the calculated loss claim. It is a constant battle.

          If getting this type of insurance, demand the terms and make changes to terms to suit you if possible.

        • John, please expand your condemnation of “insurance”. I find that there is both good and bad types of insurance, and certainly some cheating on both sides of claims (see Buddy below).

    • I have always figured that the necessity of a degree “guarantees” a certain level of social compliance, i.e., if they were stupid enough to get this ridiculous degree, then they will do EXACTLY as I say.

      Sort of like the uni-forms that most people wear to their jobs.

  7. We don’t lead the way in much, but our tertiary loans system is a good one to follow. It is only payable when you are working, and only a certain proportion. That, and the fact that “government places” effect a large subsidy, makes HECS only a moderate burden.

    Of course, as Buddy points out, many Australian students are now paying 40k as full fee paying students, but the US’s 100k is absurd when you have to pay it back when unemployed. What the hell do yanks do with their taxpayers money? Oh, wait…

    • Hi Two Dogs,

      Our Government calls it HELP (Higher Education Loan Program) now how ironic. But this is not full fee paying but the cost of the non subsidised proportion of the Australian born students contribution (Used to be called HECS – Higher Education Contribution Scheme). Full fee paying students pay a lot more. That is why we have so many Indian and Chinese students in Australia working as many hour as legally possible to repay their tuition.

      The HELP loan is indexed for CPI inflation.

      Two Dogs is right. It is only repayable after incomes exceeds $49,096, and then is 4% of Taxable Income. So in theory you may never have to repay, if you can reduce your taxable income etc.

      http://www.ato.gov.au/individuals/content.aspx?doc=/content/8356.htm

      From what I hear students are not undertaking degrees, and are choosing trades and on the job advancement. This puts undue reliance on foreign students. And I think it tends to be predatory, as many of these OS students are unable to find employment in their field of study (I have had hundreds of OS students pleading for Accounting work experience)

    • This 2nd posting of $100k for four years of US college tuition/expense reminds me to provide an update. It is now > $200k ($50k per year). for a top university. BTW, let’s help everyone to grasp the enormity of debt, deficit, waste, etc.: $1 trillion = appx. $3,000 per US capita or $12,000 per family of four — not just students, all citizens! Everyone is being fleeced, not just present and future taxpayers, but also recipients of present and future welfare, disability, food stamps, etc. And when the seemingly inevitable default (government checks bounce) or runaway inflation hits, the “poor” will suffer the most.

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  11. A demand for the extension of rights within a political society is often confused with the demand for human rights. But the two are quite distinct ~ Maurice Cranston: chair of political science at London School of Economics

    • Al: Would you or Prof. Cranston please define “rights within a political society” and “human rights”?

      In the U.S. we have forgotten, or deliberately discarded, the founders’ concept of “unalienable” (natural) rights. Martin Luther King era “civil rights” — assembly, speech, voting, public education, etc. — would probably be described by the Obama-supported Occupy brats as “Sooo yesterday”.

  12. “(The number of Americans under the age of 25 with at least a bachelor’s degree has grown 38 percent since 2000)”

    It would be interesting to know what the amount of growth was for jobs that actually require a college education between that time period. Allowing student loans to be non-dischargeable in debt completely destroys any possibility of market forces regulating the supply of college graduates and the amount of resources spent (and wasted) on higher education.

    The way Americans think about higher education is going to need to change radically from “guarantee of at least solid middle class success” to “very risky investment”.

  13. A thing by itself (or, “in and of itself”) is (or would be) necessarily outside any causal chain since it doesn’t, or wouldn’t, interact with any other things without first demonstrating properties other than ‘just’ being the “ground of being”…In demonstrating any properties other than ‘just’ being the “ground of being” (or, “in and of itself”)…a normative (or, scientific or empirical?) contradiction would have arisen…

    Another example of someone thinking aloud about this subject is Nietzsche in his Beyond Good and Evil book, wherein he said….

    “”[I]t is high time to replace the Kantian question, ‘How are synthetic judgments a PRIORI possible?’ by another question, ‘Why is belief in such judgments necessary?’–in effect, it is high time that we should understand that such judgments must be believed to be true, for the sake of the preservation of creatures like ourselves; though they still might naturally be false judgments! Or, more plainly spoken, [...] synthetic judgments a priori should not “be possible” at all [...]”

    Though Nietzsche was critical of theories concerning what could not be observed, he believed that theories ought to be capable of being falsified: while arguing against what he held to be the negative influence of the Kantian noumenon in the philosophy and science of his day, Nietzsche roughly approximated the scientific philosopher Karl Popper’s assertion that falsifiability was the basis of scientific knowledge:

    “One can sum up all this by saying that the criterion of the scientific status of a theory is its falsifiability, or refutability, or testability”.

    Nietzsche wrote in the eighteenth section of the first chapter of Beyond Good and Evil that
    “It is certainly not the least charm of a theory that it is refutable; it is precisely thereby that it attracts the more subtle minds”.

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  17. This is absolutely true! Just giving a loan a nondischargeable status doesn’t mean that the loanee will be able to repay. If loans taken for luxury can be discharged, why no student debt, which is a good debt and obviously taken for legitimate reasons. Moreover, with job opportunities for recent graduates still awful, student debt defaults will certainly climb.

    Poor jobs prospects after graduating have left students with no hope to shed off the debt incurred. Even it’s a great shock to know that after July 1, 2012, graduate and professional students are no longer eligible to receive Federal Direct Subsidized Loans.

    • “If loans taken for luxury can be discharged, why no student debt”

      I agree. A person can go on a wild credit card spree, and go Bankrupt. That is ludicrous. Debtor Prison for them, Bankruptcy for the Unemployed student.

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