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Risky student loans

August 10th, 2007 at 09:02 pm

I borrowed Freakonomics from the library and just started reading it. Really interesting so far.

One of the major themes (even though the introduction of the book says there is no theme) is the power of incentives in our daily lives -- particularly financial incentives.

This crossed my mind when we recently discussed student loans on the forums. Many years ago before the federal government guaranteed student loans, lenders were very careful in giving out student loans. If the student didn't earn enough after college to pay back the loan, the lender was left holding the bag.

Because the banks were very cautious in making these loans, the argument goes, the nation was underinvesting in its education. The federal government's solution was to guarantee loans for anyone who wanted to go to college, for whatever course of study they chose.

This was great in that many more students were able to get a college education -- students who would otherwise have gone to go to work in a factory or on a farm or whatever.

But now the lender gets paid by the government regardless of whether the borrower can pay back the loan. There's no incentive for the lender to determine whether this high school senior has the potential to succeed after college and earn in a degree in a field that will make the student loan worthwhile.

This leads to a situation where someone majoring in English takes on $80,000 in debt and ends up becoming a struggling writer for a salary of $20,000 a year.

The federal government has applied its own incentive to get students to think twice before getting a foolishly high student loan -- making loan payback mandatory. Not even bankruptcy can clear a student loan. But let's face it, for a 17-year-old ready to get out of the house and live the college life, 5 years seems like an eternity. They don't think of the ramification of being saddled with a $400 minimum monthly payment on a student loan.

So the problem is we want students to be successful and get an education, regardless of financial need. But we have to be realistic and give reasonable loans to students based on their potential and career choice. The government (and ultimately taxpayers) foot the bill for bad loans, while young people fresh out of school have to deal with a crushing amount of student loans they can't pay back.

Solutions?

1 Responses to “Risky student loans”

  1. Joan.of.the.Arch Says:

    Career route is not even highly correlated with bachelor's degree. One of those English majors may go into most anything, including some jobs that earn them a good wage.

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