Gyroscopic Investing

http://www.politico.com/agenda/story/20 ... 94?hp=t4_r

Most parents will do just about anything for their children, especially when it comes to education. Predictably, at a time when college costs are exploding and students are staggering under more than $1 trillion in debt, one opportunistic lender is making huge profits on loans to their doting moms and dads.

Less predictably, that lender is the United States government.

[...]

According to the White House budget office, the expected recovery rate for defaulted Parent PLUS loans is a remarkable 106 percent, a testament to Uncle Sam’s unique power as a collection agency. Overall, the program is expected to return $1.23 on every dollar it lends this year, thanks to its relatively high interest rates and minimal opportunities for debt relief, as well as the government’s relentlessness in tracking down overdue education loans. The only federal loans that generate slightly better returns are the similar PLUS loans to graduate students, which have much lower default rates.

POLITICO has been investigating the government’s bizarre $3.3 trillion loan portfolio, which is riddled with tensions between the interests of borrowers and taxpayers. Some credit programs are almost comically risky for the government, most memorably a rural broadband effort with an official default rate of a seemingly impossible 116 percent. Parent PLUS loans are the flip side of the coin, generating reliable profits for taxpayers but serious risks for moderate-income borrowers.

[...]

Parent PLUS is classic predatory lending. It’s not a safe product for many of these families, and the debts will hound them forever,” said Rachel Fishman, an education policy analyst at the nonpartisan New America think tank. “But it’s a cash cow for the government, so it’s going to be extremely difficult to reform.”

[...]

PLUS loans have also become a key revenue source for many schools, particularly historically black colleges and for-profits that tend to serve lower-income families.

But that just illustrates the increasingly tortured economic paradoxes at the heart of modern higher education, where schools have no incentive to provide affordable prices as long as they can count on federal dollars for making education affordable. Ultimately, Parent PLUS sluices more cash into the college-industrial complex, helping educators jack up their tuitions while pressuring parents to make up the difference with debt, while doing nothing to ensure they’re getting a real return on their investment. It enhances accessibility, but not really affordability, simply giving parents a way to punt the skyrocketing costs into the future. Even some advocates who fiercely defended Parent PLUS during a high-profile controversy in 2011, when the Obama administration briefly reined in loans to parents with sketchy credit histories, told me the program is deeply troubled and inherently flawed.

At historically black colleges and universities, which had been particularly hard-hit by the recession, the number of PLUS recipients dropped 45 percent over the next two years, depriving them of an estimated $150 million. Three struggling black colleges—in Virginia, Georgia, and North Carolina — ended up shutting their doors, and larger schools like Morehouse endured mass layoffs.

“Our schools were screaming bloody murder,” said Thurgood Marshall College Fund President Johnny C. Taylor Jr., a leading advocate for historically black colleges and universities. “Forget salt — this was pouring acid in our wounds.”

For-profit schools absorbed an even bigger hit, a 54 percent decline in PLUS enrollment. But for obvious political reasons, the black schools (with fierce support from the Congressional Black Caucus) led the fight to get the first African-American president to reverse or at least delay the changes. Taylor and other advocates had several tense meetings with Education Secretary Arne Duncan, repeatedly asking why a two-decade-old snafu had to be corrected immediately, why the tougher reviews couldn’t be limited to new PLUS applicants, why a secretary who had said expanding access to college would be his “North Star” was restricting access to college. Duncan emphasized that the changes weren’t directed at black schools, but Taylor shot back that they were having a disproportionate effect on black schools.

Pointedstick wrote: But that just illustrates the increasingly tortured economic paradoxes at the heart of modern higher education, where schools have no incentive to provide affordable prices as long as they can count on federal dollars for making education affordable. Ultimately, Parent PLUS sluices more cash into the college-industrial complex, helping educators jack up their tuitions while pressuring parents to make up the difference with debt, while doing nothing to ensure they’re getting a real return on their investment. It enhances accessibility, but not really affordability, simply giving parents a way to punt the skyrocketing costs into the future.

Another way to approach costs is to remove the incentives for universities to accept government-subsidized student-loan money regardless of a student's prospects of graduation or gainful employment. Under the current setup, incentives run the other way: Schools get their money up front via student loans; if students are unable to pay the loans back, the burden falls on taxpayers (if the loan was "guaranteed" by the federal government), and the students themselves, while the schools get off scot-free.

A serious student-loan fix would change this incentive. First, federal aid could be capped, perhaps at a national average, or simply indexed to the consumer-price index, making it harder for schools to raise tuition willy-nilly. Second, schools that receive subsidized loan money could be left on the hook for a percentage of the loan balance if students default. I would favor allowing students who can't pay to discharge their loan balances in bankruptcy after a reasonable time—say, five to seven years, maybe even 10—with the institutions that got the money being liable to the guarantors (i.e., the taxpayers) for, say, 10% or 20% of the balance.

You can bet that under this kind of a rule, universities would be much more careful about encouraging students to take on significant debt unless they are fully committed first to graduating, and second to a realistic career path that would enable them to service that debt over time. At the very least, schools would be more likely to warn students of the risks.

TennPaGa wrote: I suspect people worried about government debt would think this is an awesome program: $1.23 is returned for every $1 lended out.

Libertarian666 wrote:

TennPaGa wrote: I suspect people worried about government debt would think this is an awesome program: $1.23 is returned for every $1 lended out.

Right, so why don't we have a new program of selling all suspected terrorists organs? That would be very profitable too!

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moda0306 wrote:

Libertarian666 wrote:

TennPaGa wrote: I suspect people worried about government debt would think this is an awesome program: $1.23 is returned for every $1 lended out.

Right, so why don't we have a new program of selling all suspected terrorists organs? That would be very profitable too!

(Note: )

But the terrorists didn't contract with the government for their organs.  Students who go into debt did.  Doesn't that make it ok?