Student Debt in America: Lend with a Smile, Collect with a Fist
As the article states, this individual is in the 1.8% of all debt holders with the large amount that she owes. She does not represent the majority but rather a minority that has slipped through the cracks based on the current policies.<p>The payday loan industry and consumer loans in general are under ever-growing scrutiny and some of the most recent proposals and regulations are based on ability to repay. If a lender does not do their due diligence on a potential borrower based on objective information of current&#x2F;projected income and expenses, the lender could be penalized and even lose their lending license.<p>With student loans, the ability to repay is considered a moot point since the borrower is a student and likely has no income, let alone income history. However this increased risk is met with an artificially lower interest rate (&lt;10% vs 50-200% APR), the most lax underwriting criteria &amp; acceptance rates (almost all domestic students qualify and receive), and no questions about how it will be paid off.<p>The primary externality here is that a whole industry, secondary education, has adapted to these crutches by increasing tuition, as the article states. The value provided by these institutions is arguably not increasing since it&#x27;s becoming more of a commodity than a value-add (e.g. the fact that the bachelor&#x27;s is the new diploma) and thus you could argue that adjusted for inflation post-degree salaries are not increasing. This leads to the ability to repay not improving and even getting worse.<p>The false assumption in all this is that education is an investment that yields a higher income even while adjusted for the interest on loans. The elephant in the room is the necessary segregation of students based on potential ability to repay, which is the present value of a student&#x27;s income based on their future income. The primary indicators of this are based on caliber of the institution, graduation rates as per institution&#x2F;major, desirability of their major, performance in school, necessity&#x2F;likelihood of going to graduate school, current unemployment in the industry, job growth in the industry as it relates to time of graduation and beyond, and other significant factors. By understanding this, loan products can be customized for each student in the absence of credit history to more accurately assess risk.<p>Higher risk applicants may think twice when seeing higher interest rates and ultimately may make the decision to seek a lower product by pursuing a lower risk opportunity. At the end of the day, these are very personal decisions that can only be decided by the individual. However by not pricing loans accurately, we are giving the false impression that each student&#x27;s decision after high school and&#x2F;or undergrad is similar in ability to repay with their limited resources (e.g. stress, time, money). The government owes it to their citizens to be even more responsible than the private industry. Student loans may seem like an income generating opportunity such as tax revenue but it is preying on the least educated, most vulnerable, but most promising demographic. It should be viewed like Social Security and Medicare where a certain demographic is dependent on it for livelihood rather than an afterthought.