Clearly there is a great deal of misinformation out there about the Federal student-loan program. It has led some to erroneously conclude that student loans are the new subprime mortgages. While such suggestions make for sensational headlines for some, and generate book sales for others, in reality, there are relatively few similarities between the two types of loans. I am not saying that the Federal student loan program is without its share of problems, but student loans and subprime mortgages differ in a number of important ways.
I’ll admit that there are two ways in which subprime mortgages are similar to student loans. The first is that both were created in order to achieve some larger public-policy goal that received almost unanimous bipartisan support over the past several decades. In the case of subprime mortgages, this practice supported the goal of increasing home ownership while in the case of student loans the program allowed more people to earn a college credential. Whether or not it is true that all people should own a home or that all people should go to college is a question worthy of serious debate, but that was the goal and loan programs were the enabler.
The second similarity is that both programs allow the borrower to enjoy reduced or defered payments in the early years of repayment. In the case of student loans, there is a compelling reason behind Congress’s decision to allow students to defer all payments until after graduation, which is that students who work fewer hours while in school tend to be more likely to succeed and graduate.
With these couple of similarities revealed, it is time to consider all of the ways in which student loans are not at all like subprime mortgages.
First we need to look at who is doing the borrowing in each type of loan. Subprime mortgages are issued almost exclusively to inherently risky borrows, and the sum of money made available to those borrowers is generally quite large—in the range of hundreds of thousands of dollars. On the other hand, student loans are much smaller than mortgages in terms of total dollar amounts, and they are made to the full range of borrowers, not just risky borrowers. Yes, poor students tend to borrow more than wealthier ones, in part because Congress has set higher borrowing caps for poor students, and in part because poor and independent students frequently don’t benefit from having parents who saved or borrowed on their behalf (including through second mortgages, PLUS loans, personal loans, and loans against retirement savings). But it isn’t just poor students who borrow through the Stafford and PLUS loan programs. Approximately 25 percent of subsidized Stafford loans (intended for low-income borrowers) are made to students who come from families with incomes of $50,000 to $100,000 per year, and approximately 10 percent go to students from families that have annual incomes of over $100,000. Students and families who borrow through the unsubsidized Stafford loan program and the PLUS loan program tend to be wealthier than those who borrow through the subsidized program, so clearly many borrowers in the student-loan program are not high-risk borrowers.
Second, we need to look at the significant differences between a mortgage foreclosure and a student-loan default. In the case of a mortgage foreclosure, the borrower can walk away from the obligation, and the lender can reclaim the asset in order to mitigate at least a portion of the loss. However, in the case of a student-loan default, the student does not walk away from the obligation. There is this false assumption that if a student defaults on their loan, the taxpayer pays the bill, but nothing could be further from the truth. The only students who get to walk away from their debts are those who die, those who are declared permanently and totally disabled, and those who qualify for Congressionally mandated loan-forgiveness programs, such as those made available to teachers and some others who work in public-service jobs. It may take longer and cost more to collect on a loan in default, but the government does find borrowers who have defaulted, and it does collect the debt, plus significant penalties and fees. While this may present a seemingly unfair burden to students as compared to homeowners, the student in default still benefits from the asset (the education) whereas the homeowner in foreclosure or bankruptcy does not (he or she loses the home). A defaulted loan is not a forgiven loan, and since student loans cannot be included in bankruptcy proceedings, the large majority of student borrowers do repay the loan, including those who default along the way.
Third, unlike most subprime mortgages which do not generate revenue for the government, student loans issued through the Direct Loan program do. With the conversion to an all Direct Loan program, it will be the government that reaps the benefits of the 7- to 9-percent interest rates charged to students and parents through the Federal loan programs (of course, minus the cost to the government of borrowing money to issue the loans in the first place and of hiring contractors to run the loan program). Yes, those who qualify for subsidized Stafford loans are enjoying a temporary reduction in interest rates, but soon they, too, will be borrowing at 6.8 percent, which is well above current market rates. It is odd to me that in the 1980s, mortgages were at 13 percent and student loans were at 9 percent, whereas now mortgages are at 4 percent and student loans are at nearly 7 percent. While a student loan may be an unsecured loan to a bank, it is not an unsecured loan to the government since the government has the ability to hunt down a student in default and make him or her pay. The IRS may be the world’s best repo man.
Like many, I do worry about the burden students take on when they borrow to pay for college, but we must acknowledge that it isn’t just the principal that is difficult for students to manage. Compounding loan interest and fees can more than double the cost of college over the term of a student loan, and those interest and fee payments to the government bring no added value to the student’s educational experience. While Congress is asking colleges to lower their tuition and fees, I would urge members to also consider the benefits to students and parents of reducing Federal loan interest rates. The main benefit of a government-run student loan program is that the Congress is now completely in control of interest rates charged to students and parents. I do, however, realize that the government depends on interest payments from students and parents to subsidize other programs and that while lower interest rates would help students and parents who need to borrow to pay for colllege, it would hurt those who benefit from other government programs.
I share a concern about rising default rates, which are inevitable (but not necessary) when unemployment rates are high in general, and even higher among recent college graduates. But make no mistake that the default hurts the student far more than the taxpayer since the government ultimately collects on the loan. Sadly, scholarly research has demonstrated time and time again that default rates are highest among nontraditional, independent, low-income, first-generation college students, regardless of where they go to school or which major they declare. Without financial support from their families, these students generally need to borrow more, especially if they are supporting a family while going to school. Efforts to increase educational attainment among adults have been effective, and now there are more independent, first-generation students in college than ever before, which means that more students are borrowing more money than ever before.
Still, there is no reason for a student to default on a Federal student loan because the government, unlike subprime-mortgage lenders, provides a number of repayment options and benefits—including deferment, forbearance, and income-contingent repayment—to help struggling borrowers maintain a solid repayment and credit record. Yes, it costs more in the long run when a borrower takes advantage of extended payment terms or reduced monthly payments, but this beats the likely alternative, which is to not attend college at all.
What is particularly interesting to me is that we spend so much time talking about student loan defaults, as if the taxpayer is paying the tab (when, in fact, the taxpayer is not), but we don’t talk about policies that do require the taxpayer to foot the bill for otherwise gainfully employed individuals. The taxpayer makes hefty student-loan payments on behalf of many federal workers who receive loan repayment benefits as part of their compensation package, in addition to their regular salaries. In addition, the taxpayer repays the student loans for many teachers, despite the fact that we now have a teacher surplus due to tough economic times. And don’t forget all of those doctors and lawyers who benefit from public service loan forgiveness programs—funded by the taxpayer—since their debt significantly exceeds their earned income. Does this mean that doctors and lawyers who perform public service do not qualify as being gainfully employed? I support loan-forgiveness programs, but let’s be honest about the fact that wealthier students often times benefit from these programs whereas many disadvantaged students do not.
In the end, taxpayers are likely to spend far more to support a person through entitlement programs than they are to support a student through college, and the return on the educational investment is substantially higher than that of entitlement programs. We all know the saying: Give a man a fish and he eats for a day, teach him how to fish and he eats for a lifetime. Sure, some people need entitlement benefits, and we should provide them, but isn’t it better to provide an opportunity for an individual to become independent and self-supporting through education rather than to condemn him to a life of dependency?
It is good and right for the taxpayer to enable an individual to earn a credential, get a better job, enjoy a better life, and have the privilege of paying income and payroll taxes for decades to come. There are no guarantees that a student who has the chance to go to college will make the most of the opportunity, or that he or she will succeed, or that there will ever be enough jobs to employ every college graduate in their chosen field at a premium salary. Not every college graduate will earn a six-figure salary, and even those who do probably won’t earn that much in the first years out of college. But I am willing to pay the price and take some risk in order to give someone else the opportunity that taxpayers afforded me many years ago.
10 Responses to Student Loans and Subprime Mortgages: An Invalid Comparison
trendisnotdestiny - June 24, 2010 at 9:57 am
Diane,I can appreciate that you want to clear up the confusion with respect to who bears the burden in cases of default (i.e. taxpayer and consumer burden). However, when I read an article like this, it obfuscates the problem that most americans face in academic, employment and relational worlds: what is being promised or sold is not what the buyer is receiving. In other words, risk is transferred in each case onto the individual with the promise that it will all work out in the end. One forgotten similarity of subprime mortgages & Diploma debt is that we are asking people with modest means to take on massive debts with the idea that they will be able to a some future point a way to find an opportunity to pay it off later…. However, the risk is completely born by the individual. Sell WIN-WIN and eventually ignore WIN-TIE/LOSE…. Especially as academia erodes itself into a private corporation run by evidence based administrators bent on replicated themselves into the (for-profit host cell), it is incumbent upon us not to sell education as a product in some sort of perverted predatory process of success, but to make explicit the expenses of education while simultaneously helping people understand the time cost of their decision…
mheffleychron - June 28, 2010 at 10:29 am
I second trendisnotdestiny’s points and thrust. While your article usefully points out facts and options that may work for some borrowers, thus validating the status quo, the premise that the IRS/repo man can get blood from a turnip is the fatal flaw in your thesis. There’s just too much risk-taking/enabling going on out there, and too much unjust profit and debt both being incurred by it. We need more responsible correlations between input/outcome and risk/prudence projections put in place…
intered - June 28, 2010 at 10:55 am
Thank you, Diane, for this welcome and overdue breath of objective air on this topic. Too many posts are dominated by uninformed opinion, tunnel vision on outliers, and the ideological ranting that you are seeing. As you point out, taxpayers make money from student loans and the vast majority of the students who take them out realize lifelong benefits that otherwise might not have been possible for them, clearly a win/win situation. I, too, believe that we will see default rates return to former rates when unemployment falls below 5%. In fact, given 10% unemployment, defaults are lower than we might have expected.Given your vantage, can you comment on how much the Department collects on loans that have fallen into default? The only credible report I saw estimated that the Department collects $106 for every $100 of loan default. Is that in the neighborhood?- Robert W Tucker
marka - June 28, 2010 at 6:26 pm
I concur with the 1st 2 comments here. Additional similarities:Default rates – the ‘subprime’ mortgage meltdown initially was around 1% default. That figure has continued to rise, but so has default on student loans. A small default rate can have substantial ripple effects — here in Oregon, the State has run out of $ for its tuition grant programs, because it has promised more than it has.Failure of remedies – altho’ many troubled borrowers have any # of avenues to rework debt, many don’t even bother to avail themselves, and those that do tend to default anyway. Likewise with student loan debt, as the article actually delineates.Who benefits? Well, borrowers potentially benefit from the loan, whether it be for a home purchase or an education. But they won’t financially if the anticipated return from the investment can’t pay for the debt interest, much less the principal. Borrowers expected their home to be worth more – and hence not under water – with each passing year. And yet that didn’t happen. Likewise, students are saddled with debt – sometimes into the hundreds of thousands of dollars ($100,000s) – with the expectation that they will be able to pay off the debt with whatever income they achieve. But the real beneficiaries of the loan are — home builders, sellers and their agents (brokers): they get their $ right away, while banks & borrowers are still on the hook. And for education – the institution and its employees: professors & other staff. Again, they get their pay right away, while the borrower & lender are still on the hook.And this is where the real rubber hits the road: who supports these programs with extensive lobbying? Not consumers, but the providers of these goods & services.Who are the losers? Those who go under water – borrowers for either home or education. Potentially the lenders — if enuf borrowers go under, so does the portfolio. And yes, the taxpayer – whether thru bailout or other subsidies. In the case of education, many institutions are state-owned or nonprofits & don’t pay the same share of taxes on real estate, etc. Someone has to make up the difference – the taxpayer.
intered - June 29, 2010 at 1:39 pm
@marka,I think anyone who understands the issues is concerned with the potential for high debt load. A few things have yet to come out that may broaden our view and corresponding judgment.- Student-initiated abuses or excesses are the cause of many of the problems they are experiencing. Cases are now common in which tuition might be $7,500 annually yet students are borrowing $90,000, $100,000 or more and living the non-working “college life.” I’m still contemplating the best kind of solution but one approach would be to more actively qualify the need for and use of loans.- Colleges may not benefit so much as you believe. Many of these students drop out early, before they reach a financial break/even point for the school.- Most economists believe that the growing easy access to student loans is a direct cause of higher education’s hyperinflationary practices. Colleges greedily suck up any and all new benefits to students in the form of tuition increases that outpace the cost of living increases and economic growth by a factor of 2-3.- We need more thorough analysis of the lifetime contributions of a college education, all in. I still see many individuals packing that $100K debt who are nonetheless immeasurable better off in terms of their income, social position, future opportunities, etc.e troubled positions they find themsleves
trendisnotdestiny - July 1, 2010 at 1:39 am
Intered,”I think anyone who understands the issues is concerned with the potential for high debt load. A few things have yet to come out that may broaden our view and corresponding judgment.”Your comment reminds me of 2005 Bankruptcy Bill when huge amounts of lobbying money from the banking lobby went into manufacturing claims that people were ‘gaming the system’ en masse. This student initiated abuses argument makes me physically sick. However, Please go on —- student break even point —- would love to hear about this especially after you referred to public universities abuse of tuition over the years (are they victims of false promises by students who fail or financial overlords who oppress through increases in tutitions) Robert please explain the dichotomy) I know you love to have an uninformed audience to bark at in the tunnel vision of outliers and rantings of ideology…. Your last statement is drivel. High debt loads indicate a lot things. Here is a list so you might stop and consider before writing so myopically:HIGH DEBT LOADS MEAN:1) Immediate budgetary pressures for launched young adults2) Already living in a pay to play world (generational inequity)3) More malleable/exploitable – Limits choices (have to do it)4) Delays Family Formation (marriage, children, social relations) * women (children-occupation tensions)5) Delays Longterm Savings in a Roth IRA (paying off education) * pay yourself first or pay your lender? You know the rule6) Two income family formation means twice the debt load7) Changes the Nature of Divorce (domestic violence or abuse) * the wrong relationship leads to financial impoverishment8) Poor Job Prospects of Free Market (supply and demand based) * US is known for their undereducated, overpriced labor force Outsourcing, Off-Shoring and Competing with Asia9) Systemic Debt at all levels: Corporate, Gov’t, State, Consumer10) Income, Social Position and Future Opportunities * IF NOTHING GOES WRONG, THEN MAYBE Lastly,”Too many posts are dominated by uninformed opinion, tunnel vision on outliers, and the ideological ranting that you are seeing.” Robert, I agree… maybe you should sell crazy someplace else?
intered - July 1, 2010 at 12:29 pm
@trendisnotdestiny,A generous read of your 10 points reveals that some are either conflations/restatements of each other or are causally irrelevant to the topic. Again, generous. Some readers may find them unfocused ranting.The remaining concerns, those that I can relate to the topic, would appear to create a burden upon which you have yet to deliver. Stay with me Mr. Trend.The second most important principle in evaluation research goes to the “Compared to what” question. If the concerns that you express (I am assuming you are offering them as concerns; the actual structure of your locutions is all over the board) accrue to the current situation, can you answer the “compared to what” question? I made specific points, properly framed as conceptual or empirical in nature. My empirical claims are disprovable on empirical grounds. My conceptual claims can be evaluated for their soundness via common criteria (clarity, fact-congruence, internal and external consistency, etc.). You, on the other hand, whip fact, concept, ideology, and a good measure of anger into a soup that is nearly unintelligible below the level of metaphor and emotion.Let’s see if you can be specific. You imply the existence of an alternative world in which the concerns that you express are either vitiated or do not apply. Perhaps you could enlighten us as to where we will find that world or how we might attain it? Even more pleasant would be seeing you propose a practical solution that did not rant atop the soapbox of your political ideology. You will certainly have my support for any workable solution that lives in the real world.Finally, after weeks of observing the hypocrisy defined by hiding behind a cloak of anonymity while stridently criticizing the integrity, openness, and motives of the good work of others (on all sides), I am calling you out Mr. Trend. Either become real or be labeled hereinafter as someone lacking the courage and principled conviction to stand behind his words. It doesn’t show much character to take potshots and then hide.- Robert W Tucker
trendisnotdestiny - July 1, 2010 at 3:02 pm
intered,Maybe this will address specificity for you.”A generous read of your 10 points reveals that some are either conflations/restatements of each other or are causally irrelevant to the topic. Again, generous. Some readers may find them unfocused ranting.”Blah, Blah, Blah… no real comment or dialogue here.. try to establish good intentions with legitimizing judgment (sounds like a white male with privilege to me) — could you colonize this space any more?”The remaining concerns, those that I can relate to the topic, would appear to create a burden upon which you have yet to deliver. Stay with me Mr. Trend.” Alex, I’ll take how to manufacture legitimacy using a condescending tone and unreflective dialogues for $200 please.”The second most important principle in evaluation research goes to the “Compared to what” question. If the concerns that you express (I am assuming you are offering them as concerns; the actual structure of your locutions is all over the board) accrue to the current situation, can you answer the “compared to what” question? I made specific points, properly framed as conceptual or empirical in nature. My empirical claims are disprovable on empirical grounds. My conceptual claims can be evaluated for their soundness via common criteria (clarity, fact-congruence, internal and external consistency, etc.). Yeah… we all know… you are so great, so smart and empirically legitimate… neoconservative hero of Johns Hopkins bravo! You spend a lot of time telling us how much authority that you have. Your understanding of people may not be so well developed. “You, on the other hand, whip fact, concept, ideology, and a good measure of anger into a soup that is nearly unintelligible below the level of metaphor and emotion.”The criticisms you wage are fair at least initially. However, permit me to introduce something other than my own thoughts:1) Immediate budgetary pressures for launched young adults (Tamara Draut, Strapped 2006)2) Already living in a pay to play world (generational inequity) (Cary Nelson, No University is an Island, 2010)3) Malleable/exploitable Laborforce Limits choices (have to do it) (Barb Ehrenreich – Nickel and Dimed, 2001)4) Delays Family Formation (marriage, children, social relations) * women (children-occupation tensions) (Allan C Carlson, Anti-Dowry? The Effects of Student Loan Debt on Marriage and Childbearing, December 2005)5) LT Debt delays Longterm Savings in a Roth IRA * pay yourself first or pay your lender? You know the rule (Robert Manning, Credit Card Nation, 2000)6) Two income family formation means twice the debt load (Elizabeth Warren & Amy Tyagi, Two Income Trap, 2003)7) Debt Changes the nature of Divorce (dom. violence or abuse) * the wrong relationship leads to financial impoverishment (Skrogrand, Schramm, Marshall & Lee, Newlywed Debt, 2005)8) Poor Job Prospects of Free Market (supply and demand based) * US is known for their undereducated, overpriced labor force Outsourcing, Off-Shoring and Competing with Asia/India etc (Krugman, Stiglitz, Kuttner, & Roubini websites)9) Systemic Debt at all levels: Corporate, Gov’t, State, Consumer (Bill Moyers, Inside the Banking Crisis Anthology, 2009) (Bill Black, Best way to Rob a Bank is to own one, 2005) (Dean Baker, Plunder & Blunder, 2009) Government Accounting Offices, CRL, CFA, Demos etc.10) Income, Social Position and Future Opportunities * IF NOTHING GOES WRONG, THEN MAYBE There are a lot of smart people with credentials who believe that there is important work to be done in the narrows between the ideal and real, between was it profitable and necessary and between what is maintains power and what disrupts it: Naomi Klein, Noam Chomsky, Cornel West, bell hooks, Noreena Hertz etc…I do not see this as ‘a soup of anger’ or facts whipped up to suit my own ideological interests, but a voice forum for those without access… “You imply the existence of an alternative world in which the concerns that you express are either vitiated or do not apply.” Nope… projecting a bit here?”Perhaps you could enlighten us as to where we will find that world or how we might attain it? Even more pleasant would be seeing you propose a practical solution that did not rant atop the soapbox of your political ideology.”Well Robert, my first response might be of help… but you failed to respond to it other than diminishing it… Ewen Cameron anyone?”You will certainly have my support for any workable solution that lives in the real world.”Seriously doubt this to be true… no empirical evidence for it”Finally, after weeks of observing the hypocrisy defined by hiding behind a cloak of anonymity while stridently criticizing the integrity, openness, and motives of the good work of others (on all sides), I am calling you out Mr. Trend.”Does this mean that I will have to cite you in my memoir now? “Either become real or be labeled hereinafter as someone lacking the courage and principled conviction to stand behind his words. It doesn’t show much character to take potshots and then hide.”Ultimatums, hmmmm have you been involved in our foreign policy decisions for the last several decades? Chile? Iraq? All joking aside, you haven’t been a bastion of character invoking your authority at every turn. This is a message board where we can express our views anyway that we would like without harming or damaging anyone. If it is your intention to marginalize my space here, then do it! But don’t try to claim the victim of unfair criticism role with that of the avenging academic who is determined to get justice. Too many white male privileged redemption narratives out there already….Lisbeth Salander
goxewu - July 3, 2010 at 10:45 am
Ms. Salander:Before you get out the Crazy Glue and your tattooing needle, you should understand that there’s nothing wrong with your point of view that an expensive hands-on executive retreat with other dynamic education decision-makers in Idaho–where you could concentrate on your data-centered up-to 50:1 ROI pertaining to facilities management and pre-sales support of enrollment enhancement, combined with Market-Maker (TM) and a full SWOT analysis, leaving you well-positioned for future mission-critical vendor management–couldn’t cure.
trendisnotdestiny - July 5, 2010 at 4:00 pm
Goxewu,HOF post!