Guest Post: Student Debt Malinvestment

Tyler Durden's picture

Submitted by John Aziz from Azizonomics

Student Debt Malinvestment

Student debt levels continue to soar. In 2012 they hit $1 trillion for the first time ever.

But college education isn’t reaping the rewards it once did.

According to the Associated Press:

About 1.5 million, or 53.6 percent, of bachelor’s degree-holders under the age of 25 last year were jobless or underemployed, the highest share in at least 11 years.

And real wages have fallen for recent college graduates — although this has been part of a broader trend of falling real wages in the general population:

So why is student debt still soaring?

The crucial factor is that student debt isn’t like other debt — it cannot be discharged simply through bankruptcy.

 

There’s no incentive for private lenders to be particularly careful in who they lend money to, because they know that there’s no way that whoever they lend the money to will ever be able to get rid of the debt short of dying.

But just because a loan is nondischargeable doesn’t mean that the loanee will be able to repay. With labour conditions for recent graduates still quite awful, student debt defaults have climbed. The Washington Times notes:

The number of borrowers defaulting on federal student loans has risen substantially, highlighting concerns that rising college costs, low graduation rates and poor job prospects are getting more and more students over their heads in debt.

The national two-year cohort default rate rose to 8.8 percent last year, from 7 percent in fiscal 2008, according to figures released Monday by the Department of Education.

That means that more unemployed former students will end up being hounded for debts that they cannot afford to repay, yet cannot discharge through bankruptcy. If those debts had been accrued at the roulette wheel, though, they could.

It wasn’t always this way.  Until 1976, all student loans could be discharged in bankruptcy. Until 1998, student loans could be discharged after a waiting period of five years.  In 1998, Congress made federal student loans nondischargeable in bankruptcy, and, in 2005, it similarly extended nodischargeability to private student loans.  Since 2000, student loan debt has exploded, and private student loans have grown even faster.

This presents a bigger problem than simply sending people to college who end up unemployed or underemployed. It means that capital is being misallocated. If debt for education cannot simply be discharged through bankruptcy, as other debt can be, private lenders will tend toward offering much more of the nondischargeable debt, and less of dischargeable debt. This means that there is less capital available for other uses — like starting or expanding a business. If the government’s regulatory framework leans toward sending more people to college, more people will go (the number of Americans under the age of 25 with at least a bachelor’s degree has grown 38 percent since 2000) — but the money and resources that they are loaned to do so is money and resources made unavailable for other purposes.

The efficient allocation of capital demands that lending is undertaken based on the real underlying market conditions. To ensure that this is the case, the bankruptcy rules for debt should be universal so that loan applications are considered on merit. This should mean that student loan debt should be dischargeable under the same bankruptcy conditions as other debt. More discerning lenders would likely mean less student lending — but would also mean that potential students would have to think harder about the decision to study, and be able to justify to themselves and to a lender why they are choosing to study (or why they are choosing to study a particular subject), instead of choosing to work, or choosing to start a business.

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Michael's picture

How much more evidence do we need the whole shithouse is going to go up in economic flames?

AlphaDawg's picture

true dude, its turned into a shitshow

tick, tick, tick

my money is on pensions being the black swan.

Thoughts?

I think I need to buy a gun's picture

one of the writers not to long ago said student loan debt helps pay for our federal budget,,,,,i have no idea how true that is but interesting if it does,,,,,,,,,

Manthong's picture

College administrators and professors aren't stupid.

They know how to get in on the front end of a good government bubble and milk it for all it’s worth..

http://i48.tinypic.com/ejx7nt.jpg

nmewn's picture

Preach it brother...and the babes in the woods lapped it up like kittens from their professors.

I've often wondered, what would happen to a society when they finally discover, just about everything they have ever been taught, is a lie. 

CompassionateFascist's picture

When the Jew rules...the moneylender rules. Debt slavery.

Gully Foyle's picture

AlphaDawg

My thought is a reset to global digital currency.

Money is just numbers on a computer somewhere, pretty simple to declare a day one where everyone switches to digital currency.

Michael's picture

I"m voting for complete and total worldwide economic collapse, cause it's gonna be the winner.

Mithril's picture

Hell the Fedral Reserve will give you free money without allowing you to pay it back to the tune of +16 Trillion....To foreign and US Banks! End the Fed
Results comming in from US Senator Sanders.
http://www.sanders.senate.gov/newsroom/news/?id=9e2a4ea8-6e73-4be2-a753-...

DosZap's picture

but the money and resources that they are loaned to do so is money and resources made unavailable for other purposes.

 

Yes,it will enslave them to their graves in this enviroment...............no Bankruptcy here.

logically possible's picture

"But the money and resources that they are loaned to do so is money and resources made unavailable for other purposes"

How we ever going to start another housing bubble?

ZeroAvatar's picture

These educated, unemployed individuals will be able to work off their debts.  BE ALL YOU CAN BE, BITCHEZ!

Ray1968's picture

At least mine are paid off. Thank God for that.

r00t61's picture

The "Cannon Fodder" loan forgiveness program. 

Ask a government bureaucrat about how you can sign up, today.

RECISION's picture

The Aztecs had a similar sort of programme.

For the greater good... something you could really put your heart into...

vast-dom's picture

now take that table and adjust it for the average student debt 2011 vs all other years = adjusted wages WAY LESS TODAY!!!!!!!!!!!!!

pursueliberty's picture

At current rate of inflation of education it will only contiue to spread.  Well, that and wage deflation

 

francis_sawyer's picture

PhD's in beer pong bitchez!

infinity8's picture

I always preferred "quarters" (off my big nose ramp). I prefer the weight of the coin and to be seated when I get my drink on. 

magpie's picture

Nationalize universities. Problem "solved"

covsire's picture

They are for all intents and purposes nationalized already.  You cannot graduate without being inundated with hundreds of hours of liberal and communist propanda.  Nationalizing them wouldn't change anything other than risk a backlash from the parents who are too ignorant to know what is really going on in colleges today.

Vendetta's picture

what's really going on in colleges today... tell us.

Sofa King Confused's picture

I have a daughter in college and try to explain to her what is really going on in the world with the banksters, corporations, corupt politicians, the illusion of a stock market and lying news media and she looks at me like I am a fucking wacko.

Hmm....Maybe I am.

Colonial Intent's picture

"You cannot graduate without being inundated with hundreds of hours of liberal and communist propanda"

Your village called, their idiot is missing.

LMAOLORI's picture

 

 

When you nationalize institutions like Universities or Banks you Socialize the LOSSES. Anyone who is for people being able to write off the student loans guaranteed by the Federal Government in bankruptcy is FOR further enslaving their own children.

Vampyroteuthis infernalis's picture

Want to stop the rising college tuition scam? Start with student loans. Two easy steps would stop this crap.

1) Allow students to discharge debt in bankruptcy

2) The gov't would not back the default. If a student fails to pay, the lender gets nothing.

Watch student loans quickly decrease in volume.

AlphaDawg's picture

u watched the video in this atricle and repeated it in an executive summary. insightful

BurningFuld's picture

With you 100%. The USSA is one screwed up country.

Ricky Bobby's picture

You must be one of those "FREE MARKET TERRORIST"!

Sabibaby's picture

but what happens to the bank when the student fails to pay on the loan goes into bankruptcy? Will the bank need to be bailed out by tax payers?

People don't seem to learn from their mistakes when there are no consequences for their actions.

FrankDrakman's picture

The reason student loans aren't dischargeable is some sharpies back in my day realized that you could live high off the hog at school - getting student prices for everything, and borrowing it all - and then immediately file for bankruptcy after college, when the only possessions you had were your clothes, a few milk cartons of LP's, and maybe a beat up car. Lenders caught on, eventually, That's when they made the loans non-dischargeable for five years. So the next group of sharpies just realized that you live poor for five years, maybe travel a bit, but certainly move around a lot so the bill chasers can't find you. Then you declare bankruptcy.

So, if you want to know why today's kids are saddled with undischargeable debt, once again you can look at the boomers for the reason. We truly are the 'most selfish' generation.

Bob Sacamano's picture

Agreed.

And while "private lenders will tend toward offering much more of the nondischargeable debt" -- It very simple folks, DON'T ACCEPT THEIR OFFER.  No one puts a gun to anyone's head to borrow money.   Stop borrowing. 

fonzannoon's picture

After all that has gone on.....if you have a 17yr old who is a half ass student with no real ambition who managed to get themselves accepted to college and you green light them to take on 150k in debt, you deserve what you get at this point. I hope this problem corrects itself as people wake up and start making different decisions.

gbresnahan's picture

It blows my mind when I see people featured in the news who have 6 figures in student loan debt and their major was something like, oh, Culinary Arts.  Even if things worked out, 6 figures in debt.  They're never paying that off, and I do not feel bad for them at all.

pursueliberty's picture

My mom has a friend whose grand daughter is seriously borderline slow.  6 years of college later, she is a junior who cannot go to school because she is maxed out on student loan debt due to the fact she is still a junior.  She will never pay back her loan, she just took a 30hr/wk $8/hr job.

Point is, she should have never gone to college, she would be making $10/hr at the same job she is working at now, maybe be asst. manager even.

nmewn's picture

She should consider a different identity...a fresh start, just sayin.

I'm past honoring contracts with thieves of all descriptions.

//////////////////

Would the government-banker troll like to address what the meaning of all basic contracts are or just roll through with a junk?...I won't hold my breath ;-)

Ghordius's picture

nmewn, how about the "statist" troll that says that among the many regulations a banking system needs there should be something that prevents the exploitation of the weak? as this is done in several countries?

or the "social conservative" troll that says that debt negotiations of people below the age of thirty should be with the involvement of their families, best paired with the father having to be part in cause and co-liable? and of course with the right to veto if he thinks this is not opportune?

or the "european-classical-liberal" troll that says together with the "european-socialist" troll that nearly-free university education at gov expense - paired with selection of the best and closed numbers - should be the normas this is done in several countries, too?

or the "european-socialist" troll that says that if the US would have tariffs and would tax the inter/trans-national corporations then there would be enough blue collar / middle-class jobs in the country so that an university degree would not be that important for the future of the young?

I could go on and on and on... ;-)

nevertheless, I like your approach. America used to be the place where you were allowed to try, to fail and to retry. too bad that this right of default without social downfall has been taken away from the student loans. it's astonishing, I'd say, and very slanted against the younger generations

MeBizarro's picture

That's true but look at the overall numbers.  This is a basic breakdown in the economy functioning properly when you have roughly ~50% of college graduates finding employment commensurate with their educational level.

monopoly's picture

It will blow up. Just not yet. Banksters get richer and our youth gets poorer. Amerika!

Dollar Bill Hiccup's picture

A college education should be helpful to society at large, since a literate citinzenry is essential for a functioning Republic.

The downside is that a college education has been co opted by the Debt Machine, promises of riches in parallel with debt enslavement, all facilitated by the ultimate facilitator, the Government.

Mix in the entitlement ethos where college is more a party than anything else, ok its a spa and resort as well, and we have the unfortunate outcome of semi literate graduates who can't figure out how they wound up with no work and crushing loans, all with the continued belief that they deserve a corner office at some point.

CompassionateFascist's picture

Kids used to "get literate" in grades 1-4. Phonics and all that. Now they go to college just to learn (remedial) English. The universal, TU-inflicted JewMarxist dumb-down.

I am Jobe's picture

Blame the inbred parents for this crap.

Gully Foyle's picture

I am Jobe

Bingo, we have a winner.

Do you know this story?

https://en.wikipedia.org/wiki/John_Ogbu

In 1986 Signithia Fordham co-authored, along with Ogbu, a study which concluded that some African American students in a Washington, D.C., high school did not live up to their academic potential because of the fear of being accused of "acting white." Ogbu further echoed these findings in his 2003 book Black American Students in an Affluent Suburb: A Study of Academic Disengagement (which summarized his nine-month research on the educational gap between white and African-American students in the Shaker Heights City School District located in the upscale Cleveland suburb of Shaker Heights, Ohio). He concluded that these students' cultural attitudes hindered their own academic achievement and that these attitudes are too often neglected by parents, educators and/or policymakers.

http://www.eastbayexpress.com/ebx/rich-black-flunking/Content?oid=1070459

Rich, Black, Flunking  Cal Professor John Ogbu thinks he knows why rich black kids are failing in school. Nobody wants to hear it.

...

Ogbu concluded that the average black student in Shaker Heights put little effort into schoolwork and was part of a peer culture that looked down on academic success as "acting white." Although he noted that other factors also play a role, and doesn't deny that there may be antiblack sentiment in the district, he concluded that discrimination alone could not explain the gap.

"The black parents feel it is their role to move to Shaker Heights, pay the higher taxes so their kids could graduate from Shaker, and that's where their role stops," Ogbu says during an interview at his home in the Oakland hills. "They believe the school system should take care of the rest. They didn't supervise their children that much. They didn't make sure their children did their homework. That's not how other ethnic groups think."

It took the soft-spoken 63-year-old Nigerian immigrant several years to complete his book, Black American Students in an Affluent Suburb: A Study of Academic Disengagement, which he wrote with assistance from his research aide Astrid Davis. Before publication, he gave parents and school officials one year to respond to his research, but no parents ever did. Then Ogbu met with district officials and parents to discuss the book, which was finally published in January.

The gatherings were cordial, but it was clear that his conclusions made some people quite uncomfortable. African-American parents worried that Ogbu's work would further reinforce the stereotype that blacks are intellectually inadequate and lazy. School district officials, meanwhile, were concerned that it would look as if they were blaming black parents and students for their own academic failures.

But in the weeks following the meetings, it became apparent that the person with the greatest cause for worry may have been Ogbu himself. Soon after he left Ohio and returned to California, a black parent from Shaker Heights went on TV and called him an "academic Clarence Thomas." The National Urban League condemned him and his work in a press release that scoffed, "The League holds that it is useless to waste time and energy with those who blame the victims of racism." The criticism eventually made it all the way to The New York Times, where an article published prior to the publication of Ogbu's book quoted or referred to four separate academics who quarreled with his premise. It quoted a Shaker Heights school official who took issue with the professor's conclusions, and cited work by the Minority Student Achievement Network that suggested black students care as much about school as white and Asian students. In fact, the reporter failed to locate a single person in Shaker Heights or anywhere else with anything good to say about the book.

Poor Grogman's picture

ZH is the best free education out there.

A generation has been sold unnecessarily into serfdom....

monopoly's picture

And why do we pay Administrators $150,000 +. And college costs as posted at Zero Hedge have gone up far more than any commodity or food item. Amazing.

pursueliberty's picture

That is a huge problem with all levels of education.  Superintendents making $125k at school districts with a few hundred kids. 

seek's picture

Indeed it is. About 10 years ago our local district held a bond override election because they desperately needed $5M for classroom construction, or so they claimed.

The principal of the school spent $2.5M on his new office. For real. Marble, mahogany, literally gold-plated bathroom fixtures.

When is was discovered, he was let go. No criminal prosecution, blacklisting, anything. He was working at another local district in weeks.

A few years later I met a (new) member of the school board who was venting about how anti-spending everyone in the district was, and how hard it was to find money, so I explained the score to her. If private financing had been available to the district, god knows how bad the damages would have become.But that's exactly the case for many large universities.

Educational spending it insane, and sadly it's not going to professors or students or education -- it's going to administrators, landholders and construction companies building insanely overpriced facilities and kicking some of the "profit" back to the legislators and admins, and the expense is all on the backs of students and taxpayers.

insanelysane's picture

Awesome.  Got in an argument with one of my kids friends' parents about me being anti spending.  Do I hate the kids or something?  Our district spends $10k per year per kid and the state average is about $13k.  I say how do you know that it doesn't actually cost $8k per kid to educate.  Where is the data?  If you spend millions on administrators that goes into the total amount per student but doesn't give the students crap.  

This year the district is charging a user fee for sports and clubs in high school.  A month before school starts, the administrators are leaving mass voice mails on everyone in the district's phone saying that we should pay before school starts because it would be easier.  They can't wait to blow the cash.  Must be getting some new flat screens for teachers' lounge or maybe the coffee vendor wanted money upfront.  I heard that some teachers stiffed a company last school year.

nmewn's picture

"Got in an argument with one of my kids friends' parents about me being anti spending. Do I hate the kids or something?"

Thats the way its done...the guilt trip. Very perceptive on your part.

I say again, I will never live to see the day the NEA says, yep, we're good, we need no more funding.