The sinister in me asks "Well, who tends to make shitty decisions?" The innocent asks "How is this legal?" The realist middle-classer I am asks "Are my tax dollars going to be used to fix this shit again?" The Democrat in me says "well we should definitely introduce legislation to fix this." The Republican alter-ego laughs and says "we already fixed it because you can't get rid of that shit, even in chapter 7 and 13 bankruptcy."
>The Republican alter-ego laughs and says "we already fixed it because you can't get rid of that shit, even in chapter 7 and 13 bankruptcy."
That's not Republican at all. Debt that is impossible to get rid of is the entire reason that the market can't price this correctly. People essentially have access to hundreds of thousands of dollar loans without collateral or any proof of the ability to pay it back because of government intervention. It's antithetical to the entire 'free market' ideology.
The Republican alter-ego in you would actually say something like, "treat this like any other debt that can be discharged in bankruptcy and it will be priced appropriately by the market."
Dschargeable student loans, and the subsequent elimination of everyone and their dog automatically getting student loans, would also probably go a long way towards reducing constantly-ballooning tuition in the US.
For any other type of loan, if you have more current/future income, you can get a larger loan. For student loans, you get a larger loan for having LESS current income. This is reasonable since the loans are government-subsidized, but it might help to have some correlation between the loan and your ability to pay it off (i.e. future expected earnings due to your education).
This sounds like an excellent arbitrage opportunity for a startup. Find mispriced student loans (say, some honor roll student in MIT Computer Science paying the same 7% as some fine arts student at University of Phoenix) and refinance them at 4%.
You could even securitize the debt and sell it to alumni! I know I'd buy Waterloo CS Class of 2018 Honour Roll debt at even 3%.
This happens already. There was an article linked here some time about it. The twist was that the article scolded those companies, because it meant that the rates for government loans would have to go up, because their portfolios now consisted of worse borrowers.
If you're good enough to do so I think it's more cost-effective to forgo co-op, stack on the debt, and graduate earlier so you can earn full-time salary and begin vesting stock.
For their studies, they borrow from the state. Then they pay their debt through 50% income taxes, limited to 7 years. If they get a bartender job with their engineering degree, they can still survive. Therefore studies are not free, they still have the responsibility of choosing right, they're not choked with debt and they still get a margin if they get a good job.
As an Australian currently paying off his education, this isn't accurate.
Firstly, there's no time limit. You need to pay back all of it.
Secondly, it's not a 50% tax rate. It's a additional % (4-8 %) on top of your normal tax rate, depending on how much you earn. There's also a threshold, so if you earn less than about $54k, you don't pay it back. At least, not that year.
Edit: Although I do agree with you: The answer is in Australia :)
Anything free creates a perverse incentive. Each year wagons of French students get graduated with History degrees at the free university. What job do they really intend to perform, how do they plan to contribute to society and how do they plan to earn money to give it back? How many historians do we really need? Most of them go straight to unemployment benefits for years. Which I also pay for.
I mean it has to be easy to study, like in Australia, but students need to be responsible with society's money, therefore it shouldn't be free.
It's legal because many people have a belief that the free market will successfully detect and avoid such scams, despite seemingly obvious evidence to the contrary.
If people are willing to spend money on something that is apparently "worthless", then who are we to complain or be "high-morals" about and make illegal? It obviously represents some value to them, therefore they are willing to pay money for it.
Are they worthless, scammy degrees? Who knows, maybe. Are some people told lies and believing in it? Maybe the case, too.
Is that on a simple cash flow basis? The value of the guarantees being made should count as a "cost", since insurance isn't usually given away for free, even if it doesn't pay out.
"Many country and city governments in the United States choose to "opt out" of GAAP practices as they operate on a cash basis, as opposed to an accrual basis."[0]
If publicly traded companies are expected to report GAAP numbers and our governments aren't, it has to make one wonder… it certainly makes it harder to determine how to go about effective resource allocation in a society, especially when we're asking kids to make informed investment decisions about their futures…
Actually most insurance companies operate on a cost neutral basis (i.e., the premiums are designed to match the payout on average). They make money because they are allowed to invest the premiums (often with a lot of leverage). This is why Warren Buffet bought up so many insurance companies. It's essentially a free loan (probably made more sense in the 80's than it does now, but you get the idea ;-) ).
So, I think the only cost you should account for is the cost of having to pay in the case of default.
Where did you get that information from? I spent 2 years of my professional life both designing insurance products for many of the major insurance companies, as well as filing for rate increase in almost all 50 states.
What you said it blatantly false. What your talking about is called the Loss Ratio (or LR because actuaries love acronyms). Insurance companies shoot for long term loss ratios of around 0.6 i.e. for every dollar put in, they expect to pay out in the form of benefits 60 cents.
Where are you getting your information from?
Additionally, insurance companies have a lot of rules on how they invest their reserves, so these aren't going into high risk high reward baskets. Insurance companies have tons of overhead, from underwriting, advertisement etc.. which would completely dwarf what they make from interest alone.
I mean you have to compare like with like, right? If you're comparing the value of guarantees given out, you compare that with the value of the debt received. Or you can compare it on a cash flow basis (money out minus money in).
