Wednesday, August 29, 2012

POTUS Talks Law School Student Debt... Not Really

As some of you fine interweb trolls (like myself) know, our supreme commander shined light on the dark corners of the internet today by doing an AMA (ask me anything) thread on the always educational  One of the questions posed (to which he provided a response) was regarding student debt and, in particular, law school debt.  Here is the question and answer:

I am recent law school graduate. Despite graduating from a top school, I find myself unemployed with a large student loan debt burden. While I'm sure my immediate prospects will improve in time, it's difficult to be optimistic about the future knowing that my ability to live a productive life -- to have a fulfilling career, to buy a house, to someday raise a family -- is hampered by my debt and the bleak economic outlook for young people. I know that I'm not alone in feeling this way. Many of us are demoralized. Your 2008 campaign was successful in large part due to the efforts of younger demographics. We worked for you, we campaigned for you, and we turned out in record numbers to vote for you. What can I say to encourage those in similar situations as I am to show up again in November? What hope can you offer us for your second term?
I understand how tough it is out there for recent grads. You're right - your long term prospects are great, but that doesn't help in the short term. Obviously some of the steps we have taken already help young people at the start of their careers. Because of the health care bill, you can stay on your parent's plan until you're twenty six. Because of our student loan bill, we are lowering the debt burdens that young people have to carry. But the key for your future, and all our futures, is an economy that is growing and creating solid middle class jobs - and that's why the choice in this election is so important. The other party has two ideas for growth - more taxs cuts for the wealthy (paid for by raising tax burdens on the middle class and gutting investments like education) and getting rid of regulations we've put in place to control the excesses on wall street and help consumers. These ideas have been tried, they didnt work, and will make the economy worse. I want to keep promoting advanced manufacturing that will bring jobs back to America, promote all-American energy sources (including wind and solar), keep investing in education and make college more affordable, rebuild our infrastructure, invest in science, and reduce our deficit in a balanced way with prudent spending cuts and higher taxes on folks making more than $250,000/year. I don't promise that this will solve all our immediate economic challenges, but my plans will lay the foundation for long term growth for your generation, and for generations to follow. So don't be discouraged - we didn't get into this fix overnight, and we won't get out overnight, but we are making progress and with your help will make more.

Now, my disdain for most things liberal aside, this feels an awful lot like a non-answer.  Maybe because it is a non-answer.  In any event, I think I have seen people mention student debt once or twice on this blog, so, well, you folks can feel free to have at it again.

Also, for those interested, here is the link to the AMA Reddit thread.


Blogger Danny Zee said...

It is a non-answer. And the student loan bill will not have a significant impact because education costs have continued to rise.

The education finance system is a serious economic problem that this country has to reckon with. The sad thing is that there is already an economic bomb set by the current system, and it may be too late to defuse it.

Student finishing college over the last 10 years, and in particular those with graduate degrees, have been saddled with higher and higher debt but weak job prospects. Now, whether or not you feel bad for those students, this sets us up for another collapse of the housing market, and one that will likely be worse than the most recent one.

Throughout the 1960s, the average age of first time home buyers was in the low- and mid-20. (I could source this better, but whatever; it is true.... Today, how many 23 year olds are buying property? The average age of property buyers is WAY up from the 1960s, and it is going to get much worse in the next decade, as those with student loan debt are much less likely to buy homes. The real effect of this demographic shift has not yet hit.

The President's "non-answer" fails to address the fact that our current education finance "system" is another bubble. Remember the days when all we heard about was how ridiculously easy it was to get a home loan? And how that was a cause of the housing bubble? Well, I certainly remember how easy it was to borrow $250,000+ to go to school. With no collateral. And no immediate concern with how I would pay it back. I don't mean to suggest that it is a bad idea to make it easier to pay for education; but ANY time you encourage lending decoupled from a sober consideration of the ultimate cost of that borrowing, you wind up with people drunk on credit.

The effects of the current lending system include: (1) banks get a huge windfall, considering they can lend without any real concern that borrowers will be able to discharge the loans via bankruptcy (note: even the housing market has at least this counterweight to the banks' economic grip on borrowers); (2) students are, and have been, encouraged to seek education regardless of the cost, because, hey, the money is so easy to get; and (3) schools KNOW that there are lenders standing by to finance higher and higher tuition, so the need for stopping the ever-increasing, what-should-be-prohibitively costly tuition is put off for another day, even though it should be treated as the immediate calamity that it is.

If the President were serious about avoiding the student loan debt bubble bursting (i.e., either massive waves of defaults, or the collateral effect of having generations of 20- and 30-somethings with severely diminished purchasing power), he would have to talk about something more direct than the general economic issues he's already been hashing out in his campaign. He could talk about a tax break for student loans--imagine if you could pay student loan interest with pre-tax dollars? That would be a far more economically efficient tax subsidy (i.e., it would promote a thing of value to society--education) than the home mortgage interest rate deduction, which is enormous and very inefficient (it bestows increased spending power on people who already have a modicum of spending power; it may promote home ownership, which one may (convincingly or not) argue is some sort of social good, but it is a tax benefit that overwhelmingly benefits the entrenched, monied class).

I would argue that ALL education expenses should be payable with pre-tax dollars, but I guess that would take the fantasy too far.


8/29/2012 7:06 PM  
Blogger Patrick said...

That's funny. "Non-answer" was exactly the word that came to my mind when I read this as well.

8/29/2012 8:00 PM  
Blogger SJ said...

A testamentary trust is a trust which arises upon the death of the testator, and which is specified in his or her will.

8/30/2012 1:56 AM  
Anonymous Debt Help said...

You are right. There is no better way to feel good than to tell the truth. Also, regarding student loans as good debt could be the best outlook you could have in your situation. After all, that debt is with good intentions..

8/30/2012 2:26 AM  
Anonymous Anonymous said...

Danny Zee -

You CAN pay your student loan interest with pre-tax dollars under the existing student loan interest deduction. Whether the allowable deductions are large enough is up for grabs.

8/30/2012 8:45 AM  
Anonymous Anonymous said...

You get a better deduction on mortgage interest. That's why it's smart - when you're at a point that you can - to refinance your home and use the cash to pay off your student loans.

8/30/2012 8:48 AM  
Anonymous Anonymous said...

Obama has created a generation of wage-slaves through this debt bubble and hasn't had the courage to do what is right: send this to a free market system with discharge-ability.

The current system completely ignores market signals. Despite the fact that most Boalties have a 100% of paying back loans, the interest rate is 8%. Despite the fact that mental patients who attend Golden Gate Law will have no chance of paying back loans, same exact rate. Boalties are currently subsidizing all the retarded school decisions in their interest rates, which is completely unfair. Boalt students should pay 3%, and Golden Gate students 40%.

The government money student giveaway programs haven't benefited anyone except rich administrators raking it in and laughing to the bank. Bad Students go to subpar schools and get worthless educations, and good students are stuck with high interest rates from other's retarded decisions.

Why students continue to put that Obama sticker on their Pruis, and encourage a President whose educational policy is free worthless educations in order to create a generational slave class is beyond me.

8/30/2012 8:51 AM  
Anonymous Anonymous said...

Obama has created? That makes no sense. This system has been in place for years!

8/30/2012 8:53 AM  
Blogger Patrick said...


The problems with the student loan interest deduction, particularly for law students, are (1) it is capped at $2,500 per year and (2) it begins to phase out for incomes over $60k, and at $75k the deduction is barred. (Higher caps for joint filers.) So it's not much help to most law students.

The problem with refinancing a home is that the vast majority of students graduating with heavy debt don't own a home to refinance. They could buy one (by using money that they could have put toward their loans) but that will not give them the equity to refinance. So their best option is to buy and hope the home appreciates in value, or try to improve its value, both of which amount to bets on the home as an investment. The question people in that situation should ask themselves is this: is the potential return of the difference in interest between a home loan and a student loan worth the risk the investment will not perform, when compared to the guaranteed 7-8% return the borrower can get by just paying the loan faster? I don't think it is.

8/30/2012 9:23 AM  
Anonymous Anonymous said...

In the FACE, ATL! We beat you to this shit:

8/30/2012 9:48 AM  
Anonymous Joe said...

It does not make sense to bemoan the student debt "bubble" and then to propose additional federal subsidies (i.e., tax deductions) for student debt. The student debt "bubble," which in turn has fueled the skyrocketing cost of higher education, is in large part fueled by federal subsidization. Federal guarantees allow private lenders to lend willy-nilly with no real downside--just like federal insurance of mortgages helped inflate the massive housing bubble (accentuated of course, by the home mortgage interest deduction and mortgage securitization).

The root of the problem is that we have decided to fund public education through guaranteed student lending rather than direct support for universities. Subsidized lending entrusts students with the choice of how to spend public money but in the process saddles them with debt that they are too young or naive to understand. At the same time, universities can keep raising tuition because they know that no matter how high it goes, students will borrow and pay because (a) they are stupid and (b) federal guarantees ensure that there is unlimited credit.

The real solution here is to stop pouring money into student loan subsidies and guarantees. Students think they ought to be able to attend whatever institution they want, study whatever subject they want, and then worry about paying for it after they graduate. This is the lie that our student loan system perpetuates, with dire consequences on the back end.

If we want robust, public, and accessible education, we should be funding public institutions directly--not pumping even more public resources into the lending bubble.

8/30/2012 2:10 PM  
Blogger Patrick said...

The student loan bill tried to address this problem by cutting the banks out of the middle of the process; it used to be that students borrowed from banks and the government backed the loans. This was a bonanza for banks because it created risk free lending. The bill fixed that by taking the banks out of the picture and having students borrow directly from the government. I take it your point is that the bill should have done the opposite? I.e., students should be borrowing from banks and the government should not be backing anything at all? I've never thought of that. What effect would it have on access to education by the poor?

8/30/2012 2:18 PM  
Anonymous Joe said...

Well, my point is that we need a paradigm shift. Direct lending denies the banks a windfall, but it's still a bonanza for universities. There is no cost control because lending expects students to internalize the cost of their borrow. But students are naive and do not feel the impact of their borrowing until long after they make the choice of where to go (and, of course, how much to spend). I think that direct funding of low-cost, public institutions is a better way to make education available to the poor.

8/30/2012 3:21 PM  
Anonymous Joe said...

I guess to answer your question directly: Yes. I do think the bill should have done the opposite. Federal support for student lending in any form has an undesirable inflationary effect on the cost of education. And, in any event, our student loan system is not tailored to helping the poor. Interest rate subsidies are nominally need-based. But the free credit (i.e., guarantees or direct lending) is available to all (as far as I can tell).

8/30/2012 4:05 PM  
Anonymous Anonymous said...

go back and watch those youtube clips of Barney Frank cajoling Fannie and Freddie into making housing loans to people who couldn't afford them and then saying that he was comfortable "rolling the dice."

the government has been doing the same thing with educational loans and the president's non-answer just promises more of the same.

the local governments set public union pensions as if money can be created by fiat.

some in the federal government believe that you can deficit spend forever without consequence (because in the long run the boomers will be dead before the bill comes due).

if something can't go on forever, it won't.

if we elect politician who sell us financial fairy tales, can we complain?

8/30/2012 8:49 PM  
Anonymous Danny Zee said...

Yeah 8:45/8:48, the interest rate deduction is basically meaningless to those with HUGE student debt. If you financed your education to the tune of $200k+ (and I'm not talking about whether that is EVER a good idea) and you want to pay that off, you are going to need a gross income above the threshold for the current interest rate deduction to apply, and your interest payments will be way higher than $2500, even at today's low interest rates..

8/30/2012 11:49 PM  
Anonymous Danny Zee said...

And Joe,

I don't disagree with your premise, but I do disagree with the suggestion that a tax break for education costs, given the current messed up situation, would not be an improvement.

It should all be scrapped and rebuilt with the right goals and incentives in mind. But perfect is the enemy of good.

8/30/2012 11:56 PM  
Anonymous Kuruvilla said...

I don't have a strong background in economics, but it seems pretty intuitive to me that a system of loans or grants that are available to all comers is a raw deal for students.

If an education costs $4,000, and students are actually paying that price, granting every student $4,000 won't (in the long term) make that education any cheaper for students. In the absence of some sort of price control, schools will just raise the price of education by $4,000. That way, students end up paying $4,000--which they were already willing to do--and the government pays an extra $4,000. The only entities that benefit are the schools. This is the inflationary effect Joe mentioned.

I guess an "econ" counterargument is that as the price rises, other institutions will enter the market, which will prevent the price from rising further. But I'm not sure that's true for higher education, where institutional "prestige" or recognition is part of what you are buying. The difficulty in accumulating such prestige or recognition erects a high barrier to entry. I think this is called inelasticity of supply. (?)

Loan's aren't quite as bad, but, as others in this thread have pointed out, they have their own downsides. Students, unlike educational institutions, are not sophisticated parties. It seems to me that they often can't or won't attach a "rational" value to their education. I know I never really calculated the total cost of my education and compared it to my expected increase in income. This allows schools to raise the cost of programs, secure in the knowledge that students will keep signing on the dotted line. And this, in turn, leads to a terrible version of the mortgage mess--defaulting students who can't declare bankruptcy and can't get out from under the debt.

I think we are already there. I have friends with completely unsustainable debt loads. Unless they win the lottery, they are going to be making relatively large monthly payments for a long, long time. As Danny Zee pointed out, this delays a number of milestones, including home ownership, having kids, and retirement.

Finally, I think the push for a more robust student loan interest deduction is a terrible idea (even though it could turn out to be a huge windfall for me). The "savings" generated by that deduction will probably just get priced into the cost of an education. So while those who have already taken out loans will benefit, future generations of students won't see a dime, and the government will take a tax hit. The schools, of course, will do fine.

/end depressing musings

8/31/2012 12:04 AM  
Anonymous Kuruvilla said...

Um... that should be "Loans" not "Loan's."

8/31/2012 12:06 AM  
Anonymous ajay said...

nice blog

9/25/2012 10:58 PM  
Blogger Darnell King said...

For as little as I care about politics, this is the one thing that will define Obama's presidency. If he can offer debt help to all of the recent college grads, maybe he can influence the next generation of the workforce to not take their educations for granted like the current generation does. In 20 years when all of the recent college grads look back, will they be offering more assistance to the generation that is entering/leaving college then? Will we be able to better manage out debt?

10/01/2012 1:34 PM  
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