Are liberals wrong about the student loan industry exploiting young people?
Joyce Park stashed this in Economics
Little bit sarcastic but brisk explanation of why student loans are more expensive than auto loans.
Thanks for stashing this. It explains a lot.
Why are student loans sometimes more expensive than mortgages? For starters, they aren't backed by an asset. If you default on your truck or condo, a bank can repossess it. But the Department of Education can't take your political science degree. Instead, it has to send a debt collector your way to recoup whatever money it can. The government has lots of power on this front—student loans are nearly impossible to discharge in bankruptcy, and the feds can garnish your wages if they see fit—but it still typically loses money on defaults thanks to the cost of paying those collection agencies.
This is all especially important because the Department of Education doesn't do much underwriting. The government will give anybody a loan to go to college, no matter how bad or nonexistent their credit histories might be, and charge them the same interest rate. This is wonderfully progressive. But it means that the government has to charge higher rates overall than if it were only lending to people with spotless personal finances. Moreover, it also means that comparing the flat rate on federal undergraduate student loans to the lowest available rates on mortgage or auto loans is misleading, since rock bottom mortgages and car loans are only available to people with good credit.
I know what you're thinking now. But the student loan program is run at a profit. Why not lower rates so it just breaks even? The thing to remember here is that, on net, those profits don't come from undergraduate lending. They come from loans taken out by parents (who are disproportionately sending their children to private colleges) and graduate students (who end up disproportionately wealthy). If social justice is your main concern, offering those borrowers cheaper debt shouldn't be a particularly high priority, especially since they are perfectly capable of going and finding a private loan if they think there's a company willing to offer them a better deal. Now, the government could theoretically take it profits from lending to parents and lawyers/doctors/McKinsey consultants in training and plow them into cutting undergraduate rates even further. But then that raises another question: Why not spend the money elsewhere? After all, every dollar devoted to lowering student loan rates is a dollar that could be used increasing funding for the Pell grant program, which specifically targets low- and middle-income students.