Student loans are disconnected

by Admin
Updated: June 27, 2018

Financial instruments such as a student loans are disconnected from the normal rules of finance

When the risk of providing finance is artificially reduced, there is a disconnect. When the risk of providing a defective product is artificially reduced, there is a disconnect. A student loan is an example of one being used to pay for the other.

Some careers require a degree and going to a full-time college can enable networking opportunities that shouldn’t be overlooked.

In general, having a degree has been considered a positive indicator for employment and also risk (credit, insurance).

Increasingly however, going straight to college on a student loan is becoming more & more expensive and looking less & less like a good investment.

No bankruptcy protection

Except under very special circumstances, student loans are excluded from bankruptcy protection. This means, no matter how much financial difficulty the borrower is facing, there is no way to remove the burden of this particular debt except by paying it off.

This makes sense at face value. Otherwise, declaring bankruptcy immediately after graduation might be a very attractive strategy.

This softens the exposure of the lender.

Deferred to the future

Student loans are long-term and subject to renegotiation so the risk can be deferred significantly far into the future.

This means the debt will remain on a lender’s books even though there may be a significantly reduced chance of it being repaid.

This further softens the exposure of the lender.

Minimal accountability

With more risk transferred to the student and to the future compared to a conventional loan, the need on the part of the lender to assess the risk (quality of education, reputation of college, ability of student, future market) is reduced.

This allows, at least in principle, for marketing to the student to be more disconnected from eventual reality.

If you buy something that turns out to be not fit for purpose, you normally have some recourse against the supplier. It is difficult, if not impossible, to sue a college for a worthless degree.

This means there is reduced incentive on the part of the college to include real-world skills for long-term benefit.

Uncertain value

When you buy something you can normally value it in terms of resale, earnings or conversion. None of these apply directly in the case of education.

You normally only borrow money if you have a high level of confidence that it will help you make more than the amount you borrowed, including interest and fees, in reasonable time. A “high level of confidence” means as close to a sure thing as possible.

Poorly defined hope doesn’t qualify, yet the idea that if you have a college degree - any degree - you’ll get a better job is still promoted as all the basis you need.

Fee inflation

Self-assessed value - especially when combined with high availability of financing - means college fees are subject to unlimited inflation.

Absence of trade credit

In order to encourage sales, suppliers often offer trade credit. By exposing themselves to some immediate financial risk they have a strong incentive to ensure the product is fit for its purpose. It is a sign they have confidence in their product.

It is good sign when a college offers financing for its own courses.

Consequences

The combination of easy financing and high fees lead to a massive debt problem.

This in turn stifles innovation because the graduate cannot afford to take risks. Only a job that pays reliably will do.

There is no guarantee that a degree on its own will lead to a high-paying job.

If the degree doesn’t quickly lead to related employment, the graduate may be forced to take a job unrelated to the original field of study and the value of even a good qualification will fade with time.

Alternatives

Full-time degrees can & should be closely connected to future employment. Ideally, get sponsored.

Scholarships and grants exist. Seek them out.

Costs can be reduced, e.g. meeting residence requirements can reduce fees.

Part-time degrees enable simultaneous employment and a pay-as-you-go situation will avoid the debt problem. Ideally, the employment should be in a related field.

Maybe going straight to college isn’t that important. I worked in industry before doing my first degree. Most of what I use day-to-day I learned in high school.

More info

We have a student loan crisis - info & numbers (2015 - 2017) are at investopedia.com and forbes.com.

Student loan default info is provided by studentaid.ed.gov and student loan debt in bankruptcy is reviewed at nolo.com.

Financial aid is available via FAFSA (fafsa.gov) and LRAP (lrap.org). Some colleges do provide financial aid (lists at bestcolleges.com and usnews.com) and scholarships can be found through scholarships.com.

Lists of employers who provide tuition reimbursement can be found at thebalancecareers.com and estudentloan.com.

Internal links

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