[gozur88]

>Federally-backed student loans, undischargeable and given to all and sundry, to be spent wherever on whatever, is a gigantic short in the moral-hazard circuit.

I'm not sure you're using the term "moral hazard" correctly. If the loans were dischargeable that would be a moral hazard, because the smart thing to do would be to borrow up to your eyeballs and then declare bankruptcy ten years later on graduation day.

[pjlegato]

It's a moral hazard for the banks and schools, not for the students. It induces banks to knowingly make loans that are unlikely to be repayable. It induces schools to tell students to take loans to attend programs that are very unlikely to ever lead to employment that will pay enough to be able to pay back the loans.

[gozur88]

I don't agree. The whole point of the program is to get banks to lend money to students when the spreadsheet says it's a bad idea.

And the schools should not be in the business of telling students what they can afford. For one thing, they probably can't know.

[pjlegato]

But you just repeated my exact points. Those reasons are precisely what makes it a moral hazard to have this structure.

Without the government guarantees, banks would think hard about whether a loan was repayable, and schools wouldn't have nearly as many anthropology or art history programs cranking out unemployable specialists year after year.

The government guarantee removes economic consequences for certain actors -- for the school and the bank, but NOT for the student. The student with an art history degree is now stuck with a massive loan that is not even dischargeable in bankruptcy, whereas the bank and the school suffer no consequences for having trained someone in an unemployable specialty of little to no economic value.

On the contrary, they are incentivized to do that.

[dpark]

Is it not also a moral hazard to lend unceasingly knowing that you'll destroy the economy before taking a hit on the bad loans you've issued?

[gozur88]

I don't think so. Getting companies to lend to students was the whole point of the program. Normally you'd use the term to describe unwanted side effects.

[dpark]

The term describes the situation in which the cost of one party's risks are born by another party. Whether it's "unwanted" doesn't actually seem that relevant. If foolish incentives create a moral hazard, the moral hazard still exists regardless of the intent behind the incentives.