[bumby]

We are to judge because we are the taxpayers who guarantee the vast majority of those loans. That’s the mail reason I said “collateral-free.” Most of those loans would not happen in a private market because teenagers, in general, do not have collateral to secure the loan, meaning they have little to lose by defaulting.

[BobaFloutist]

Their degree and future earning potential is supposed to be the collateral.

Unfortunately, the earning potential of a generic bachelor's degree seems to have mysteriously fallen at roughly the same time a flood of students were offered huge loans to achieve them. Maybe some day we'll be able to find the connection.

[bumby]

I don’t think that’s correct. You can’t put up “future earning potential” as collateral while simultaneously allowing for discharge of debt in bankruptcy. That results in an incentive to incur as much debt as possible and then declare bankruptcy shortly after graduation when the impact is negligible. That’s the whole reason why student loans aren’t generally dischargable in bankruptcy.

[BobaFloutist]

Yeah exactly. That's the original theory. It... doesn't seem like you disagree with me.

[bumby]

I do not disagree, I’m just curious what ideas are out there to manage the unintended consequences.

[BobaFloutist]

I'm glad you don't disagree, but that makes it confusing that you started your response with "I don't think that's correct"

[bumby]

I agree that's the theory, I disagree that it actually is what would happen in practice. E.g., if the government stops guaranteeing the loans I seriously doubt banks will accept "future earning potential" as collateral. So I disagree that it's actually collateral (your initial claim). The real collateral is the govt promise to back up the loan.

So the question still stands: if the government no longer guarantees the loans, what is the proposed solution to prevent banks from no longer lending to students?

[eru]

> We are to judge because we are the taxpayers who guarantee the vast majority of those loans.

Yes, get the taxpayer out of the loan guarantee business. Sorry, I thought that was a given.

[bumby]

I’m not against that, but I do think just getting rid of federally backed loans previously causes more problems. (Ie it’s one of those simple cures that may ignore blowback) Do you think there is an opportunity gap to be closed? If so, how do you think that would work?

[eru]

> (Ie it’s one of those simple cures that may ignore blowback)

I actually want exactly the 'blowback': I want student loan creation to fall off a clip.

> Do you think there is an opportunity gap to be closed?

What is an opportunity gap?

> If so, how do you think that would work?

I'm guessing here what you mean by opportunity gap. I think the cheapest way is to open the US labour market to virtually anyone on the globe. That would be good for the US economy, wouldn't cost the tax payer anything (in fact you would save on border enforcement), and the people with the least opportunities globally would benefit enormously.

If you only care about Americans, I would suggest to give poor people money, and let them decide what to do with it.

Eg whatever the cost to subsidise education (including subsidised student loans) right now, just pay it out to poor people. Than they can buy education, or whatever else they deem more necessary.

[bumby]

>whatever the cost to subsidise education (including subsidised student loans) right now

It sounds like you may not understand how the system works. It doesn’t cost the government anything, with the exception of the loan repayment pause surrounding COVID.

I know the simple solutions like “Just give away money” can be seductive, but IMO they generally don’t work well in complex and nuanced problems. People aren’t rational actors by and large, and it’s a mistake to assume they can be modeled as such in many cases.

[eru]

> People aren’t rational actors by and large, and it’s a mistake to assume they can be modeled as such in many cases.

You'd still be on the hook explaining why you know what's better for people than they do.

> It sounds like you may not understand how the system works. It doesn’t cost the government anything, [...]

There are always opportunity costs. But what parts of the 'system' are you talking about?

[bumby]

I'm talking about real costs. The government doesn't lose money by guaranteeing loans (in fact they make money, which is a totally different — but reasonable —argument against the current setup). I assume you mean opportunity costs as in "what else could the govt fund" with that money; if that's your claim, it again belies a misunderstanding of what's going on. You seem to have created this false narrative in your head that doesn't reflect reality.

There is much research, especially in behavioral economics, that shows that more objective decisions can be made by creating systems that facilitate more rational decisions. So my current position is that we should set up systems/institutions to foster those better decisions rather than push everything down to the individual, given the complexities of modern life. So to directly answer your question, there's decades of research that shows individuals aren't great at making rational decisions at the individual level. It's also interesting that you simultaneously seem to claim the "state" should make decisions, but also that institutions don't know what's better than individuals. It doesn't make for a very cohesive take.