Excerpt from: http://online.wsj.com/article/SB125511860883676713…

“We saw an extension of credit to a much deeper socioeconomic level, and they got access to the same credit instruments as middle-class and mainstream Americans,” says Ronald Mann, a Columbia University law professor. Now, “it will be harder for families at the bottom of the income ladder to get credit cards,” he says.

The financial crisis has forced lenders to be especially cautious with the riskiest borrowers, a category that low-income families often fall into because their debt tends to be higher relative to income and assets. The ratio of credit-card debt to income is 50% higher for the lowest two-fifths of Americans by income than for the top two-fifths, Federal Reserve data show.

Although the tone of the article tends to focus on young people and their consumer behaviors, there is also a glimpse at a much more troubling problem.

Treasury Secretary Timothy Geithner, testifying before Congress in July, said: “We now know that millions of Americans were…unable to evaluate the risks associated with borrowing to support the purchase of a home, a car or an education.”

Student Loan Bubble is curious to hear more about Geithner’s perspective on the inability of Americans to evaluate risk, and if this can be remedied by better information, better financial education, different regulation, or perhaps something else entirely.

Education is an excellent vehicle for elevating one’s socioeconomic status, but The WSJ has identified a major issue for those in greatest need of elevation: disproportionate debt levels, coupled with the previously unheard of suggestion that education might be a risky investment.

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Dear Chairman Frank and Chairman Miller:

As representatives of students, consumers, colleges, administrators, and counselors, we want to take this opportunity to thank you for your efforts to include consumer protections and accountability under the Troubled Asset Relief Program (TARP) through H.R.384, the TARP Reform and Accountability Act of 2009.

We are writing about an urgent matter related to the planned roll-out of the TARP sub-program, the Term Asset-Backed Securities Loan Facility (TALF), in February. As you know, we are concerned about the planned allocation of TALF funds to private student loan providers. Private student loans are more risky and expensive than federal loans because of high variable interest rates and few consumer protections, and private loan lenders already enjoy special bankruptcy treatment under federal law. For these reasons, financial aid experts agree that private loans should only be a last resort for students. Additionally, we estimate that just eight percent of undergraduates use private student loans, and many of those borrowers have not exhausted their federal loan options.

To ensure that taxpayer dollars in the TALF program serve students and consumers as well as lenders, we ask you to urge the Secretary of Treasury to make the receipt of TALF funds for private student loan financing conditional upon adequate consumer protections and better data collection. Specific conditions that we believe are important for the Secretary implement include:

1. Loan modification and/or work-out requirements, such as reductions in principal and economic hardship deferrals, for current and future private student loans;
2. Discharges in cases of borrower death or severe disability, for current and future private student loans;
3. Limits on interest rates, origination and other fees for future loans;
4. Mandatory loan certification and inclusion of the FTC holder notice for future loans; and
5. Detailed data reporting on individual future loans replicating the reporting required for Family Federal Education Loans (FFEL) pursuant to section 1092b(a) of 20 U.S.C..

A bailout for the providers of usurious private student loans will not solve the college affordability crisis caused by the failing economy, and will actually be detrimental to many students and consumers. However, if a form of rescue is provided for private student loans, it would be unconscionable to do so without also providing better consumer protections. Implementing these protections will help ensure that private lenders do not unfairly benefit from the bailout at the expense of past, present, and future students and their families.

We realize that there are many pressing issues requiring your attention during these difficult economic times, but respectfully request that you consider this issue a priority given the fast-approaching commencement of TALF fund disbursement.

Sincerely,

American Association of Collegiate Registrars and Admissions Officers
American Association of Community Colleges
American Association of State Colleges and Universities
American Association of University Women (AAUW)
Americans for Fairness in Lending
Campus Progress
Consumers Union
Dēmos: A Network for Ideas & Action
The Greenlining Institute
National Association for the Advancement of Colored People (NAACP)
National Association of Student Financial Aid Administrators
National Center for Public Policy and Higher Education
National Consumer Law Center (on behalf of our low-income clients)
National Consumers League
The Project on Student Debt (an initiative of the Institute for College Access & Success)
National Association for College Admission Counseling
The Sargent Shriver National Center on Poverty Law
U.S. Public Interest Research Groups
United States Students Association

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1. inflation – year after year, our currency is devalued as the monetary base is expanded, thereby reducing the purchasing power of our currency. This is reflected in the cost of all goods, although tuition appears to increase at a certain multiple of the rate of inflation.
2. prestige – colleges seek to increase their prestige, as this is a critical factor that differentiates colleges from one another, and colleges may justifiably expend more money on prestige-related expenses (faculty hires, luxury construction, etc).
3. student achievement – the quality of students is related to who submits applications, whose applications are accepted, and which students decide to attend. In attracting the highest quality students, colleges might offer tuition breaks to certain students, which they would offset by charging all students a generally higher tuition.
4. resource provisioning – related to all of the previous factors, it is critical for colleges to provide resources to students to increase prestige and student achievement, but the amount expended on resources will be subject to inflation.
5. available student credit – the capacity of students to “afford higher tuition” is related to the amount of credit that is available for students to borrow. This credit is subject to legislative pressures, and less influenced by traditional financing metrics (e.g. collateral, credit history).
6. education legislation – the ability of lenders to take risks on financially unproven debtors (i.e. 17- and 18-year old students) is related to incentive programs that must be artificially inexpensive for lenders, which is not possible through free-market forces and must be driven by extra-market intervention through legislation.

Likely, there are other factors to include in this model, but this is a start.

The core question involves “what causes what.” Do colleges charge more because they must do so to grow their prestige, or can they grow prestige because students are able to pay more? Does it cost more to pay for school because schools provide more resources, because those resources cost more, or is this fundamentally unrelated? The number of different models that can be formed using the factors listed above only grows as more factors are identified. For now, Student Loan Bubble will look at existing work to see what others have identified, but this is a theme that Student Loan Bubble will revisit from time to time.

In the following New York Times piece, Glater describes certain consequences of the year-over-year increase in tuition, and some of the forces that drive it. It’s not a “grand unified theory of tuition” but many of the previously listed factors are reflected in this article. I was particularly interested to learn that lending at public schools is inversely related to state funding of those schools, such that students have historically made up the funding deficit through loans. State citizens will be exposed to the cost of public school funding through the taxes they pay, and reducing this form of exposure increases the costs that are shouldered by individuals. I also thought it was interesting that certain forms of low-income grants have decreased in recent years, and I am curious to know more about that causes for that.

Read on, and if you can think of other factors that influence tuition prices, please post a reply to this article.

Excerpt from: http://www.nytimes.com/2007/10/23/education/23tuit…

“The average price of college is continuing to rise more rapidly than the consumer price index, more rapidly than prices in the economy,” Sandy Baum, a co-author of the report who is a senior policy analyst for the College Board and a professor at Skidmore College, told reporters at a news conference yesterday.

Ms. Baum added that the prices “are probably higher than most of us want.”

Those price increases reflect increases in the sticker price that colleges advertise, though, Ms. Baum said, the average student does not pay that full amount. At public universities, the average student gets about $3,600 in grants and tax benefits, lowering the actual cost to around $2,600. At private institutions, aid totals about $9,300, bringing the cost to $14,400.

But even the net price, after taking into account grants and other forms of aid, is rising more quickly than prices of other goods and than family incomes. In recent years, consumer prices have risen less than 3 percent a year, while net tuition at public colleges has risen by 8.8 percent and at private ones, 6.7 percent.

The changes in tuition at public institutions closely track changes in financing they receive from state governments and other public sources, the report found. When state and local support for public colleges declined over the last seven years, tuition and fees rose more quickly, and as state support has grown of late, the pace of increases fell, it said.

“We hope that state governments – which really set tuition prices at most public colleges and universities – will do their part to reinvest in higher education,” David Ward, president of the American Council on Education, said in a statement released by the College Board.

Private loans, those not guaranteed by the federal government, continued to be the fastest-growing form of borrowing, totaling more than $17 billion in the 2006-7 academic year. In the same period, students and their families borrowed $59.6 billion in federally guaranteed loans.

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For its lending and collection businesses, SLM Corporation enjoys unprecedented legal advantages that are not shared by any other class of financing, including many unique techniques for retrieving repayment from students who have defaulted. As a result, the repayment rate for student loans is currently 95%, which is significantly higher than in the past, and is higher than other industries. Stahl interviews several experts to figure out how SLM Corporation came to be, and uncovers a fascinating story of amazing profits and questionable expenses.

RTFA: http://www.cbsnews.com/stories/2006/05/05/60minute…

“It may be called ‘private’ by the people in the system. But it’s not private at all,” says Michael Dannenberg, who analyzes student loan policy at the New America Foundation, a non-partisan think tank.

“What do you call it?” Stahl asks.

“Frankly, it’s a socialist-like system,” he says. “It’s not as if this private entity is assuming any risks. No, no, no. The law makes sure that this so-called private entity has virtually no risk.”

On top of that, Sallie Mae also owns some of the biggest collection agencies in the country. Once a student borrower goes into default, the government pays Sallie Mae all the principle and compounded interest that have accrued.

The loan then passes into the collection phase. If Sallie Mae is the collector, it gets to keep up to 25 percent of whatever is recovered. In 2005, nearly a fifth of its revenue came from its collection business.

“Sallie Mae makes money if you pay back on time. And Sallie Mae makes money if you don’t pay back on time,” says Elizabeth Warren, a professor of bankruptcy law at Harvard Law School.

Warren says it’s a mistake to allow Sallie Mae to be both a lender and a collector.

“It shouldn’t be the case that Sallie Mae gets to play every hand at the poker table while the government is the one that keeps anteing up the money,” Warren tells Stahl. “But let’s be clear. That by itself isn’t enough. We have to decide collectively as a country: do we want to encourage the young people who are trying to get college diplomas? And if the answer to that is yes, the way to encourage them is not to double and triple the amount that they owe when they get into financial troubles.”

By law, private lenders must offer payment options, but that usually means the loans just balloon. So even though 95 percent do pay up over time, many are burdened with heavy debt. In a statement, Sallie Mae told 60 Minutes it makes far more money from those who pay on time, than from those who default

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The practice of leveraging credit cards against student debt is a recipe for disaster, because it isn’t the interest rate of credit cards that makes this behavior attractive, it is the debt repayment terms that make the more expensive option attractive. Students are unable to default on their educational loan debt, but they may have more options for dealing with poorly managed credit card debt.

Excerpt from: http://online.wsj.com/article/SB122756709839854439…

Recent graduates traditionally live on a shoestring, but they were often protected by a financial safety net: their parents. Now, as 401(k) balances erode and home values plunge, many families are coping with other financial problems and are less able to help the children.

Mandy Kakavas graduated in 2007 with $25,000 in student loans and $3,000 in credit card debt. Her mother raided her 401(k) to help her daughter pay for a degree in mass communications from the University of California, Berkeley, and can no longer help her financially.

“I look at the headlines about the bad economy, and I feel like I’ve already been there for a while,” she says.

Although Ms. Kakavas has cut corners on dining out and taken a second job to earn extra cash, she says she often uses her credit cards to pay her student-loan bills. In January, a new batch of student loans that were deferred will land.

“It’s going to catch up to me,” she says. “It’s hard to see financially where you’re going to be 20 years from now when you don’t know how you’re going to make payments next month.”

Some are taking out loans to cover the loans. Lindsay Fletcher of Wilmington, N.C., has $50,000 in student loans. To make ends meet for the next couple of months, she has taken out a $2,500 personal loan at a 13.9% interest rate to help pay off her credit cards and student loans, which come out of forbearance — deferment due to financial hardship — in November.

“There’s been a lot of tearful calls to Mom,” Ms. Fletcher says. “And I know that if she could help me, she would. But I don’t want her to have to. That’s why I went to college.” Unlike mortgages and credit cards, student loans are not forgiven in bankruptcy proceedings.

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Excerpt from: http://www.forbes.com/2008/10/22/college-debt-loan…

College tuition has increased by more than three times the rate of inflation for the last 20 years, despite U.S. wages flat-lining since 2000. The average tuition at a private four-year institution grew 6.6% year-over-year in 2007 to $23,712, according to the College Board. This is pricey in itself, but when you add in all the luxe living expenses, the total bill touches $50,000 a year at the high end.

To the chagrin of financial advisers, students are increasingly turning to higher interest private loans to meet the burgeoning college bill. Private loans made up 24% of total education loans in 2006-07, up from 6% a decade ago. In 2008, students secured $20 billion in private loans–amounting to roughly a fifth of total undergraduate borrowings for the year. Taxpayers pony up, too, chipping in an average $4,000 per student through government loans and grants to private institutions, which usually come up with $3,720 in aid (often in the form of discounted tuitions) as well.

It’s a scenario familiar to anyone who watched the housing bubble blow. “We are at a trend line that cannot be sustained,” says Matt Snowling, an analyst at Friedman, Billings and Ramsey, who covers the student loan industry. “Tuition must go down, or there will be limited demand at high-priced private schools.”

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The student loan bubble is the product of decades of inexpensive loans that were made available for the purpose of purchasing post-secondary education in the United States. The widespread availability of cheap credit drove college prices up, which increased at a rate that vastly outpaced inflation, resulting in students borrowing increasingly large amounts to pay for school, year over year.

Over the course of several years, the variable rates for student loans have fluctuated, sometimes reaching double-digit annual rates. Students who have borrowed tens of thousands of dollars – perhaps more than $100,000 – are having trouble meeting loan repayment schedules this early in their careers.

Similar to the sub-prime lending crisis, financiers have speculated on the ability of students to repay debts, without having any evidence to justify this speculation. In previous generations, individuals would acquire similar debt levels to purchase a major asset, such as a house, after they had a stable career and could prove their ability to pay the loan back. On a standard financial balance sheet, these individuals would have a home asset that nearly equaled the amount of debt they acquired through their home mortgage.

The student loan bubble is unique because students have been left with serious debt and no asset to balance it. Without collateral to offset their debts, students are unable to acquire new loans for major purchases, such as automobiles and houses. With payment schedules that ensure their indebtedness well into middle age, these students have a significant financial burden for decades to come.

The true nature of the student loan bubble is yet to be understood, but it is already clear that its consequences will not merely be financial in nature, and will involve social dimensions as well.

Student Loan Bubble is dedicated to covering this crisis as it evolves, and will provide news, analysis, strategies, and a forum for discussing this topic. The goal of Student Loan Bubble is to create a valuable resource that will improve the lives of students whose futures have been affected by the student loan bubble.

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