Animal’s Daily Student Loan News

Here, from the Mises Institute, is a fun little fable on student loans.  Excerpt:

A student goes into a bank. He tells the personal loan banker, “I want to borrow $7,500 per year for the next four or five years.”

“That’s at least $30,000 over time,” the banker says. “Personal loans have a 10 percent interest factor.”

“For my loan,” says the student, “I need an interest rate close to a home mortgage, like 6 percent. Also, I don’t want to be charged interest for the first four or five years of the loan.”

The banker asks, “How long will this loan be for?”

“A twenty-year payoff after graduation or shorter,” replies the student.

The banker asks, “Do you have any collateral assets to secure the loan?”

The student says, “No collateral, but I promise to pay it off when I get a job.”

The banker is incredulous. “Anything else you want to tell me about your plans?”

“Yes,” the student says, “there is a 10 percent chance that I will totally default in the first year and a 30 percent chance that I won’t finish my degree. And I may default a few times paying off my loan.”

The banker looks ready to pass out.

It gets worse from there.

At the risk of repeating myself (something I’ve never had trouble doing in any case) I’ll state the obvious answer to this, in fact the answer that would also put paid all of the stupid, useless Underwater Ethnic Dog-Polishing Studies degrees:  Privatize education and the financing of education.  All of it.

Right now, on student loans, the risk of default is borne by the taxpayer; there is no risk to the lender.  If we made that one change, so that the risk of default is borne by the lender, you’d see a big sea change in the way student loans were approved and disbursed.

Conversations like the one in this fun little fable would then be very, very different.