1) You have capital seeking a return.

2) There exists a basic need that can be facilitated by the application of capital (a degree for a "good job").

3) You remove all the risk out of providing capital for filling the need through government guarantees.

4) You provide a rate of return that is higher than the government guaranteed rate on their own capital instruments (treasury bills).

#4 there, which gives you higher returns on low risk investments, creates a demand for those instruments. And that demand causes a supply of instruments to be created. And the regulation on that supply is minimal.

The result is you get financial institutions giving loans to students for useless degrees at inflated cost institutions knowing that the government has made defaulting nearly impossible (hence the low risk) and they can offer better rates than t-bills.

Students are being exploited exactly like unqualified home buyers were being exploited in the mortgage fiasco of 2008.

What annoys me about the journalistic coverage is that the 'rage views' are "Students are graduating with few prospects from college and a mountain of debt" whereas the bigger story is that "Rich people demanding higher returns, enslave unsuspecting youth through their loan seller proxies."

What's even worse, is that the money just goes right to the colleges inflated overheads. No student ever "sees" the money from the loans. In this case, the cost of the schools just keeps going up so that the loans remain ~80pc of the cost of a degree. Now, how much money is in the Harvard Endowment? Stanford? Princeton? Massive amounts growing far in excess of inflation, and all Tax free. Why are these places even allowed to charge fees for tuition??

What's UC tuition nowadays? $3700 for resident tuition. $4900 when you include all the fees (which my $1000 figure did). Push everything forward 20 years and my parents would have no expectation to be making much more money now than they did then. I would be carrying more debt.

Pick your narrative for explaining what happened in the meantime. "Rich people demanding higher returns, enslave unsuspecting youth through their loan seller proxies" works for me.

This stands in contrast to virtually every kind of loan out there, which can be discharged (written off). As a result, there is less risk for the lender to give a loan to any old fool out there, regardless of the major they choose, regardless of the quality of school they go to, etc. anything that might correlate with the ability to pay it back.

you might say, great, they don't discriminate against liberal arts students at no-name schools. and that might be something that suffers if reforms were made. but perhaps that student might be better served if funding were hard to come by. complain now versus complain more later, kind of thing.

the great sin in the student loan market is the online degree mills, which target relatively vulnerable segments of the population, all funded by loans. for example: did you know that online universities cost almost the same as physical ones? that makes absolutely no sense when you think about it, but i don't think many of their students do. online only should be a fraction of the rate.

Perhaps the online university is a market to be disrupted. not unstructured MOOCs, but credentialed degree schools that are a fraction of the cost of current ones. i can see the ycombinator startup already.

and student loans should be dischargeable. it's the only fair thing to do.

So... your prediction is wrong.

There are way too many factors that cannot be ignored, but that you choose to ignore. You need to look at the interest rate environment (which determines the cost of capital), banking regulations (which have changed dramatically in the past several years), the unemployment rate (you might have noticed we're in the slowest "recovery" since the Great Depression) and inflation-adjusted wage growth (hint: there basically is none), amongst other things.

Finally, you fail to note that the federal government was a participant in the student loan market well before 1996, so you cannot look at the history of private student loans without understanding that the government has influenced the market to varying degrees for some time.

If you want to assume that private lenders would rush to provide student loans at low rates at the same pace the federal government has in this economic environment and without the discharge restrictions currently in place, I'd love to introduce you to someone looking to sell you his 100 year J.C. Penney bonds. They yield over 11% and you can buy them at ~70 cents on the dollar - a great deal!

Good.

Then people will stop lending students tens or hundreds of thousands of dollars. Then schools will lower their prices.

Let's make your comment a little more accurate:

Then the federal government, which is responsible for ~85% of the student loan market, will have to stop lending students tens or hundreds of thousands of dollars, and there will be no end to the cries that millions of young Americans are being denied a college education by well-to-do politicians who are out-of-touch with the economic realities of the average American.

You don't make society's huge education bills go away just because the government is paying for them.

We're in a lose-lose situation here. If student loans are plentiful, tuition costs rise and the debt must be secured by laws preventing discharge in bankruptcy, which leads to complaints about the cost of an education and debt levels. If student loans become less plentiful, the complaints will shift to focus on lack of access to education. Even if costs decrease substantially from today's levels, there is sadly a sizable market of would-be students who simply don't have the funds to go to college. Telling them they can't go to college and major in [insert wacky subject here] is political suicide for politicians.

I'm not convinced it would happen as you say, since the crippling burden of college loan debt described in this article is increasingly familiar to many Americans. Once it begins affecting us personally, it becomes significantly harder to sweep these things under the rug.

No doubt, they would try their best, perhaps suggesting that reduced loans will result in higher taxes for average Americans and will shift the financial burden onto the older generations. That would be much easier (and more desirable, to special interests) than attempting to tackle the underlying issues that have resulted in hyperinflated tuition costs.

If only there were a way to broadcast the views of an intelligent, non-partison, and informed demographic to the average American household. Though I'm not sure anybody would tune in, as people find Fox News' fear-mongering and political divisiveness so entertaining.

What, don't you want to become a botanist???

As I noted in another comment, one in five federal student loans outstanding is already in default or delayed default, and that number does obviously not include the number of loans that are in deferral still accumulating interest. Put simply, there are a lot of people out there who likely could and would consider filing for bankruptcy if it allowed them to discharge this debt.

We can't have it both ways: if you want everybody who wants a college education to be able to obtain one, the federal government has to be in the lending business and it has to be all but impossible for borrowers to discharge their debt.

Not only will this necessarily force lenders to increase the cost of these loans to borrowers, a lot of folks apparently don't understand that the biggest lender in this market is the federal government. Of the more than $1 trillion in student loans outstanding, about 85% have been provided by the federal government. Just over one in five federal student loans is already in default or delayed default. If the law is changed to permit discharge of these loans in bankruptcy, Student Loan Debt will become Mortgage Market 2.0.

if loans are able to be discharged the federal government wouldn't be handing them out like free candy to anyone that wants it.

It's exactly that there is no downside for the government that the situation is the way it is.

But the problem is bigger than the trillion dollars in debt you and I are already on the hook for. A lot of people like free candy, and if you take it away here, we'll go from "Tuition costs are too high, and I have too much debt!" to "Washington politicians are denying me an education!" The education lobby is strong and too many people are dependent on federal student loans for this to be "fixed" in a logical fashion. Everybody has been sold the idea that a college degree is a prerequisite for access to the middle class, and government-subsidized student loans are practically seen as an entitlement.

As much as one can hope for a better system, it isn't likely to come. We're well beyond the point of no return.

Well, in so far as the people (and our government) who are already in debt, I can't disagree. We're in bad shape.

However, I do have hope. The online instruction revolution is still in its infancy, and I have much hope that quality education will be spread far and wide (at low cost). And that anyone with a reasonable amount of motivation can learn and grow and become more productive and wealthy as a result.

I believe part of this is the convenience issue. I finished my MBA 4 years ago, and at the time the school was pushing online classes pretty hard. And the online classes cost more than regular classes.

(Faculty also commented that they were pressured to give higher grades than they believed were earned because of the profit component, and few argued they learned better online. But they sure can be convenient.)

The question "What makes a degree valuable?" is at the heart of its success. All these companies that demand a four year degree - what are their criteria? When they see that someone got their degree at a very inexpensive online school, will that hurt the perception of value?

Some doctors graduated from med school with $100ks in loans. So they immediately filed for bankruptcy and cleared the debt. After a few years of work they were back in the bucks and debt-free.

The loan industry had congress write some new laws (was it 2008 ish?). The package clamped down on debt-collectors calling at all hours. It also eliminated clearing college loans with BK.

The loan industry celebrated - nothing like sure bet! Indentured servitude - Yahoo! They started giving away loans like candy.

Then the schools noticed all the free-flowing money and joined the party.

Doesn't seem to be unintended consequences at all.

"Where the supply curve is more inelastic than the demand curve, producers bear more of the tax and receive more of the subsidy than consumers as the difference between the price producers receive and the initial market price is greater than the difference borne by consumers." [1] http://en.wikipedia.org/wiki/Effect_of_taxes_and_subsidies_o...

"Part of the reason," yes, but take a look at Why Does College Cost so Much? by Archibald and Feldman (http://www.amazon.com/Why-Does-College-Cost-Much/dp/01997445...). Their short answer is "Baumol's cost disease. The long answer is the book.

Think of it as a perverse incentive for collusion between the schools and finance providers to milk the students through the mechanism of easier credit.