[waffleau]

Hacker News has a pretty well educated community, so it's not surprising that the general response seems to be that this was an obvious outcome. But this story is not unique to this woman. There are a huge number of people that seem to be in the same situation, and it's dismissive to just say that people should be more educated.

People aren't rational agents. They suck at making decisions about their long term well being. They're told that the best way to support their future is to go to university, so they take out a loan under the assumption that once they're finished, they'll earn so much that paying it off won't be an issue. And if you're not particularly financially literate, you might assume that this is fine since everyone else seems to be doing it. And you might also assume that they wouldn't lend you money that you couldn't repay.

The reality is there's an information asymmetry in favour of lenders. They know better than you how likely you are to repay your debt. And their incentives are structured to maximise their return, not clear your debt. So if the best way for them to make money is for you to not be able to pay off your debt, that's what they'll try to do. The harder it is for you to understand what you're getting into, the better for them. The less financial literacy you possess, the better for them.

I'm not arguing that the author shouldn't bear responsibility for her decisions. Of course people should understand the things that they agree to and meet their obligations. But there is a calibration problem when the pursuit of an education can lead to three decades of financial hardship.

[Rapzid]

By all accounts she was well educated; she was accepted to and attended a private university and then graduate school over seas. She also made poor financial decisions spanning a decade. I'm sure she would have rather not made those bad decisions, but it's probably safe to say she could not have made better decisions because.. She would have, but didn't.

So what's the solution here? Do people take a test to determine if they are allowed to make their own financial decisions? If they don't pass their parents or the government decides for them? Sure we can tweak the terms, put up special regulations for student loans, or increase education.. However if we accept that some people are incapable of making good financial decisions, potentially for their entire life, this problem will remain? Does this extend out past financial decisions? We could have the human equivalent of processor binning.

I messed up my credit when I was in my early 20s. I was lucky enough to find myself in a better situation in my early 30s.. I'm not convinced I have gotten much better at financial decisions or have just managed to out earn my natural spending habits. Maybe both.

[wonton2]

Some countries have free (and good) education alternatives. Some countries also have student loans as a public service. Education is probably one of the most important things to preserve a democratic state, so you would think it is in the public interest.

[ransom1538]

Further, interest calculation is actually a differential equation. I wouldn’t expect half the graduating class to understand its wreckless power. What students need is a nice excel sheet they can “play” with. If I paid this I would be done paying with loans here etc.

https://math.stackexchange.com/questions/1499656/compounded-...

[Mirioron]

We need to make video games where you have to take loans at the start and then later pay them off. If this mechanic became popular enough I would wager that a lot of people would have some form of intuitive understanding of these loans.

[marpstar]

I learned this playing a "Drugwars"[1] clone in the late 1990s, borrowing money from loan sharks to finance operations.

[1]: https://en.wikipedia.org/wiki/Drugwars

[niftich]

Roller Coaster Tycoon (1999) had a basic loan system where you'd start most scenarios off with a 10k loan, and every week of the month you'd be paying back some interest. RCT 2 had a more sophisticated system where the interest rate was displayed to the player, and it some parks it was fairly high, to where one had to carefully reason about their financial options.

[RickJWagner]

Yes, great idea!

[slavik81]

You don't need to know any of that to understand a loan. That's somebody's math homework, not an actual financial transaction.

When you get a loan, they tell you the interest as annual percentage rate (APR). That annualized rate plugs right into the simple interest formula they teach you in high school math class. You just calculate each year one at a time, plugging in the amount you owe at the start of the year and you'll get how much is owed at the end of the year.

If you make payments or if the rate changes during the year, you can use the same formula to calculate what you owe at the time of change/payment, and continue on from there. Using the effective annualized rate for less than a year will give you an answer that's slightly off, but it will be very close.

You'd have a very difficult time using differential equations for a real loan. That question has the buyer making an infinite number of infinitesimally small car payments, because a monthly installment would make it a bad differential equations homework problem. The sensible way to solve most real-world problems is just to calculate the result iteratively using basic multiplication and addition.

[ransom1538]

I suppose? The above mentioned method is really inaccurate. Student interest is calculated daily.

Here is a top search result for calculating student loan interest. They suggest not to do a yearly approach like you suggest. It even mentions doing a daily compounded function. I added a [LEAP] where the author left the reader hanging.

--- To understand how compound interest works, let’s look at an example. Consider a Direct loan with a $10,000 balance and a 4.45% interest rate.

First, you figure your daily interest rate by dividing 4.45% by 365 to get 0.012%. On $10,000, that works out $1.20. That $1.20 is added to your loan balance, bringing it to $10,001.20. That’s your new balance, and when interest is compounded the following day, you’ll pay interest on that total amount.

[LEAP]

By the end of the year, you’re looking at paying $455.02 in interest, rather than the $445 you’d pay if your interest was compounded just once a year instead of daily.

https://studentloanhero.com/featured/how-student-loan-intere...

[slavik81]

That's not using the APR percentage, which would be 4.55% for that loan. Had they used that, they would have gotten the correct value.

> By the end of the year, you’re looking at paying $455.02 in interest, rather than the $445 you’d pay if your interest was compounded just once a year instead of daily.

They used the wrong percentage and got $445/year. That's off by $10/year. Still, it's close enough to use for yearly financial planning and for judging if the loan is worthwhile. It should be sufficient to prevent any surprises like the article author's.

[fspeech]

A very basic thing to do here is to pay off your high interest loan first. Her payments seemed to have gone mostly to reducing the balance of the lower interest ones. She did manage to reduce her total balance by $26000 and that could have been used to eliminate the $24000 high interest loan (which would actually result in higher balance reduction overall as well since less money would have gone to paying interests). Is there some structural thing preventing her from paying off the high interest balance first or was she simply not aware of a better way?

[lacker]

Based on the screenshot, it seems like autopay was set up on the lower-interest loans but not on the highest-interest loan. It's hard to say for sure but it does seem possible that she missed the impact of this.

[merinowool]

You forget that there are also ignorant people who just take the loan whatever the deal is regardless if what they do makes sense - it just "feels" right for them. Then when the time comes to pay it back, they'll just try to moan it away. If there is enough people with such attitude so that it could be a good number of voters, there will be a politician willing to climb on it and force companies one way or another to waive the loans. Ultimately people should be taught to take responsibility and not that ignorance pays off.

[givinguflac]

You act like all of these kids (and that’s what they are when taking loans, kids) have a support structure and education that’s taught them how to make good long term financial choices. Not everyone has good parents who taught them finances, never mind long term life planning.

[dnautics]

No, but they all went to college, so they should have learned calculus, and derivatives. Even a debt that high should be payable with sweat and some deferral of immediate enjoyment, a situation that would have become obvious with just a little bit of math.

[lewilewilewi]

How did they go to college before they were making the decisions about taking a loan in order to go to college?

[dnautics]

The decision is about how to pay off that loan.

[tehwebguy]

Not every college path includes calculus.

[clintonb]

> No, but they all went to college, so they should have learned calculus, and derivatives.

I've been out of school for ten years, and haven't used calculus in about twelve. How exactly do you think knowing calculus would have helped here? Be careful assuming everyone learned the subject as you did and knows how/when to apply it to various situations.

Personally, I learned about interest rates in middle school. I used that knowledge, combined with additional research on subsidized loans, to decide to take out loans. I also had the advantage of learning the downsides of debt collection from my brother's mistakes.

Not everyone is a rational economic actor. Children/young adults ages 17-22 definitely aren't the most rational amongst us.

[angersock]

> Ultimately people should be taught to take responsibility and not that ignorance pays off.

You mean like the people who keep lending money to students who aren't going to be able able to pay it back?

[paulddraper]

Absolutely. Both lenders and borrowers shouldn't be able to bailed out.

(Somehow -- through mechanisms that are still beyond me -- this is exactly what happened in 2008. Absurd.)

[oligopoly]

No one said democrat policies were responsible.

Seriously though it's obviously by design. Ever wondered why they don't teach financial responsibility in school? Give people incentive to work as much as they can to keep economy rolling. Capitalism at it's finest.

[5DFractalTetris]

You forget that repaying a loan for something like the postmodern conveniences of a University Science Education may be the wrong thing to do, especially given that the Universities generally don't require vocational training as part of general education.

When people take the loan it's because they feel like they have to, and when they don't want to repay it, sometimes it's like, "No, look: if the people around me needed this so that I could live, something's wrong, and I don't want to continue collaborating with them."

The U.S.A. may also be experiencing an ongoing violent revolt against compulsory literacy in the high schools, so the problems don't really start with the loans and the college application process.

[DocTomoe]

I vehemently disagree that this is an information asymmetry issue. That woman has been to a private university for some time when she signed that 9.5% loan contract. She must have had basic calculus in elementary school and calculating with fractions a few years later. Even her working-class father realized this was a bad idea.

[marpstar]

A relative of mine is currently attending university who decided to blow a $50k college fund on TWO years of a four-year degree. I didn't even pay that much for four years (this was 10 years ago). A lot of the younger generation don't care because they don't have to pay anything now, so they'd rather go to a school they can brag to their friends about.

[ac29]

That isn't that expensive: $10k/year for tuition and books, $15k/year for housing/food/life expenses. Now if its actually $25k/year just for tuition, that's pretty expensive.

[mitchdoogle]

if you're going to a school worth bragging about (read: Ivy League) then those are actually the ones that provide pretty good financial aid to those less well off. If you don't meet the qualifications for financial aid but still find yourself unable to pay, perhaps you're parents are holding out, and/or living above their means.

[fspeech]

The high interest loan was for her last year of school. She has indicated that there was no alternative. Of course it would have been better to arrange for all financing before she started school but that would have taken some foresight. I wouldn't blame her for taking the loan in the senior year. It is not a matter of simple calculus as you said -- it is strictly worse to not take the loan and quit school at that moment.

Add: Please consider the possibility that not knowing when you start school that you may need a high interest loan as a senior in order to finish school is an example of information asymmetry.

[DocTomoe]

> She has indicated that there was no alternative.

Actually, she indicated that the alternatives were not attractive to her (especially the friendship thing is ravingly stupid).

> Of course it would have been better to arrange for all financing before she started school but that would have taken some foresight.

Yep. The ability to divide cost through four years, add a little bit for emergencies. This ain't rocket science.

Liferafts tend to cost a lot more when the flood is coming.

> Add: Please consider the possibility that not knowing when you start school that you may need a high interest loan as a senior in order to finish school is an example of information asymmetry.

I do not think anyone is served by abusing vocabulary to hide the true meaning you implied: it's stupidity and lack of planning, not information asymmetry.

[qaq]

This can be generalized to fairly large number of decisions one has to make in life ultimately a person making the decision will have to bear the consequences of their decisions. I think a general theme of people expecting someone else to bear the consequences for their poor decisions is a significant contributing factor to people getting into these situations.

[givinguflac]

It’s almost like 18 year olds don’t have a firm grasp on how to manage their future. Especially when they’ve been brainwashed to believe College is the only way they’ll have a future.

[manicdee]

The Australian Prudential Regulation Authority has made it a condition of approving loans that the minimum scheduled payments end up paying off the loan in the indicated timeframe, and this applies to loans for real estate which is supposed to be a source of income.

Perhaps it is time to apply the same kinds of rules to loans for education, along with increasing the minimum income at which repayments are required to be made, and the maximum proportion of total income that the repayments are allowed to be.

In addition, require that student loans must be not-for-profit.

Perhaps even consider nationalising the student loan system and having repayments taken out of incomes at fixed low rates, so the incentive is for the state to improve wages?

[Mirioron]

The problem with the argument about information asymmetry in this case is that one of the loans was signed right after the financial crisis. Loans and topics about interests and all that were talked about in many places.

But I agree with the other commenter about excel sheets and playing around with numbers.

[tehwebguy]

The financial crisis didn’t stop the far, far too wide a gap in information semetry with lenders.

[qrbLPHiKpiux]

I’m hearing more and more of kids in school that are unable to secure loans for years 3 and 4. They’re dropping out, paying on years 1 and 2.

[Balgair]

Jesus! That can't be right, can it? If so, those lenders deserve a special place in Hell.

[jancsika]

I've got a template that I think will solve this kind of cross-talk. Here it goes:

What follows is an institutional critique.

Some content goes here, preferably with citations.

This concludes the institutional critique.

Once the header and footer is in place, the reader is not allowed to make counterarguments based on anecdata or moral speculation about the personal responsibility of the institution's participants.

HN users are perfectly capable of making these distinctions. I'm sure if I post a paper about timing attacks that leverage subnormals, nobody would complain that HTML5 users need to better educate themselves on IEEE 754.

Now that I write that, I'm not so sure-- so please always use the template above when making an institutional critique.

[analog31]

To me, this seems like a possible case where people are rational agents, but they don't have comprehensive information. Selling a financial instrument that someone can't possibly understand is unethical, and should be illegal. My own rule of thumb is that the higher responsibility goes to the bigger guy.

[Mirioron]

You can buy a car without knowing anything about cars. You can buy a house without knowing anything about them. Do you think the seller is being unethical in these cases too? Particularly when you're buying the car from a manufacturer or the house from a large broker. What about selling a computer to somebody that is computer illiterate?

I agree that what the banks are doing is very likely unethical, but I think your generalization about the bigger guy having more responsibility doesn't always hold.

The other problem is that people will generally say that they understand even if they don't. Maybe a mandatory class on basic finance and economics would be a good idea.

[analog31]

Cars and houses are both heavily regulated for the exact reason of information asymmetry. Markets appear to have regulated computers, but I don't know if that can be generalized to other kinds of products.

I agree that schools should teach about personal finance. My son was assigned a paper to write on the payday loan business, and it was pretty eye-opening for him.

[paulddraper]

> Cars and houses are both heavily regulated for the exact reason of information asymmetry.

Not really. I've bought and sold houses and cars while knowing relatively little.

The real difference between cars, houses, and educations is that the first two are collateral and lenders do due diligence to avoid foreclosure.

Educations can't be forclosed on -- there is no collateral, and relatedly the loans are non-dischargable.

[qaq]

Why? google search of student loans problems turns up literally a ton of results on very reputable sites discussing these issues. If a person can not be bothered to make a simple google search before making a 100K decision I don't think the problem is the bank.

[ransom1538]

"I don't think the problem is the bank."

Oh. It sure isn't the bank's problem. You can't even default on a government backed student loan. The bank is incentivized for you to fail and rack up fees.

[qaq]

don't doubt that but starting salary of 20K with masters degree tells me the choice of degree was not optimized very well. There are many ways to get degree for close to free just takes a bit of effort but paying down 200K is def. significantly more effort.

[tehwebguy]

Because most 18 year olds don’t think the entire financial system is designed to make them into financial slaves? Someone with authority says they are offering something good and smart for their situation so they believe them?

[qaq]

So it's reasonable approach to spend 100K and literally do 0 research into it? and it is someone else's fault if things do not workout?

[tehwebguy]

Basically yes, that is exactly reasonable.

The banking institution which created, offered & services the financial instrument you’re describing has about 1 trillion times more data on the risks and the possible outcomes. They should absolutely have the responsibility when offering 5-6 figures to 18-year-olds.

[qaq]

Well than I have a bridge to sell you. You can not make a system where there is no personal consequences to making dumb decisions there is no "they" who will take a fall for you.

[givinguflac]

I would argue the majority if not all of those websites didn’t exist for people who are struggling today. For new students, sure. But someone struggling in this situation didn’t have these resources in early 00’s.

[qaq]

That it is I guess a valid point. But people are still taking out those loans even though all this information is one search away.

[iampims]

This happened 10 years ago, and while I don’t doubt there were articles warning you about the dangers of student loans, it probably wasn’t as visible as it is today.

[paulddraper]

> People aren't rational agents. They suck at making decisions about their long term well being.

Sure. But I'm missing your suggestion here.

Others aren't saying "people should know better" to pontificate, but just to say "there isn't a solution outside of personal responsibility."

Do you believe there is a (worthwhile) institutional solution? If so, what?

[gaius]

People aren't rational agents. They suck at making decisions about their long term well being

But, are legally adults, and that’s what that means.

These arguments about students not knowing what they’re doing has only one solution: raise the age of legal adulthood to 25. Which is not as unreasonable as it sounds; it was 30 in Ancient Greece.