Monday, May 13, 2013

The Big Crunch


Today, The New York Times published another good article by Joseph Stiglitz about student debt.  It seems that the Times is starting to tackle this topic with the urgency it deserves.  The Stiglitz article avoids the rosy picture tacked onto last week’s reporting.  Instead, the article describes how our impossible-to-escape student debt could easily collapse the nation—and soon!

My favorite part of the article summarized the Obama administration’s modest attempt to regulate the federal loan money diverted to for-profit colleges by making it a requirement that at least 35% of graduates are paying back current loans (among other optional requirements that a school can try to meet).  Yes – 35% only! – and a pig judge still struck the requirement down, for now.

The Stiglitz article also provides a reasonable solution for our student debt problem, something missing in most media stories.  While Stiglitz focuses on the problems with the rigged bankruptcy laws, he also describes the Australian system for motivating loan repayment and efficient higher education programs with positive employment outcomes.  I liked the idea of this system, as it could be implemented here without too much screeching about interfering with the holy Free Market.

11 comments:

  1. The "holy Free Market" solution would be to end Federal gurantees for student loans, thus making banks charge real interest rates and assess borrowers' risk. Fewer loans would be made, and universities would then have an incentive to compete on cost. Tuition would likely go down. Current federal guarantees on loans mean there is NO incentive to compete on cost -- its foolish if you are a profit maximizing institution, even one run by good Progressive profs.

    As much as I'd prefer the Free Market solution, its politically unrealistic. The next best thing is simple, blunt force regulation -- no student loans above $20-25,000 can be given any year. For technical schools, some of the WORST overchargers of tuition, a $10k limit per year. Profs and deVry will howl and scream, but tuition will go down.

    What I would view as bad solutions are those that put the burden on the taxpayer, like Stiglitz's suggestion we copy Australia -- student loans come from the government and payback schedule can be slowed and payback amount reduced by the government. That means the taxpayer gets milked so students can live consequence-free, regardless of grades, what they studied etc.

    Other bad solutions would include attempts to micro-regulate student loans/Higher Ed, a la Dodd-Frank, a +1000 page bill no one understands, least not the regulator, which will soon produce 1000s more pages of regulation. Not that all regulation is bad, but extremely complex rulemaking is hard to enforce and understand for the "regulatee". Regulations, where necessary, should follow KISS - Keep it Simple, Stupid!

    -Jim

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    1. I think the Aussie system creates the opposite incentives that you imply (taxpayers footing the bills). Students with bad outcomes lead to reduced income for the school. If the school produces good products, i.e. students with good incomes, they make more money. It is about as close to the holy free market as you can get in this type of "industry."

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    2. Spot on Jim

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    3. I have to +1 here. I've seen a few posts that refer to a "free market" in higher education. There is no such thing--in a free market one person (taxpayer) would not be forced to guarantee another's loan. In a free market, if a lender lent money which the borrower could not repay, the lender would be SOL (shit out of luck) and would definitely be more careful about whom he lent to. Please stop referring to higher education (at least in the US) as a free market.

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  2. This also appeared in NYT today:

    http://www.nytimes.com/2012/12/10/education/three-dozen-private-college-presidents-earned-over-1-million-in-2010.html?_r=0

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  3. Although I agree that Stiglitz is addressing an important issue, there are two points that I cannot agree with:

    1. The suggestion (implicit, granted) that for-profit institutions are THE problem. As those who are aware of the law school scam are fully aware, the problem is far broader than for -profits. If we make for-profits the boogeyman, than we invite politicians to say "problem solved" when they tighten student loan rules for for-profits.

    2. Fundamental to this problem is that we have a mismatch of economic incentives, which boils down to this: the people who use the service (students) are not the ones spending the money to pay for it (government), at least in the first instance. Reducing interest rates, or tying repayment to income do nothing to address this issue, and as with the focus on for-profits provide an easy out for politicians to claim "problem solved" when it is far from solved.

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    1. Couldn't have said it better meself.

      -Jim

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  4. Why would any bank want to turn of the spigot?

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  5. I agree with 7:20AM that politicos/commentators, usually those left-of-center, in my opinion, tend to zero in on for-profit universities.

    In reality, "non-profit" universities behave exactly the same, except they are more effective in hiding their motives.

    As a commentator on the NYT article said, lending an 18 year old $80,000 at 6% interest is insane.

    It makes one wonder: how did this happen? But of course we know the answer: a pinch of greed, an ounce of good intentions from well-meaning politicos, and a pound of false conventional wisdom.

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    1. Targeting for-profit colleges protects the tenured professors at the "real" universities who do not want any pay cuts.

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  6. Sometimes I really do think that the law school issues are similar to those of for-profit colleges: greedy profs, scammed students, and a whole system set up to take advantage of the young for the benefit of the old.

    Is there any way that we could reach out to similar groups of students? I know that we have little in common with grads of for-profit medical billing colleges...or do we?

    It's not about quality of education or shit like that. It's about being victims of a student loan scam system that encourages these operations to continue. They need to be shut down.

    Take the profit out of education, whether that profit is overt (e.g. for shareholders of those trash online schools) or covert (e.g. professors with their sabbaticals and paid European "international study" over summer for them and their families etc.)

    Fuck this whole scam. I'm furious.

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