Government's Role in Student Loans-BECKER

A young couple with modest earnings can buy a house that costs many times their combined incomes without putting down more than a small fraction of the cost, as long as they have reasonably stable employment and a decent credit history. They pay a market-determined interest rate to the lender that is presently about 6 per cent in the United States for a 30 year fixed rate loan. However, it is crucial that they offer their home as collateral, so that the lender can repossess it if they fail to meet their mortgage payments. They can borrow to purchase a car too, essentially by offering the car as collateral. Yet with the exception of medical and a few other types of students, young persons cannot borrow on a purely commercial basis without parental or other co-signers to finance their higher education. The usual explanation has been that unlike homes and other consumer goods, education cannot be offered as collateral to guarantee repayment. This means that in the event of defaults on student loans, there would be no assets for lenders to repossess. Put differently, lenders cannot take ownership of the human capital they finance since that means taking ownership of the individuals receiving the education, and no modern country allows people or institutions to own other individuals. Still, even without such collateral, it is possible to encourage a fully commercial student loan market with a few straightforward changes. Countries typically help students by paying most of the direct costs of higher education, and also sometimes by providing scholarships to help pay for the cost of living while in school. Though the stated reason for this is to allow poorer students access to higher education, the beneficiaries are mainly children from the middle and upper classes since they are the ones who attend these mainly state-run colleges and universities. Even in the Unites States, about 80% of all students are enrolled in subsidized state-run institutions. This system penalizes less prosperous families who do not have children at universities and colleges, but are nevertheless taxed to help support the education of children from richer families. Even children from modest backgrounds who do manage to get a university education tend to become part of the economic elite. In order to provide a better way to support students, or at least a way that complements direct subsidies, the United States about 40 years ago introduced a system of loans for college students that would be repaid gradually after they finish their schooling and are working. Similar systems have been introduced in a few other nations. To encourage private lending, the federal government guarantees repayment of defaulted principal and interest. The program has grown rapidly, so that the value of student loans outstanding has increased to over $400 billion. The current interest rate on new loans is about 31/2% (it is regulated and tied to short term interest rates). Interest rates on student loans are well below rates on mortgages, credit cards, and other sources of consumer credit mainly because the federal government rather than lending institutions bears the burden of defaults. By the early 1990�s this burden became great indeed, as defaults on student loans ballooned to over 20 per cent. No commercial loan system would be viable with these default rates at the low interest rates allowed. Partly because wealthy lawyers and doctors allegedly were responsible for significant numbers of these defaults, politicians pushed for tougher enforcement. A 1998 law made it very difficult to discharge student loans by declaring personal bankruptcy- a privilege not available to credit card companies and many other lenders to consumers- the federal government began aggressively using private agencies to collect defaulted interest and principal on student loans, and these agencies could garnish significant fractions of the earnings of borrowers in arrears on their debt. As a result, default rates have plummeted to about 5%. They are in fact relatively low among graduates of professional schools and elite colleges, and are highest- among persons who had attended community colleges and trade schools. Loans to finance education (and other investments in human capital) are a good idea, but why should the federal government subsidize them? College education raises earnings and improves health and many other aspects of living. Since these effects are huge and even larger than a few decades ago, loans to finance education should be attractive even without subsidies. It is especially inappropriate to subsidize loans to students coming from middle class and wealthy families who can expect very high earning over their lifetimes. Some writers lament the burden of large student loans, but even $100,000 in student loans is easier to repay than $150,000 in mortgages, a burden that many young families are clearly willing to bear. Private lending institutions would be willing to make student loans without government subsidies at interest rates that I believe would not be much higher than mortgage rates if certain conditions were met that already apply to government subsidized student loans. The most important are that commercial student loans should be hard to discharge by declaring personal bankruptcy, that collectors could garnish a reasonable share of earnings in the event of defaults, and that interest on student loans could be deducted from taxable income. Originators of student loans-Sallie Mae and another private institutions-typically repackage them, and sell them in a secondary market, similar to the way mortgages are repackaged and sold. So the �securitization� of student loans is a reality. What is needed to have a well functioning and extensive private commercial market in student loans are the various privileges already available to government-backed student loans that help overcome the absence of collateral when making loans for education. In addition, since education is an investment in human capital, the amount students invest- perhaps measured to start by the amount they borrowed to finance their education- should also be deductible over time from their taxable incomes, the way corporations can deduct the cost of capital from their tax liabilities. A private commercial market in student loans under these conditions would not need government subsidies, and would have the flexibility to develop new contractual forms. These might include the often-suggested system whereby interest rates on student loans would not be fixed, but would rise with the eventual earnings of borrowers. Other innovations would emerge as freer and more imaginative competition in the market for student loans developed. It is surely time to rethink the conclusion by economists that commercial loans on education are not feasible because education capital cannot be used as collateral.

Comments

[kputnam]

Re: wages as collateral in order to make the students loans like home loans rather than credit cards.

Let's suppose during law school I meet my handsome prince and decide upon graduation that instead of becoming a fledgling attorney, I'd like to be a 28 year old stay at home mom with $100+K student loans. And suppose my handsome prince and I are terribly irresponsible and default on my student loans. The lender does not have any collateral because I am not working. Is the lender going to force me to leave my newborn child at home and enter the workforce? Bankruptcy ramifications aside, I don't think this is ideal for a lender.

Despite all that, there are some very creative people in the financial industry who could create a financial instrument that addressed all these concerns if they had an incentive. Perhaps the issue is not whether these obstacles can be overcome, but if we want to make education more expensive for the student (and less expensive (???) for the taxpayers)?

[Corey]

"They will do this because there is money to be made in making the best offer."

And after that, they will give us all
lollipops, because it is nice to have lollipops
and multi-national banking executives operating in collusion with each other in a barren regulatory climate are our friends.

To take a step back, couldn't this whole discussion be characterized as a solution in
search of a problem? Does anyone have a
compelling reason or some great need that would
justify changing the current student loan
system. (Other than, "We are privatizers and that is the Neo-American Way!")

[patrick]

It's hard to respond to conspiracy theories, but check out this article re: the effects of interest rate ceilings on collusion.

Price Ceilings as Focal Points for Tacit Collusion: Evidence from Credit Cards

American Economic Review, 2003, vol. 93, issue 5, pages 1703-1729

Abstract: We test whether a nonbinding price ceiling may serve as a focal point for tacit collusion, using data from the credit card market during the 1980's. Our empirical model can distinguish instances when firms match a binding ceiling from instances when firms tacitly collude at a nonbinding ceiling. The results suggest that tacit collusion at nonbinding state-level ceilings was prevalent during the early 1980's, but that national integration of the market reduced the sustainability of tacit collusion by the end of the decade. The results highlight a perverse effect of price regulation.

[salty]

Why is Mr. Becker assuming that home mortgage is purely private? Most home mortgages are backed up by the U.S. government. Before the government did this, the interest on home mortgage was very high, and downpayment was substantial, because the house tended to devalue at a rate faster than repayment. Based on this experience, it seems reasonable to assume that the rates would go UP in student loans once the government withdraws; after all, wage garnishment isn't fool proof; some people never end up making much money, even with college (or advanced) degrees.

[L. Harriman]

Parents have reacted to the obscene price of college by preparing their children in high school to CLEP and AP out of as many classes as possible.
We educated parents know good and well much of beginning college was repetitive.
The Universities are getting so scared of this that they are crying crocodile tears that high school grads are not 'mature enough' to enter college as juniors.
Well kids could go get mature working or travelling, they sure wouldn't get more mature by paying a fortune to a university for spinning their wheels for two years.
L. Harriman

[Anonymous]

مركز تحميل

[Anonymous]

بنت الزلفي

[Anonymous]

شات سعودي

[Anonymous]

شات سعودي

[Anonymous]

Hello. History is more or less bunk.
I am from Republic and too poorly know English, please tell me right I wrote the following sentence: "Renters insurance assures that you will be covered for personal property in the event of theft or natural disaster."

8) Thanks in advance. Lang.

[Anonymous]

Thank you, you always get to all new and used it
شات

دردشة

[Anonymous]

شات مصر
--
دردشة مصرية

[Anonymous]

دردشة
___
صور

[Anonymous]

thanks
شات تعب قلبي

شات الحب

[Anonymous]

شات الرياض

شات غرام

[Anonymous]

دردشة الشلة

دردشة تعب قلبي

[Anonymous]

thanks to tell me that,i think thats ao usefully----
tiffanys
links of london

[Anonymous]

دردشة الشلة

شات روحي تحبك

[Anonymous]

شات الخليج

شات حبي

[Anonymous]

دردشة الشلة

دردشة الرياض

[Anonymous]

دردشة برق

دردشة الخليج

[Anonymous]

thanks very.. Sesli Chat

[Anonymous]

شات حبي

شات الحب

[Anonymous]

شات دلع

شات الود

[Anonymous]

tiffany jewellery
abercrombie and fitch