Good question. EG Why doesn’t everyone default on a loan? This is asking “how do loans work”.
Typically, a loan with interest is a gamble. You want to get your money back with a return. If you loan money you want to ensure you will get your money back by qualifying the applicant. There is a risk though because they might not pay it back, thus you increase the interest rate according to how qualified the loan is. Good investors really focus on getting a qualified applicant (one that can pay it back). Sometimes they don't get their money back and they are forced to write it off - it is apart of the loan business.
Basically, I am not trying to be insulting but I will end up explaining how a loan works - so I will stop there.
With college loans ALL basic loan concepts are wrong. You cannot default on a college loan by law. It follows you through marriage, bankruptcy, or even service in Afghanistan. The people which made these poor loans know they made poor loans backed by the US government. Thus, they have lobbyists pushing congress to ensure student loans are 'unforgivable'. SO! Investing in a student loan is a damn good deal. You have 0 chance of someone defaulting because it is illegal to default. The loan has zero risk. This is why tuition has exploded and why we have a crisis.
So, if you want to major in 18th century French Dance at Yale for 190k - there isn't an investor willing to stop you.
Tuition in your country has not expanded because of cheap loans.
People need jobs and you have a job shortage.
College is seen to be the best/only option for a middle class life - which is driving people to college.
College is not free in America. So people need to pay, but job pay is concentrated in certain fields, and any hitch in the process means that payment schedule gets extended.
To a certain extent, the problem is of course having loans.
But that would just make the main problem obvious - life is expensive and there’s now fewer ways to make a middle class life.
This is like the Indian job market- You are either a STEM / law/ CA / or bust.
How do you propose funding poor people's education then? Keep in mind education is not like a house where you generally pay 20% down and the bank gets to keep your house if you default which they can then resell to recoup some/most of their loan. Poor people have very little money to pay for education and all of the value goes towards their brain which a bank cannot just reposses which is why the government takes ownership of said loans and effectively repossesses your future earnings.
I propose that the government should have an anti NEET law (for 'working age' people), that is, someone should always be in Employment, Education or Training. It was either to complete the acronym, or the latter two are differentiated between theory education and trade-school education.
The education/training parts are pretty simple; a minimum 'living wage' (for ACTUAL living, not fake numbers) and housing near the education/training site will be provided in exchange for participating in the education/training. This payment also applies to child student dependents of legal guardians (usually parents) and is their "tax credit" replacement.
The employment part is a combination of publicly paid internships and/or work directly for the public good. In both cases the employee is a civil servant and any "works" they create become the public domain; unless the median pay rate for that job is paid to the government as a "temp" placement fee.
While I'm at it, part time workers receive pro-rated benefits funding and the option to buy from (any of) their employer's benefits pool(s). Partial work shouldn't be an excuse to deny benefits.
If benefits are fully socialized (E.G. single payer primary health cost coverage) then the above can still apply to over the top benefits.
Income-based repayment has to be codified through some kind of legislature, similar to no-default guarantees of the current regime.
Bad news for art history departments and copious law schools, but good news for nursing, aircraft maintenance, computer science, chemical engineering areas.
Wait, why is this a good question? I mean the OP said “it’s not that simple” which says he/she has a DEEPER understanding of loans that the previous post.
The answer to the OPs question is obvious to someone who understands loans (“the same things that keep everyone from defaulting on every loan”).
So, isn’t it actually a dumb question? Or rhetorical, and since its obvious and adds nothing, it seems best to just ignore it.
The original US student loan program gave loans which could be defaulted on just like any other loan. So, maybe a better question would be “why did the US congress change the rules just for student loans?”
If student loans can be defaulted, it doesn't matter what the investor thinks or what interest you get or if you're backed up by the government or not.
Even if you study [insert profitable degree], the rational action to do after graduating is to default, since students typically don't have much to lose.
And then lenders won't make the loans. That's exactly the point. Student loans were a bad idea in the first place. The ready availability of tuition money has lead to schools raising tuition FAR faster than inflation for the last 20-30 years. Most of that money isn't even going to education.
Except without those loans, poor people will have to grind out low paying jobs trying to save up enough money to go to college and get a higher paying job that requires a degree because they have no money to pay for it. Then, when they finally get through college, they will be years behind the kids of wealthy people and to make matters worse, every year you delay putting off a degree decreases the future value of said degree since you generally have a limited amount of working years and thus less years to earn money from said degree.
This argument makes sense if student loans were a novel concept, but we've seen the movie and know how the story ends.
When those same poor people are crushed with insurmountable amounts of undefaultable debt that follows them for life, they don't fondly think "well, at least I didn't have to grind out a low paying job back in the day".
Exactly. It is a poor investment option. So less investments are made, so less students attend, tuition plummets, community colleges spring back to life, people focus on degrees that offer pay, kids exit with no unforgivable debt, on and on.
It seems to lead to the sort of situation where the only kind of success a poor kid can hope for in life is the kind where they get into the kinds of degrees that offer pay, whereas privileged rich kids have the luxury of getting to go into "useless" humanities degrees and curate our culture and history and whatnot. Only enabling the leisurely well-to-do to enter the latter kind of career path is generally considered a bad thing.
It's not bad. But it doesn't matter how much tuition costs or what degrees offer pay or not. Everyone will study whatever they want, borrow at 1000% interest if necessary or 1% interest for "profitable" degrees, and then dump the dept as soon as they graduate.
Or am I missing something? Original question, what's stopping everyone from defaulting right after graduation?
What's to stop people defaulting on other unsecured loans, like credit cards? Some people do, but most people don't. Why? Because defaulting on a loan means a bad credit score and suddenly modern society becomes hard - no mortgage, no car loan, no more credit cards etc.
The difference is that other unsecure loans are only given out with some degree of expectation/evidence that the person will be able to repay them. A person with $10k/yr income does not get a $40k credit limit.
On the other hand, college loans are given out with zero consideration of that. You're just as eligible to take out tons of loans as a poor person majoring in underwater basket weaving as you are are getting a CS degree from Stanford. Even though those have very different probabilities of being able to repay them.
To default on a credit card you have to qualify for a credit card. Which generally requires some history with a bank that for youngsters involves a secured credit card to build credit - e.g. a credit card with $500 monthly limit paired with a $500 savings account that allows no withdrawals.
What happens when a lender decides you're unqualified for a student loan?
The main difference is a bank can repossess your house/car/possessions for normal loans thus making back some of the money they leant you (and you losing all of the stuff you bought with that debt). They cannot repossess any bit of the money spent on your education. This is why the federal government steps in because they legally can repossess some of your education by extracting it out of your future earnings.
Nothing would stop everyone from defaulting. There would just be less student loans to default on in the first place. If defaulting was an option, student loans would either not exists or nearly not exist. If student loans didn't exist, colleges would have to drop their cost or not be able to fill seats. If colleges drop their cost, students don't need loans. The cycle ends.
> If student loans didn't exist, colleges would have to drop their cost or not be able to fill seats.
For lots of colleges, I agree. However, lots of people who come from well to do families have their entire colleges paid for by their parents even today with high tuition costs and thus top colleges could still increase feas as rich parents can afford it whereas poor people would have to grind out for years in low paying jobs just to afford the chance to go to the rich schools. Without guaranteed loans, poor students would practically never have the opportunity to go to rich schools.
The entire premise is based on a questionable foundational assumption. The argument goes that you pay for an education but that can’t be taken back in bankruptcy proceedings or recovered when defaulted on. I’ll agree that what people pay for is an education, but what makes that education valuable in terms of employment is the paper that proves you have it. If the college won’t validate your attendance and degree what do you have except an unverifiable claim that makes you indistinguishable from candidates that don’t have a degree?
Typically, a loan with interest is a gamble. You want to get your money back with a return. If you loan money you want to ensure you will get your money back by qualifying the applicant. There is a risk though because they might not pay it back, thus you increase the interest rate according to how qualified the loan is. Good investors really focus on getting a qualified applicant (one that can pay it back). Sometimes they don't get their money back and they are forced to write it off - it is apart of the loan business.
Basically, I am not trying to be insulting but I will end up explaining how a loan works - so I will stop there.
With college loans ALL basic loan concepts are wrong. You cannot default on a college loan by law. It follows you through marriage, bankruptcy, or even service in Afghanistan. The people which made these poor loans know they made poor loans backed by the US government. Thus, they have lobbyists pushing congress to ensure student loans are 'unforgivable'. SO! Investing in a student loan is a damn good deal. You have 0 chance of someone defaulting because it is illegal to default. The loan has zero risk. This is why tuition has exploded and why we have a crisis.
So, if you want to major in 18th century French Dance at Yale for 190k - there isn't an investor willing to stop you.