The reason is so that these loans are low risk (no risk?) to those providing the loans. This was done in an effort to provide everyone that wanted an education but couldn't afford it could get a loan. Obviously the mechanism used to reach the goal here backfired and people have just doubled down on the bad decision.
They aren't, particularly; they are low risk to those buying the loans, not to the issuer (even with the difficulty on discharging them) who is, after all, the guarantor.
Well, except in the sense that the issuer can literally just fiat dollars into existence whenever it chooses, so essentially all dollar- denominated debt is zero-risk.
If the American government is going to print money so people can go to college, why not print money for everything? The idea is much worse than an income tax because with money printing nobody knows who is losing out. We know by raw balance equations that someone who would have gotten something real now isn't but there is no way to identify who or what.
That level of confusion can't possibly be a good idea. "Just print money and solve the problem" is a dangerous approach and really better dropped from the conversation. Playing word & number games to pretend something real didn't happen is a bad direction to take politics.
Hypothetically, there's no reason the US government couldn't structure its loan program thusly:
(A) Originate loans for existing fiscal year, (B) bundle multiple loans together / blind desired loan details (e.g. lendee race, etc), (C) auction off loans on the open market, (D) require budgeting for next fiscal year loan program on the basis of previous year's auction.
You'd get the benefit of price / cost discovery while controlling for unfairness as desired?
There'd need to be some legal papering to deal with the outcome lag, but it seems more responsive than the tossing money down a well we do now.
Firstly, leverage. A lack of rules and enforcement allowed unreasonable amounts of capital to amass around mortgage bets. Without the crazy leverage via derivatives, the mortgage crisis would have been "A lot of loans go bad and some people get fired." Limit via regulation.
Secondly, capital requirements. My understanding is that mortgage-backed securities are treated preferentially in terms of where a bank legally can allocate capital. Consequently, as they had to find returns somewhere, they constantly needed to plow huge amounts of money into the market. Inflows of money >> smart money meant that price discovery broke down: those who cared were drowned out. You'd need to avoid structuring taxes, etc to artificially force capital into this scheme.
n.b. I'm not suggesting this is a GOOD system, just explaining the reasoning behind it.
I mean, they kinda do; Student loans are unlike most other loans in that there's no collateral. Mortgages have houses, USDA loans have farms, etc. They could theoretically "repo" your diploma, but that would be a token gesture and wouldn't really make much sense anyway.
In most other contexts to offset this you'd just get charged an exorbitant interest rate (which indeed does happen for many private student loans) or go through a rigorous qualification process, but the government offers low-interest loans and in return says those debts aren't dischargeable (thus removing the 'risk' of default).
The government typically doesn't make those other kinds of loans with no credit check or analysis of how the loan proceeds will be used. The point is that federal student loans are a regime apart from other kinds of loans, which justifies having a separate regime for handling people who cannot pay their loans. (Income-based repayment, rather than bankruptcy.)
> Though I don't know the percentage of gov:private student loans offhand.
As of December 2018, 92% of student loan debt is owed to the federal government.
> Your third point seems to suggest you may not be fully aware of the parameters of income based repayment and its many gotchas. People who rely on it, through no fault of their own, regularly find themselves paying 10x their monthly payment through paperwork malfunctions.
I took out a quarter million in student loans for law school under this precise regime, so I'm well aware of the parameters. It's a perfectly fine system. Everything is on the web, and you can change repayment plans easily through a web interface. The media loves to find a handful of anecdotes of people who screwed up the paperwork, but it is not a difficult thing to deal with for people who are college graduates.
For example, your student loan payment can shoot up if you ignore the emails from your loan servicer and forget to submit your annual income report. But even then, you can fix it in five minutes just by authorizing the loan servicer to pull your's and your spouse's most recent tax filing. It's only marginally harder than paying your utility bill, and much easier than setting up utilities at a new house.
Look. Income based repayment is not some radical concept Donald Trump came up with. Sweden, the U.K., and Australia all have every similar systems for student loans. It requires a bit more paperwork than "free college" but somehow people in those countries manage to do it.
> Additionally many of the benefits of taking jobs that qualify for perks, like loan forgiveness, under income based repayment systems are out the window under the DeVos regime.
Incorrect. If you're talking about the statistics on people having public service loan forgiveness applications being rejected, that's been the subject of some of the most misleading reporting I've ever seen. Almost everyone rejected was rejected on proper grounds. There are a lot of people who have student loans that pre-date Obama's PSLF reform. Tons of those people were filing for forgiveness who simply did not have eligible loans.
I wouldn't exactly call the mortgage lending regime careful, thorough, or prudent.
Your third point seems to suggest you may not be fully aware of the parameters of income based repayment and its many gotchas. People who rely on it, through no fault of their own, regularly find themselves paying 10x their monthly payment through paperwork malfunctions. Additionally many of the benefits of taking jobs that qualify for perks, like loan forgiveness, under income based repayment systems are out the window under the DeVos regime.
Based on this, I really don't see how your conclusions follow from your premises. If anything, your argument works against you. People who are allowed to take out hundreds of thousands of no collateral loans at ages like 18 should be able to move past them through bankruptcy. It's downright predatory.