In the US, few students get much free money these days. Instead they get loans which charge hefty origination fees - like 5 points, and which are almost impossible to discharge via bankruptcy...despite the fact that many of them are backed by insurance and those which are not insured typically compound interest during the time the student is in school (typically on the full principle).
The bloat has not been fueled by anything but massive consumer debt foisted on those least experienced with personal finance and with the least work experience and who these days are lucky to find an entry level professional position.
I agree. Most of those loans, however, are sponsored by the government and can't be defaulted on. No normal lender would give an 18 year old $50,000 to get a degree in anthropology, because they are unlikely to get it back. When the student is legally obligated to pay it back, then there is much little risk to the lender.
If defaulting on student loans were possible, then the cost of college would decrease.
But this is exactly how UK student loans work - you only pay them off if you make more than X amount of money per year(and then the amount of money you pay off is proportional to how much you make), and if you never make that much money, then you never pay it off and after 40 years the loan is forfeit.
The same loan/tuition dynamics don't apply in the UK, because:
- The government controls undergraduate tuition fees for UK/EU students (currently capped at 9k per year).
- Until about 25 years ago, undergraduates' tuition fees and living expenses were paid by the state. These two direct subsidies have gradually been replaced by student loans. It will take some time for people's tolerance for larger and larger student loans to match that in the US.
How would allowing defaults on government guaranteed student loans lower the cost of college? Cost would likely increase for most students.
If loan interest rates were increased to compensate for the additional losses this would increase the cost for everyone getting a college loan who doesn't default. And since default has significant costs overall costs would also go up. Lastly this would reduce the incentive to make wise decisions on educational choices.
On the other hand if interests rate remained the same then this be an would increase government subsidies and thus demand and thus costs for everyone. And again would reduce the incentives to make sound financial choices on education spending.
Either way costs would very likely increase for most students and we would get a less efficient education system.
> No normal lender would give an 18 year old $50,000 to get a degree in anthropology, because they are unlikely to get it back. When the student is legally obligated to pay it back, then there is much little risk to the lender.
I think the argument goes like this:
1. Allow college debt to be defaulted on
2. After some time the government (or banks) will start to assess the risk of making student loans
3. Some time after that the loan market for students will be less crazy and more rational
4. With enrolled students able to spend less, colleges will be forced to charge less or lose students
5. Some college close, others stay open
6. College now costs a more reasonable amount of money
We're seeing the same dynamic in the college market as we saw in the housing market. The banks were typically in the business of saying "no, you can't do that" to people who were borrowing money, thus enforcing restraint on those who didn't have enough on their own. Once the banks stopped saying "no" when people were not a good credit risk, everyone went nuts and bid housing up to rather crazy levels. Housing prices are inversely proportional to interest rates in a very nonlinear way.
The situation is similar in the college market. The interest rates are more sane, but the risk assessment is much worse. There's all kinds of loan money sloshing around and not a tremendous amount of out-of-pocket money. If college had to be paid out of pocket you'd see lower enrollment or lower prices or both. Allowing defaults will force the market from largely loan-funded to a more reasonable mix of loan and out of pocket funding.
Don't forget that this debt is massively subsidized by government. Do you think a bank would give a traditional loan for hundreds of thousands of dollars to a middle-class student straight out of high school pursuing a Bachelor's Degree in, say, history?
There's a $57,500 lifetime limit on federal student loans for undergraduates. The people you see on the news complaining about their $200,000 english degree debt are people who have rich family who cosigned a bunch of private loans for them. (And who will make the loan payments when the english graduate inevitably can't.)
With federal loans, you can only take out at most $5,500/year as an 18 year old, which doesn't do a lot. Cost of attendance in my home state is $20,000/year, so that's about 25% of what you need to go.
The bloat has not been fueled by anything but massive consumer debt foisted on those least experienced with personal finance and with the least work experience and who these days are lucky to find an entry level professional position.