Debt Forgiveness? Exposing the Big Education Marketing Scam

Written by el gato malo on August 27, 2022. Posted in Current News

Control the lending, control the schools. Control the schools, control the students

We just saw a raft of student loan forgiveness run through as yet another goodie room special-interest appeasement to transfer the debt of those who took out loans for educations to those who did not. it’s classic “concentrated benefit, diffuse harm” electioneering.

It’s also a terrible idea as it creates about 900 kinds of perverse incentives, but this positively pales in comparison to what the department of education would like to try next.

Not a lot of people seem to know this, but student loans have lots of payment cap provisions in them.

The current rule is that you cannot be required to pay more than 10 percent of your discretionary income (income above some locally calculated poverty rate that tends to be about $15k for single people, $22k+ for couples more if you have kids) per month over 20 years.

Any balance left after a double decade is forgiven.

This already creates all manner of bad incentives, especially as most student loans are made without any rigorous consideration on ability to repay. this endless access to debt is what has driven the price of college into the stratosphere.

This happens in any market that gets access to leverage.

Based on an emerging markets analysis i did years ago, when mortgages become available in a housing market for the first time, over the next 5-10 years the price of a home generally rises to about 4-5X what it was. what was the price of a home becomes the down payment for one as more and more money chases the same dwellings.

We saw this all over the US in the 2002-8 period when mandated loans guaranteed by freddie and fannie came to dominate in the US and the age of the rampant liar loan emerged from the ill advised risk shifting colliding with mandates to lend to subprime borrowers at prime rates.

Leverage and credit expansions drive explosive price level changes and student loans are no different. the more you offer them, the more people need them because the more the underlying price of tuition soars. colleges love this and it has led them down a primrose path of wild price expansions.

When i graduated in the mid 90’s, my university was ~$22k a year. almost no one took out loans. it’s now $81k, WAY outside of middle class affordability. and now loans, grants, or scholarships are required for most people.

See how this 4-5X multiplier works? this program to “help people afford college” has made college unaffordable.

Student loans outstanding have risen from $0.4tn in 2005 to $1.75tn today.

And the new student loan plan proposed by the department of ed is going to be worse. it will pretty much turn university pricing into a farce and require that EVERYONE get loans. it will, in fact, create a system where you’d basically have to be an idiot not to. and i fear this may be by design.

Let’s look:

On the surface, this looks like it “helps affordability.” you’re cutting monthly payments, right? but this has not yet looked at what it will do to the price level and how that will affect everyone, especially those who did not previously want loans.

You’re basically doubling the effective leverage in the market. you can expect that to double prices over time. it’s like cutting interest rates in half AND giving out a 50 percent cut in principal amount on mortgages.

That’s financial dynamite.

I made this chart to demonstrate.

The blue line is the current 20 year cap on repayment set at 10 percent of discretionary income.

The red line is the new proposed line.

I then calculated the costs for 4 years of undergrad paid back monthly over 20 years using a three percent fixed interest rate (which is lower than current rates) as a total payback amount using the average cost estimates HERE for most schools and HERE for the ivy league. i used $20k as the DI deduction.

As can be readily seen, not many folks are paying back their full loans now but damn near no one would be paying back their full loans anymore under this new system.

This is what break even looks like under current and proposed systems. it’s the minimum amount of gross income you have to earn as an average over 20 years to make payments that will actually add up to what you borrowed.

these are some BIG percentile numbers.

Under a five percent cap, you need to be 86th percentile to even pay back in state public college.

You need to be 97th percentile to pay back an average private college and 99th to pay back an ivy loan.

Even with income growth over time, that’s just not going to happen for nearly everyone.

What you will get instead is trillions of dollars of write downs, maybe 10’s of trillions.

But what you will also get is explosive college price inflation because you’ve turned the whole thing into a buffet where once you pay, you might as well pig out on lobster.

Let’s say you plan to go into a nice career with $100k in income. that’s 80k of DI, so your cap on loan payment is $4k per year X 20 years = $80k.

That means that all school costs over $80k are “free” to you. you do not need to care if college costs $20k a year or $100k a year. you will pay the same.

And what do you think THAT will do to your selection process? And what do you think that will do to the prices asked by universities, especially top ones for which competition is fierce?

See more here: substack.com

Header image: USnews.com

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