Ripping Off Young America: The College-Loan Scandal

Is it the loan companies' fault for trying to provide loans for students who likely can't pay them back? If so, should loan companies be able to discriminate based on which major a student chooses? Or on their GPA? Or likelihood of landing a job that pays $X/yr?

Is it the government's fault for not stepping in to make sure that a student can't get a loan that they can never hope to repay?

Ultimately I think it falls on a student for making a bad choice. I agree that it sucks that a student can't discharge the loan (as someone mentioned above). I'm not really sure how to fix that: if it's dischargable, loans are going to be a lot harder to get, then the government needs to provide the loan. Then we get a mixture of the two scenarios I mentioned above.

But I guess as a person I am a big believer in personal responsibility. You make your choices, just like I've made mine.

Usually, people bankrupt out or sell assets, creating a cascading effect (lots of bankruptcies or lots of selling). That ends a bubble. But student loan borrowers can't do that - they can't get out of the game via bankruptcy (student loan debts will even be extracted from your social security payments, should that be required), and they can't sell the (possibly overpriced) asset they bought, a university education. There's no exit possible.

So for current borrowers, they're totally trapped, forever. Leaving the country is their only escape, which itself is difficult. Many of them will spend their entire lives, from age 18 until they die of old age, on the edge of poverty with an unpayable loan balance looming over their heads. The bubble can't pop! The only way there can be a pop is if they all commit suicide at once.

What it can do is slowly deflate. What this looks like: an entire generation decides, possibly through seeing the suffering endured by their parents, that college is a bad deal. "Son, don't make the mistake I made." They stop going. No borrowing, no college attendance.

My prediction: emigration and noticeably lower college attendance in the future.

Yes, but it was an offer they couldn't refuse. One of my favorite results from game theory is that sometimes more options lead to everyone being worse off. Let me explain.

Suppose in scenario A only the very wealthy or the very smart and dedicated (scholarships) have the option to go to college. Most of the workforce will not have a bachelor's. The employers will require such a degree only for those jobs where it's strictly needed, and make do with training programs etc.

In scenario B, everyone has the option to go to college on expensive loans. Some people take this option. It turns out before long that employers prefer to hire these people, even in fields completely different from their major, for reasons such as: 1) finishing college becomes a signal of reliability and competence instead of wealth 2) people who need to pay off college debt will quit less readily. Before long, the college graduates' obvious advantage in the labor market pushes everyone else to try and attend college, which further drives up costs and loans. This only accentuates factors 1) and 2) above, e.g. with strong pressure to attend college and possibility to do so, it means you're either lazy or not that bright if you don't.

And so we reach a situation in which only 27% of working college graduates have a job related their major [1], 35% work in a job that requires any college degree (which clearly indicates the degree is only used as a signal), and 38% are screwed up by paying their loans from jobs that only need high school or less.

[1] http://www.washingtonpost.com/blogs/wonkblog/wp/2013/05/20/o...