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01/09/2005

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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

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