[SimpleXYZ]

A lot of people seem to assume you get handed a 18 point font piece of paper that says, "You agree to borrow $70,000 for a student loan." Mine was hundreds of pages of legalese and I didn't even know what the total of my 11 loans were until I graduated and consolidated.

[patio11]

Your impression of the documents you were asked to sign does not comport with my recollection of the contracts I was presented with. As federal loans are a fairly standardized product, you can trivially find their contracts online.

Here's one of the examples for Sallie Mae:

http://www.studentlendinganalytics.com/images/Sallie_Mae_Pro...

This document, in style and length, comports with my recollection of what I signed ~15 years ago.

8 pages; approximately the length of an apartment lease. The language should not tax the reading comprehension abilities of a college student.

Representative sample:

Interest on this note will accrue at the Variable Rate (as defined below), beginning on the first Disbursement Date, on the principal balance advanced and on the Capitalized Interest, Fees, and Other Amounts, until the principal balance and all interest are paid in full. The Variable Rate will be used to calculate interest during the entire term of this Note, and following the maturity of, or any default under, this Note; there is no initially discounted, premium, or other rate that will be used to calculate interest under this Note.

[noonespecial]

I don't think this comment should be downvoted, it was so have an upvote BUT:

I don't think this matches most peoples' experience. I think it usually goes like this...

You walk into the "financial aid" office where you sit nervously while they ask you meaningless (to the cost) questions while they click at a spreadsheet. After you stew for a while they present you with a price that looks like it could fund a trip to the moon (the 'list price'). You panic and then they say "but don't worry, financial aid"!

What you don't know is that while they're piecing together your "package" what they are really doing is figuring out how much they can borrow on your behalf to claim for themselves. After they've exhausted every external loan, grant and scholarship out there (its a big list and they are good at their job) they declare the rest of that impossible number a generous scholarship provided by the university. You made it! Welcome to Scruew U! You're so relieved just to be in the door you start signing paper as fast as it comes at you. That number looked impossible but somehow you're in! It looks like they busted their butt to help you out, but really, they figured out how to extract maximum payment from you, used car salesman style.

It will take you a long time to figure out exactly what your responsibilities are with regard to that witch's brew of loan, scholarship, and grant. Just wait until next year when you're invested and some of your grants and scholarships expire or reduce!

[umanwizard]

What kind of school was this? Public or private? All of my financial aid application was done online (Univ. of Arizona).

[kefka]

Better question:

Why are Federally subsidized educational loans at 8% interest, whilst the Big Banks get their money at 0%, or thereabouts?

One invests in the future, while the other breaks it. You can probably guess which does which.

[patejam]

Because college students are a much higher risk. You can argue that 8% is too high, but you can't argue that college students are more likely to pay back loans than big banks.

[markwaldron]

Students aren't allowed to declare bankruptcy on their loans now, and if they stop paying their wages will be garnished. I think we those types of conditions the interest rate could be lowered a bit.

[nieksand]

The bankruptcy prohibition is why you even see loans in the single digits.

You have a typical 18 year old with zero credit history and zero real income. You have a loan that may take many years to repay, but unlike a mortgage there is no house to repossess if the loan goes bad. You can't repo a degree.

A good exercise is to imagine that you're a lender writing checks with your own money. Would you even make loans to somebody majoring outside of STEM? What interest would you charge especially given other options for investing your capital? How would you have to adjust your interest rates if students were allowed to declare bankruptcy to discharge their debt to you?

[dragonwriter]

> The bankruptcy prohibition is why you even see loans in the single digits.

No, the reason you see loans in the single digits is because the government is both the sole lender (since the Health Care and Education Reconciliation Act of 2010) and sets the rates by law.

What private lenders would accept was only relevant when there were private lenders.

[tanker]

Agreed. Private lenders wouldn't take the risk at a price most people would accept.

I believe this is the problem with getting the government involved in the loans. It obscures the true cost.

Who knows what the college system would look like today without federal funding? Maybe distance learning or a more focused associate degree would have developed.

[dragonwriter]

> Students aren't allowed to declare bankruptcy on their loans now

If you mean they can't discharge the loans when they declare bankruptcy, this is a popular myth that, while it has some relation to fact, is not actually true -- it is difficult to discharge student loans in bankruptcy (and more difficult for some than others), but they are not impossible to discharge.

See, e.g., http://www.usnews.com/education/blogs/student-loan-ranger/20...

[umanwizard]

Interesting! I didn't know about the Brunner test. Suggest everyone read the link you posted.

[rhino369]

But loan payments delayed cost the loaner money. We also have loan forgiveness programs. You pay 10% of your income for 20 years and whatever you have left is forgiven.

[jaynos]

Well said. I've always cringed when people say that (even though I am very liberal). You can argue that 8% is too high, you can argue that it's in the nations interest to give loans at 1-2% and accept that they will lose some money due to default, but the comparison to big banks is useless.

Also, big banks borrow at essentially 0% when talking about the Fed Funds Rate, which is for overnight loans.

[zig]

Aren't there a lot of protections for these loans? I thought they could not be discharged through bankruptcy, et cetera. My intuition is that this would reduce risk; seems a bit odd.

[unprepare]

higher risk how?

COmpany A borrow 80k and goes bankrupt - that money goes to collections and comes out of the assets of the company, very unlikely the full amount will be paid back

Alternatively, Person A borrows 80k in student loans and goes bankrupt. 100% of the 80k will still be collected from the student, as student loans are not dischargeable debt. Person A's wages will be garnished, debt resold to collection agencies, credit adversely affected, and yet still the entire amount will be paid back.

If you think the scenario where its possible you never get your money back is less risky, i have a bridge I'd like to sell you.

[harryh]

If you think that student loans are systematically overpriced you should consider starting a student loan company that charges a lower interest rate. There are ample backers for this sort of thing if you have strong enough evidence for your thesis.

Or maybe student loans are pretty much a commodity product in which sellers viciously compete to provide the lowest possible price so the interest rates we see are commensurate with the actual risk being taken.

[unprepare]

shifting the goalposts

i didn't say student loans are overpriced, i said a student loan is lower risk than most other types of loan, since it is non-dischargeable debt.

That is the argument i'm making and your response doesn't address any of it.

also, in case you arent aware, the overwhelming majority of student loan debt has been financed through federal and state government programs, not the private market "in which sellers viciously compete to provide the lowest possible price" as you seem to believe

[dragandj]

Yes, but there are many bumps and time passed until many of those loans are paid back. And if the debtor does not have enough money, there is nothing to repossess. These loans also starts getting paid back at least 4 and likely more years later. As other people noticed, if it is such a great investment, people should start student loan companies and offer loans with less interest.

[mark-r]

You're forgetting the case where the person dies.

I wonder if there's a correlation between student loan debt and suicides?

[dredmorbius]

College student loans are ZERO risk.

[umanwizard]

If that were true, you'd expect competitive pressure to push the interest rates down to 1% or lower. Do you claim that the banks are colluding (think "The Informant") to rip students off?

[dredmorbius]

That does raise some interesting questions.

I should have clarified: zero default risk.

There's still the time / opportunity cost of money, and it's possible that a loan might not be repaid at any given rate. The interest would reflect this. And inflation risk would have to be factored in.

There's also a case that might be made that offering of loans isn't entirely competitive. Dynamics of that, and implications on interest rates resulting from that condition could be interesting to explore.

[sehutson]

Not really, because private student loans have to take you to court to get a judgment against you. Also, in some cases they can be easier to get discharged in bankruptcy, and they're subject to statute of limitations laws for collections.

[danharaj]

You can't cancel student loan debt. There's not even a risk of default.

[harryh]

Default rates on student loan debt are somewhere between 10% and 15%.

https://www.washingtonpost.com/local/education/national-stud...

[kefka]

> but you can't argue that college students are more likely to pay back loans

Well actually, yes you can. Student loans are not dischargable in bankruptcy proceedings. That distinction is only shared with criminal court ordered penalties.

In other words, they are guaranteed a payback of the loan, plus fees and interest. Even if that means garnishment of your Social Security. But look at the bright side: they do go away if you're dead.

Edit: Evidently mentioning that Educational Loan debt is not dischargable is somehow a very unpopular thing (given my and other karma scores). It will also be a very unpopular thing for the 43 million people with their collective $1.3 trillion in debt. I wonder how many have or will default? And, what will that do to our economy?

[dragonwriter]

> Why are Federally subsidized educational loans at 8% interest

They aren't. 2015-2016 federal loans are at 4.29% for undergraduate and 5.84% for graduate/professional.

[matthewmcg]

This is something that the Consumer Financial Protection Bureau has been working on. They've hired designers have A/B tested different versions of a simplified disclosure forms. You can see examples here for other loan types: http://www.consumerfinance.gov/know-before-you-owe/compare/

[rhino369]

You pretty much do get a piece of paper that says you borrow X dollars.

One problem is you get one piece of paper each year for 5 years. The total amount sneaks up on kids.

If they had to see an estimated borrowing amount for the total degree, they might do things differently.

Especially since families tend to blow their wad the first year. Use their small savings to pay for the freshman year and then all the sudden there is no money for two.

[dragandj]

Wait a minute, we are talking about college age, not about 6 year olds. How difficult it is multiplying x with 4? It is not a precise amount, but if the parents have $10,000 and x is 8.000, how hard is it to figure out upfront that college is going to cost a LOT more than that?

[umanwizard]

So you signed on to borrow money and had no idea how much you were borrowing? That's even worse than the alternative.