Student Loans a Lot Like the Subprime Mortgage Debacle, Watchdog Says • Hacker News Board

Re: Student Loans a Lot Like the Subprime Mortgage Debacle, Watchdog Says

#101

Post by zrail » Wed, Dec 11, 2019, 8:02 AM UTC

m463 wrote: post #39

psaux wrote: post #23

My wife and I lived a very simple lifestyle for years (7ish) after college so we could pay off student loan debt. Awesome Ford Tempo car, local honeymoon, Studio apt for first 5 years, limited eating out. She has a masters (more loans), and is a teacher. So that made it even tighter. Is there any data on if folks with student loans are living above their means? I.e new TV’s, new car lease, vacations, ordering out. I…

> Is there any data on if folks with student loans are living above their means? Literally every single friend of mine bought a new car when they graduated from college and got a job. Anecdotal, but I suspect it is more common than people realize. It doesn't mean they were living above their means, but I think buying a new car at the start might be a financial misstep.

I did that in 2007. I loved that car but it definitely was not a money wise decision. I also flew across the country five times that year because I was so homesick.

Re: Student Loans a Lot Like the Subprime Mortgage Debacle, Watchdog Says

#102

Post by apatters » Wed, Dec 11, 2019, 8:03 AM UTC

magnusss wrote: post #83

It seems like the majority of the commenters here are missing the point. The increasing rate of student loan default is not a result of kids who go to a four year college, graduate with an unmarketable degree in philosophy, fall on hard times and then can’t pay their bills. It's kids who go to barber or cosmetology school, take on $30k of debt, then realize they don't make enough money cutting hair to support themsel…

Sure, the most relatable problem is that a lot of college grads have debts they can't pay off.

That's not really the focus of the article though, which is an introduction to a potentially calamitous systemic problem.

The 2008 crash happened because there were about $1.7T of mortgage-backed securities (MBS) floating around in the financial system. These were essentially sliced up pieces of numerous mortgages that had been made to credit-unworthy home buyers. When these buyers started defaulting due to a weak economy, the MBS became worthless and financial institutions started going belly up.

So with that said, here are a few facts:

- There's about $1.6T of outstanding student loan debt today, and it's growing.

- Many of the borrowers who took out these loans are demonstrably credit-unworthy, as the .gov link demonstrates, they are already defaulting in growing numbers.

- Sure enough there's a thing called SLABS out on the market (Student Loan Asset Backed Securities). Very similar to a MBS but the collateral is student loans.

I don't know how widely SLABS are spread throughout the financial system at this point.

There are also differences vs 2008, biggest one is that most of the student loan debt is government guaranteed.

That last point gets used to promote SLABS but it seems to me that it just makes their value leveraged to political winds. Here is an example scenario: economy softens, leading many holders of student loan debt to vote for Bernie Sanders because he promises to forgive their debt. He gets elected and follows through on his promise. SLABS all over the system become worthless, banks end up much poorer than they thought they were, and the death spiral begins again.

I don't know what will happen, you can't simplify the workings of the economy into tweets and soundbites. But there is certainly cause for attention and concern.

Re: Student Loans a Lot Like the Subprime Mortgage Debacle, Watchdog Says

#103

Post by listenallyall » Wed, Dec 11, 2019, 8:03 AM UTC

hermitdev wrote: post #56

m463 wrote: post #39

Earlier quoted context omitted.

> Is there any data on if folks with student loans are living above their means? Literally every single friend of mine bought a new car when they graduated from college and got a job. Anecdotal, but I suspect it is more common than people realize. It doesn't mean they were living above their means, but I think buying a new car at the start might be a financial misstep.

I think it depends on the car and the job. I graduated in 2003 and had to buy a car. I was driving an 88 Chevy Blazer that was starting to hit around $750 per month in maintenance. Final straw was when a cylinder was losing compression. This was already on an SUV that had its engine rebuilt and had more than 165K miles on it. It had a Kelly Blue Book value of about $100. So, couple months out of college, I bought a m…

Your frugality and dedication to eliminating debt is admirable. And it is true that many younger people (and older people too!) prefer spending over saving & reducing debt.

However... if you were making $100k 4 years after graduating college, you were doing better than probably 97% of people who started college at the same time as you (I don't say graduate, because many didn't). Maybe 99%.

Re: Student Loans a Lot Like the Subprime Mortgage Debacle, Watchdog Says

#104

Post by techsupporter » Wed, Dec 11, 2019, 8:08 AM UTC

the_watcher wrote: post #44

diogenescynic wrote: post #38

Earlier quoted context omitted.

Why was it necessary to change student loans to being non-dischargeable in bankruptcy? That is a recent change and it shifts the burden from banks having to evaluate the loans they are making which would likely mean fewer loans and thus less money earned from interest. It seems like student loans should be treated like any other unsecured loan. And really student loans shouldn’t even be necessary for public universit…

> Why was it necessary to change student loans to being non-dischargeable in bankruptcy? That is a recent change It was in 1976, not very recent.

> It was in 1976, not very recent.

The person to whom you are replying is referring to the poorly-named Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005. That law expanded the exemption from discharge in bankruptcy of student loans to be any student loan, including privately-issued student loans, not just ones issued by the government through a federal or state program.

This is why you see companies like SoFi running around offering screamingly low rates on student loans. Because they are private, those companies need not offer any of the protections a government loan offers (income-based repayment, forbearance options in the event of loss of income or disability, and so on) but retain the power to garnish tax refunds and the loans cannot be discharged in bankruptcy.

Re: Student Loans a Lot Like the Subprime Mortgage Debacle, Watchdog Says

#105

Post by zrail » Wed, Dec 11, 2019, 8:10 AM UTC

pgcj_poster wrote: post #99

golergka wrote: post #96

As a non-american, what makes me curious is why do black students borrow twice as much money as other groups. Do they choose more expensive degrees?

Black Americans are poorer than most other groups, and I suspect that they're less likely to get parental support paying for college.

Let’s be very clear: Black Americans are poorer because of racist policies that kept them out of the huge post-WWII governmental benefit programs. Things like the GI bill and veteran home loans, and homeownership in general were white-only for many years, allowing that group to build generational wealth that continues to this day.

Re: Student Loans a Lot Like the Subprime Mortgage Debacle, Watchdog Says

#106

Post by listenallyall » Wed, Dec 11, 2019, 8:10 AM UTC

ahnick wrote: post #2

Let's say that one thinks eventually a large percentage of for profit private colleges will have to close their doors. (think small ones that no one has ever heard of, not your Ivy's) What's the analog to The Big Short here?

why not just short their stock? a bunch are publicly-traded, DeVry, Strayer, Grand Canyon...

Re: Student Loans a Lot Like the Subprime Mortgage Debacle, Watchdog Says

#107

Post by apatters » Wed, Dec 11, 2019, 8:11 AM UTC

apatters wrote: post #102

magnusss wrote: post #83

It seems like the majority of the commenters here are missing the point. The increasing rate of student loan default is not a result of kids who go to a four year college, graduate with an unmarketable degree in philosophy, fall on hard times and then can’t pay their bills. It's kids who go to barber or cosmetology school, take on $30k of debt, then realize they don't make enough money cutting hair to support themsel…

Sure, the most relatable problem is that a lot of college grads have debts they can't pay off. That's not really the focus of the article though, which is an introduction to a potentially calamitous systemic problem. The 2008 crash happened because there were about $1.7T of mortgage-backed securities (MBS) floating around in the financial system. These were essentially sliced up pieces of numerous mortgages that had…

Also to supply some context for those numbers (this is probably way too simple and wrong in some way though)

The size of the US economy in 2008 (US GDP) was around $20T. There were $1.7T of MBS. That's about 8.5% of the economy which mostly didn't exist, it was all debt for which the collateral was a fiction because the borrowers didn't have the money to pay off their mortgages.

The size of the US economy today is around $25T. So student loans are around 6.4% of the economy at present (and growing) and that money may mostly not exist either, because we know these borrowers are having real problems paying and the economy isn't even doing all that poorly at the moment.

Food for thought.

Re: Student Loans a Lot Like the Subprime Mortgage Debacle, Watchdog Says

#108

Post by eirini1 » Wed, Dec 11, 2019, 8:18 AM UTC

psaux wrote: post #23

My wife and I lived a very simple lifestyle for years (7ish) after college so we could pay off student loan debt. Awesome Ford Tempo car, local honeymoon, Studio apt for first 5 years, limited eating out. She has a masters (more loans), and is a teacher. So that made it even tighter. Is there any data on if folks with student loans are living above their means? I.e new TV’s, new car lease, vacations, ordering out. I…

living in your own studio (as opposed to a double room in a shared appartment), owning a car and going eating out on occasion definitely sounds much more luxurious than how most college graduates that I know of live right now. I think if you were to graduate today this would be unfeasible considering housing costs.

Re: Student Loans a Lot Like the Subprime Mortgage Debacle, Watchdog Says

#109

Post by joe_the_user » Wed, Dec 11, 2019, 8:23 AM UTC

ponsin wrote: post #63

planetzero wrote: post #15

We need to get rid of student loans. The problem is that Universities don't ever need to worry about a student defaulting and can keep increasing the prices of tuition with impunity. If they default, they don't care, because the money is already in the bank. If universities had to worry about students defaulting, they would get rid of bullshit degrees that don't result in an actual job and the prices would come done…

Why? If I take out a loan in order to go on a cruise, the cruise company is not responsible if I default. In fact, with almost every purchase that involves a loan, the company offering the loan is different than the company offering the product / service. If responsibility fell on the university, then they could just refuse to accept people who take out loans. The result being that only rich people could go to colleg…

If I take out a loan in order to go on a cruise, the cruise company is not responsible if I default.

Aside from the other points, this isn't an honest of the overall situation of industries and credit. For example, The real estate industry and the car industry are highly focused on the buyer's ability to pay. The company might not be legally responsible for a buyer who defaults and it may a different company making the loan but the entire industry has to take a hit and they avoid taking those hits when they can (periodic easy-credit situations can distort this but still).

Which is to say that the government giving student guaranteed credit for school certainly distorts things relative to other industries (even compared to housing, where the government is also involved heavily).

Re: Student Loans a Lot Like the Subprime Mortgage Debacle, Watchdog Says

#110

Post by avalys » Wed, Dec 11, 2019, 8:25 AM UTC

apatters wrote: post #107

apatters wrote: post #102

Earlier quoted context omitted.

Sure, the most relatable problem is that a lot of college grads have debts they can't pay off. That's not really the focus of the article though, which is an introduction to a potentially calamitous systemic problem. The 2008 crash happened because there were about $1.7T of mortgage-backed securities (MBS) floating around in the financial system. These were essentially sliced up pieces of numerous mortgages that had…

Also to supply some context for those numbers (this is probably way too simple and wrong in some way though) The size of the US economy in 2008 (US GDP) was around $20T. There were $1.7T of MBS. That's about 8.5% of the economy which mostly didn't exist, it was all debt for which the collateral was a fiction because the borrowers didn't have the money to pay off their mortgages. The size of the US economy today is ar…

You’re not comparing equivalent quantities. GDP is an annual figure (Gross Domestic Product), and you are comparing it to total outstanding debts that are paid off over decades.

Total asset value of the US economy is about $270T with about $150T in outstanding debt. So the relative proportions are not as extreme as you’re representing.