American Elephants

There is a Higher Education Bubble. Taxpayers Beware! by The Elephant's Child

Sixty-one percent of folks with a student loan are not paying back their loans.  Many of the non-payers are still in school, but many others have long since graduated and are failing to make payments on their student loans. After the housing collapse, 28% of mortgages were underwater.  Could we be worrying about the wrong bubble?

There supposedly is $870 billion in outstanding loan balance. There is $85 billion  that is held by those who are past due. The numbers seem to be somewhat unreliable.  There’s a category defined as loans under forbearance: that’s a temporary postponement or reduction of payments for a period of time because you are experiencing financial difficulty. You can get forbearance if you are not eligible for deferment.  A deferment is a temporary suspension of loan payments for specific situations such as reenrollment in school, unemployment or economic hardship. These are for people who are not making their payments, but they are officially considered as people who are making their payments, so the “default rate” is probably not a meaningful number.  It may just be a measure of the number of students who never made any payments at all.

We have this gigantic and growing government, full of certified “experts,” and they can’t keep their numbers in some form that makes them intelligible to those who want to understand the problem. Federal loans are growing — up 25%this last year — but when people who aren’t paying are counted as paying, and over 50% of those in either forbearance or deferment end up defaulting, we don’t seem to know what is happening at all.  I just read some scary numbers about food stamp fraud. We are constantly informed that there are enormous amounts of fraud in Medicaid and Medicare. Conservatives talk about the need for an audit of the Fed, and no one seems to have a clue about the real financial state of Fannie Mae and Freddie Mac in terms that make it clear that everybody is scared to really ask.

Government numbers come in first guesses, then revised numbers and revised again. If it is a bad number, like unemployment, it usually gets progressively worse: if it’s a good number like new jobs created, that usually gets worse too.  Hans Bader of the Competitive Enterprise Institute notes how much the Obama administrations has done to make things worse:

Although for-profit colleges have been demonized by the Obama Administration (which has forced some of them to jack up tuition through tightening of the 90-10 rule, and subjected career colleges — but not traditional colleges — to “gainful employment” rules),  education expert Richard Vedder says that “the for-profits care more for their students” and care more than other colleges about whether their students get jobs and are able to repay their student loans.

The Obama Administration has also done other things that increase college costs and drive up tuition.  It has harmed American industry and students who choose not to go to college by discouraging the vocational training needed for well-paying, skilled factory work, contributing to a severe shortage of certain types of skilled factory workers.

Government subsidies over the years have encouraged colleges to raise their tuition, and to dumb down their offerings to attract marginal students. “Thirty-six percent” of college students learn little in four years of college, and students now spend 50% less time studying compared with students of a few decades ago. Thirty-two percent never take “a course in a typical semester where they read more than 40 pages per week.” The conversation and the demand for change is increasing.

Obama wants everyone to go to college, which means the trends will increase. He wants more student loans, and more forgiveness for the defaulters. (Which means the taxpayers get to pay). He wants more control over the curriculum. (More indoctrination).  He wants to stamp out for profit schools.  And desiring to be the education president, he won’t even continue the DC Opportunity Scholarships that are such an enormous help for poor black children in the nation’s capitol.

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Regarding the size of government-mediated loans and loan guarantees (not counting Fannie and Freddie), now stands at 2.7 trillion.

The problem is, the rules for valuing the cost to government do not adequately account for the risk.

See this excellent recent paper by MIT’s Deborah Lucas:

To illustrate the concrete implications of this work, here is the section on Loan Guarantees for Nuclear Power Plant Construction:

“The Energy Policy Act of 2005 established incentives to encourage private investment in new technology, including advanced nuclear energy facilities.In return for a loan guarantee, the Department of Energy can charge project sponsors a fee to recoup the guarantee’s estimated budgetary cost, which, on a FCRA [Federal Credit Reform Act of 1990] basis, is likely to be well below the fair-value cost. To date no loans have been guaranteed under the program, although there are several active applications. CBO has estimated the costs of guarantees for nuclear power plant construction using projects’ credit ratings to derive expected default rates and risk-adjusted discount rates.

“In all cases, the estimated subsidy rate was significantly higher on a fair-value basis than on a FCRA basis, but the difference between the subsidy rates varied widely with a project’s credit rating and the amounts expected to be recovered in the event of a default. If the risk associated with a guaranteed loan for plant construction was in the range of risks posed by bonds rated A (less risky) and bonds rated BB (riskier), then CBO’s estimate of the budgetary cost on a FCRA basis ranged from 1 percent to 6 percent of the loan’s principal amount. In contrast, under the same circumstances, CBO’s estimate of the budgetary cost on a fair-value basis ranged from 9 percent to 21 percent of the loan’s principal.”

Given that $54 billion in loan guarantees have been authorized for new nukes, the difference between 1-6% and 9-21% of the loan’s principle implies some real money. In addition, of course, there are loan guarantees offered for coal-to-liquid plants, biofuel plants, battery-manufacturing plants, you name it.

Not only do these loan guarantees cost taxpayers, but they are so huge that they are having macro-economy-scale effects on the credit market.


Comment by Subsidy Eye

How is this guy still our president? What leader says this?? What a disgrace!!


Comment by Spartan

This is not George W. Bush, who loved the troops and was loved by them. He and Laura are at the airport to greet returning servicemen, he does everything he can to show his respect and care for them. Obama says he respects them, but he really thinks they’re a bunch of dumb clucks who can’t do something more important. Since he’s Commander in Chief, he tries to say the proper thing, but his real attitude shows up now and then. He’s undoubtedly furious with this Sergeant for making him (Obama) look bad. He really doesn’t like that. A young sergeant who attended the White House dinner for servicemen returning from Iraq, was widely reported to have remarked: “Despair is when you suddenly realize that your Commander in Chief doesn’t have a clue—and he really doesn’t give a sh*t about you.”


Comment by The Elephant's Child

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