The Journal's Editorial Board Is Again Dishonest (Education)
By Karl Denninger
Once again, into the "big lie" of "big daddy Government" ( http://online.wsj.com/article/SB10001424052970203554104577000023072914382.html?mod=WSJ_Opinion_AboveLEFTTop )....
As the default rate rises on federally backed student loans, President Obama has responded with a plan to make education lending even more expensive for taxpayers. That's hard to do, but he's determined.
....
Washington's rising subsidies for college are a big reason that tuition keeps rising faster than inflation. Tuition and fees increased 4.5% at private colleges last year and 8.3% at public ones, according to the College Board's latest data. Under Mr. Obama's plan, taxpayers will provide the subsidies that allow colleges to raise their prices even higher.
Washington's rising subsidies eh?
No mention of the real. problem, I see: The exception in bankruptcy law, passed incrementally over the last 20 years, that made student loan debt basically impossible to discharge.
Why is that the root cause?
That's simple.
Let's assume you want to study the "liberal arts"; Sociology perhaps.
Ok.
With a Bachelors in this major what does it get you in terms of earnings power? What's the reasonable expectation for a person with that degree in the world of work?
Let's look ( http://www.payscale.com/research/US/Degree=Bachelor_of_Arts_(BA),_Sociology/Salary )....
It appears that with this degree the starting salaries would be in the mid $20,000 to approximately $40,000 range.
Remember that for a new entrant into the workforce you must look at the bottom of these pay scales, as you're entering at the floor, not the ceiling.
So what would you, as a prudent lender, be willing to loan someone in order to pursue this degree?
Well, let's see. It's an unsecured loan (you can't repossess a degree) so we might limit the term to 10 years. And we would probably charge more than a house (secured) loan; let's say we'll put 2% on the interest rate for someone with good credit (that is, who has a clean payment record through college.)
We'll allow 15% of your gross to go toward payment of the obligation.
Running this through my trusty HP12c I get a maximum loan amount of $22,631. And for that amount of lending I'm going to want transcripts every quarter and you had better not show anything on them worse than a "C" with an overall GPA of 3.0 or better, plus enough on-track credits to graduate within the borrowing window for the time you have planned (in other words, if you want to borrow the full $5,600 each year, you better be on track to graduate in 4 years; if five years, then you cannot borrow more than $4,526 annually.)
Why?
Because if I lend you more than that, don't monitor your grades or don't care if you graduate on time there's a very high probability that you will default and I will lose my $22,631!
That's all there is to it.
With the collapse of the "infinite money machine" the price of college will similarly collapse. If you can't borrow more than $22,000 to get that sociology degree it won't cost much more than that to get one, all-in. And guess what - if I work for $10/hour on weekends, say, pulling 20 hours/week, I can make $10 large annually which is enough to cover my share of a small apartment ($500) plus another $300 or so a month for food.
Voila - it works; now tuition, fees and books for that degree will not cost more than about $5,000 a year. It can't, because people can't pay and thus won't.
How do you make this happen? That's simple:
● Get rid of the FAFSA crap. An 18 year old is a legal adult. Demanding the parents' financial information is an outrage. They have no obligation to provide anything beyond the 18th birthday; any such contribution is voluntary.
● Get rid of the exemption in the bankruptcy laws. You make a stupid loan, you eat it. Period.
● Get the damned government out of student lending entirely. Period. No more. If they want to write grants (e.g. Pell) that's fine. But no more loans - Stafford or otherwise. If you want to borrow money you do it from a private lender who is exposed to all risk if you default.
Now will there be professions where you can borrow more? Of course! Want to program computers? A BA in Computer Science will get you a job somewhere between $41,000 and $67,000. Guess what - you can borrow about twice as much to obtain that degree.
Why? Because the market has determined that you will have more earning power if you study computer science than sociology.
That's all there is to it.
Three simple changes and not only do we fix the student loan mess we fix the cost of college at the same time.
You're either looking for actual solutions, you're confused, or you're a damned liar.
http://market-ticker.org/akcs-www?singlepost=2775946
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