Great article. This is clearly a complex problem with no easy solution. In my opinion, some of this is tied to the maximum amount of federal loans a student is allowed to take each year. When the government increases that number, many schools increase tuition in lock-step (whether the tuition increase is justified by true cost increases or not). It seems like schools are getting free money, while the students are on hook for the rest of their lives.
Another elephant in the room is the performance of these loans. Many of the loans are in securitization pools that claim high performance. However, many of the underlying loans are not performing, but instead are automatically put into deferment programs so they don't get reported as delinquent. This practice of overvaluing these assets cannot continue indefinitely.
If the cycle of increasing both the loan amounts and the tuition year after year doesn't stop, college will be out of the question for many in the next generation.
Thank you Jason, your articles are always well written and informative.
A few thoughts:
1. First, Congress should finally pass the Retirement Parity for Student Loans and allow employers to match or make student loan payments on a pre-tax basis, just as they can with 401K contributions. (A) Generally, recent grads have negative net worth due to student loans (which is one of the reasons student loans are not forgivable in BK, with hardship). (B) The rate you pay on a liability is equal to earning a risk free after tax yield on an investment. Even with a rate of 2.75% on government loans, this is greater than the after tax risk free rate. (C) So when you are in a negative net worth and the cost of liabilities exceeds the after tax return on investment, you should pay down your liabilities first and build retirement funds (401K) second.
2. Instead of forgiving student debt of say $10K or $50K, the government should give the debtor the option of receiving this same amount as a cash payment and allow the debtor to decide if they will use the funds to pay down their student debt, or use it for more productive means. Even considering #1 above, it still may make sense to use the money for say a down payment on a home, stabilizing occupancy costs, and building net worth through home equity.
3. Going forward, the US could consider the UK's plan for financing public university, where the student repays 9% of their income above ~$25,000 USD. Payments are deducted by the employer out of your paystub, dramatically reducing servicing costs. Payments are made until the earlier of: your balance is paid off; you are permanently disabled; you reach the age of 65. And importantly each spouse or partner in a household are treated independently, so if one stays home to raise kids and the other goes off to work, the staying home spouse or partner is not penalized. Payments are made in arrears in case there is a job loss or a reduction in pay, and there is also the ability of the borrower to recapture these payments given certain circumstances.
4. Finally, let's consider revamping the accreditation system in the US. If WFH and remote learning taught us anything, it is that online learning (and working) works! Allow students to take some classes online, and make it easier to receive credit at whatever school you decide to attend. There is no reason you can't complete a degree in under four years.
Great article. This is clearly a complex problem with no easy solution. In my opinion, some of this is tied to the maximum amount of federal loans a student is allowed to take each year. When the government increases that number, many schools increase tuition in lock-step (whether the tuition increase is justified by true cost increases or not). It seems like schools are getting free money, while the students are on hook for the rest of their lives.
Another elephant in the room is the performance of these loans. Many of the loans are in securitization pools that claim high performance. However, many of the underlying loans are not performing, but instead are automatically put into deferment programs so they don't get reported as delinquent. This practice of overvaluing these assets cannot continue indefinitely.
If the cycle of increasing both the loan amounts and the tuition year after year doesn't stop, college will be out of the question for many in the next generation.
Thank you Jason, your articles are always well written and informative.
A few thoughts:
1. First, Congress should finally pass the Retirement Parity for Student Loans and allow employers to match or make student loan payments on a pre-tax basis, just as they can with 401K contributions. (A) Generally, recent grads have negative net worth due to student loans (which is one of the reasons student loans are not forgivable in BK, with hardship). (B) The rate you pay on a liability is equal to earning a risk free after tax yield on an investment. Even with a rate of 2.75% on government loans, this is greater than the after tax risk free rate. (C) So when you are in a negative net worth and the cost of liabilities exceeds the after tax return on investment, you should pay down your liabilities first and build retirement funds (401K) second.
2. Instead of forgiving student debt of say $10K or $50K, the government should give the debtor the option of receiving this same amount as a cash payment and allow the debtor to decide if they will use the funds to pay down their student debt, or use it for more productive means. Even considering #1 above, it still may make sense to use the money for say a down payment on a home, stabilizing occupancy costs, and building net worth through home equity.
3. Going forward, the US could consider the UK's plan for financing public university, where the student repays 9% of their income above ~$25,000 USD. Payments are deducted by the employer out of your paystub, dramatically reducing servicing costs. Payments are made until the earlier of: your balance is paid off; you are permanently disabled; you reach the age of 65. And importantly each spouse or partner in a household are treated independently, so if one stays home to raise kids and the other goes off to work, the staying home spouse or partner is not penalized. Payments are made in arrears in case there is a job loss or a reduction in pay, and there is also the ability of the borrower to recapture these payments given certain circumstances.
4. Finally, let's consider revamping the accreditation system in the US. If WFH and remote learning taught us anything, it is that online learning (and working) works! Allow students to take some classes online, and make it easier to receive credit at whatever school you decide to attend. There is no reason you can't complete a degree in under four years.
Thank you again