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June 19, 2012

When The Conventional Wisdom, Isn't

More flogging of deceased equine flesh:

As the Fed study showed, 43% of student borrowers have less than $10,000 in debt, and 72% have less than $25,000. And the College Board shows that, in 2009-10, 56% of those graduating with a B.A. from a public college took out a loan. The average debt of these borrowers, after adjusting for inflation, was $22,000.

Is $22,000 too much debt? Paid off over ten years, monthly payments would be $217 at an interest rate of 3.4% (the current subsidized rate) or $253 (if the rate goes up to 6.8% in July, as scheduled).

Under the graduated payment plan, the initial payment would be $140. Another policy option would be to allow students to pay this debt over 20 years instead of 10, thereby cutting the monthly bill to just $126 ($168 if rates go up).

By way of comparison, Fed data show that the average new car loan is $27,000. This corresponds to a minimum monthly payment of $500 (assuming an excellent credit score, which few students have).

The car loan would have to be paid off over five years: No bank will let you spread a car loan over decades, because a car has little market value after just a few years.

But a college education pays off over a lifetime, which is why paying for it over a long horizon makes sense. Spread the payments over the lifetime of the asset: a basic economic principle that we should keep in mind when designing student loan policy.

And from CNN, a challenge to a pervasive negative stereotype about female bosses:

Many see alpha females who will cling to power at any cost. The ones who will stomp all over other women, not think twice about putting them down. The kind of women who make anyone wish for a male boss.

Ilene H. Lang, president and CEO of Catalyst, says the research and advisory organization's latest report published Tuesday helps dispel that myth about women. The data, she says, takes the sting out of the notion of queen bees running the show.

The report finds that women - 65% - are more likely than men - 56% - to develop potential talent, to help cultivate emerging stars and help them move up the corporate ladder.

And 73% of women developing others are developing women, compared to 30% of men helping women.

"I'm not saying there are no queen bees out there," Lang says. "What I am saying is that the majority of women in leadership are very supportive of women."

For those of you who enjoy this sort of thing, a review of conventional wisdom in the form of old sayings may be found here.

Posted by Cassandra at June 19, 2012 08:26 AM

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Comments

So if college debt isn't such a big problem as it's made out to be, then colleges shouldn't really have any problem taking over as the guarantors on the loans of the students that they admit. Right?

Posted by: spd rdr at June 19, 2012 09:10 AM

They would be crazy to do so. It seems to me that the magnitude of student debt and the propensity of students to pay it back are two entirely separate phenomena.

A lender must consider both the amount of the loan and the likelihood of repayment. Lots of students who default on their loans have money for other things they want to buy. They just don't view loans as a moral obligation.

If you default on your car loan, your car is repossessed and the collateral depreciates rapidly in value (unlike a college degree). If you default on a student loan, the lender can't take back your degree.

Also, the average car payment is far higher than the average student loan payment but you don't see outraged articles about how car debt is preventing our children from succeeding.

I do think that if colleges had to guarantee the loans, we'd see far fewer college loans and far fewer students graduating.

Posted by: Cass at June 19, 2012 09:29 AM

Since most colleges are public colleges, that's just another way of asking the taxpayer to guarantee the loan.

What should happen in my opinion is that the loans should be dischargable in bankruptcy court like other debts. That way, if the student just doesn't want to pay the loan, the lender can garnish his wages or even take his car; but if the student really is bankrupted, he can deal with this like any other debt.

That would probably raise the cost of borrowing somewhat, but it might also make the loans smarter. Lenders could still offer good rates for degrees in fields that have high employment rates (and thus these loans have a high probability of getting repaid). Loans for your "Master of Puppetry Arts" degree would be much more expensive, if they were available at all.

If you really wanted that puppetry degree, you could get it in other ways; but it isn't as smart an investment, and it's strange that we have the laws structured to price the loans in the same way.

Posted by: Grim at June 19, 2012 09:38 AM

If you default on your car loan, your car is repossessed and the collateral depreciates rapidly in value (unlike a college degree). If you default on a student loan, the lender can't take back your degree.

Actually, that's a REALLY good idea! I mean, I understand they can't download the knowledge back out of your head, but fact is 99% of the value of the degree is the diploma, not the knowledge. Most of the folks who work in my IT shop do not have IT degrees. But they do all have college degrees.

So imagine a case where a student decides they're not going to pay back their loan (we're also imagining that the school cares... either because they're the guarantor of the loan, or because they just don't want to be associated with deadbeats). There's no reason the school cannot "repo" the diploma. It would work like this. Prospective Employer calls up the college and says "Is Joe Smith a graduate like his resume claims?" (We're also assuming that employers actually care about verifying resumes) University of West Podunk looks up Joe's record and sees that his degree has been suspended for non-payment. They then answer, "he graduated from our program but defaulted on his loans, so we have marked him as suspended." Joe then loses the job because Prospective Employer doesn't want a deadbeat on their payroll.

NOW... I do also see how this could keep someone who is honestly trying to pay off a debt forever out of a job. Or at least out of a career. There are ALWAYS jobs that don't care if you've got a sheepskin or not. But I do think allowances should be made for individuals who are actually trying to meet their obligations.

Posted by: MikeD at June 19, 2012 10:22 AM

Um... who says that a university can't rescind a degree?

Posted by: spd rdr at June 19, 2012 10:54 AM

Feeling feisty today, mr rdr? :)

Perhaps they could - I haven't checked into it. But how often has degree rescission been used as a penalty for student loan default?

Maybe it should be.

Posted by: Cass at June 19, 2012 11:16 AM

But how often has degree rescission been used as a penalty for student loan default?

I'm not sure it should be. It wasn't the school that was shorted by the failure to repay, unless the school made the loan (as my alma mater very occasionally did). Besides, if the person graduated--met the school's standards for achieving the degree (which generally don't include fiscal responsibility 10 years in the future)--there's no real basis for rescinding the degree: he did the work and met the standards, and defaulting on a debt doesn't alter that.

Although it would be justice of a sort (though still violating the above logic) to start withholding transcripts when the graduate falls behind/defaults. And it wouldn't be hard, except politically, to make this explicit in student loan contracts from today forward.

As for women bosses, my data sample is one. I thought she tried to do well in the sense of giving us our marching orders and then getting out of our way so we could execute, but I also was relatively freshly out of the USAF, and I thought she wasn't as aggressive sometimes as I thought she should have been, especially compared to the women officers and NCOs with whom I'd worked.

Eric Hines

Posted by: E Hines at June 19, 2012 06:23 PM

"The report finds that women - 65% - are more likely than men - 56% - to develop potential talent, to help cultivate emerging stars and help them move up the corporate ladder."

I seriously question how it's possible to measure this in any meaningful way. Those who do the most to develop talent are not always the ones who *look* like they are doing so, and especially are not always the ones who *say* they are doing so.

And if you survey the employees and ask "how good a job is your manager doing of developing you?", you will get some useful information, but you will also encounter some of the same problems that universities encounter with surveys of student opinions about professors.

Posted by: david foster at June 19, 2012 06:24 PM

I seriously question how it's possible to measure this in any meaningful way.

Well, you could ask employees whether they've ever had a mentor/sponsor and if they did, was it a man or a woman?

I can answer that question. In every job I've had, I've had a pretty good idea of who was interested in helping me succeed or get promoted and who wasn't.

That said, I'm not sure how they came up with the percentages cited.


Posted by: Cass at June 19, 2012 09:00 PM

Besides, if the person graduated--met the school's standards for achieving the degree (which generally don't include fiscal responsibility 10 years in the future)--there's no real basis for rescinding the degree: he did the work and met the standards, and defaulting on a debt doesn't alter that.

I dunno, I'd make a case for the fact that if they default on the loans, they "stole" their degree. It's why cars get repossessed, you didn't pay for it, so the title holder takes it back. You don't pay for your degree, the title holder (of the loan) should be allowed to prevent you from enjoying the fruits of your ill gotten gains. I can see a perfectly reasonable case of a bank or entity that provides student loans being allowed to call the university and placing a lean on the degree.

Posted by: MikeD at June 20, 2012 08:17 AM

Paying off all loans over the entire life of the asset purchased sounds like a good way for the consumer to be in debt his entire life and never to have any equity in anything. I can see how it's a prudent principle for the lender, but what a bad idea for the borrower.

Businesses follow this model because they're making money on the purchased asset throughout its life, and in principle they're making more by using it than they're spending on the interest to stretch out its purchase price. A consumer could follow this logic for some things, like transportation to get to work, and even a degree to enable him to do higher-paying work, but it's not a great economic model for that puppetry degree.

I have to say, though, that hand-made puppets sound like a complete blast. You know what I've always wanted to do? Find an old merry-go-round horse and repaint it in obsessive detail.

Posted by: Texan99 at June 20, 2012 08:37 AM

placing a lean on the degree

Placing the lien doesn't keep me from continuing to use the thing, though--that requires an actual repossession. The lien, though, is attached to every transaction involving the thing.

That might be a strong disincentive to walk away from the student loan: the transcripts have this little notice: this person is in arrears by x months/years on his student loan. He still owes $z thousand.

...what a bad idea for the borrower....

Nobody has stuck a gun in his ear and forced him to borrow.

Eric Hines

Posted by: E Hines at June 20, 2012 02:56 PM

Sure, I just meant what bad advice, and what a disastrous practice -- not "bad" in the sense of "lock up those bad banks for offering it." I'm amazed how common it is: loans for cars, loans for home furnishings, you name it.

Posted by: Texan99 at June 20, 2012 07:00 PM

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