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.
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.
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?
> 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.
> There are numerous private lenders that offer student loans.
Not federally subsidized ones; the program under which such loans were offered through private lenders in addition to directly by the government was discontinued several years ago (as noted in the grandparent comment.) The upthread comment was about interest rates on federally subsidized loans.
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.
> 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.
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.
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.
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.
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.
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.
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
1) Loans are priced based on their risk! Saying student loans are actually less risky than lower priced loans IS saying that they are overpriced.
2) You are correct that most student loans are financed by government programs. That allows them to undercut even the viciously competing private market because the government isn't trying to make a profit. So that makes the loans even cheaper which makes your assertion that they're overpriced more, not less, ridiculous.
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.
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?
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.
Well, what's your point, then? You were replying in a thread about whether the 8% interest rate is justified. The comment you replied to claimed that it was, because of the higher risk. Clearly this means all risk, not just risk of default.
Also, risk of default is non-zero. Google the Brunner test.
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.
> 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?