Comments on economics, mystery fiction, drama, and art.

Monday, November 24, 2014

Don't believe everything you read on the internet

One of the things I've now seen several times on people's Facebook posts is this:

(Click to enlarge.)
I've tried to ignore it, but I have finally snapped.

Let's assume we have a standard student loan in which interest is deferred, so we begin with a balance of $26,400.  Let's suppose we plan to pay that loan off in 23 years with total payments of $32,700--or about $119 per month.  For that to work, the interest rate on the loan would have to be less than 2% per year.  (Almost any loan calculator will let you figure this out.)

Or, suppose the payment is $119 a month for 23 years.  What interest rate would it take to have an outstanding balance of $45 K after making every payment on time and in full?  About 7% per year.  The initial monthly interest charge would be about  $150 per month.  So the unpaid balance would increase each month.

The thing is--you would know this, because it would be a part of the federally required disclosures.  So for this to happen, you would have to have agreed to it when you took out the loan. 

The other thing is--who would even want to offer you such a loan?

Finally, what monthly payment would actually pay the loan off in 23 years, with a 7% APR?


UPDATE:   I thought I'd say a word or two about how I think Higher ed should be financed.
And the answer is *NOT* student debt.
Across the US, state support for public higher education has declined precipitously in the last 25-30 years. Both for private higher ed and for public, tuition has gone up enormously (community colleges, not so much). At the publics, the tuition has essentially substituted for declining public support. At the privates, it has paid for a lot of things I personally find superfluous to their function. (To pick on my undergrad institution, it has recently spent a huge amount of money rebuilding its athletic facilities and is currently building a dining hall which, in the drawings that have been published reminds me of nothing so much as the hall at Hogwarts.)
A number of people who write about this point out that, on average, people who complete a 4-year degree earn a lot more than do people who do not. That's true. It's also true that the primary reason for that is not (particularly) rising earnings for college grads, but falling earnings for the others.
So what do I think we should do? (I'm about to say *WHAT* we should do, not *HOW* it can be accomplished.)
1. For the publics, reverse the trend toward lower public support.
2. For all higher ed, increase federal grants--not loans--especially needs-based grants.
3. We have already seen experiments with debt forgiveness (in public health, for example) for people who work in certain types of jobs upon graduation. So expand that, and guarantee that there will be jobs available.
4. Improve opportunities for people who do not want to attend college:
.....a. Expand apprenticeship opportunities, with federal funding if necessary.
.....b, Expand skills training outside employment, and fund it.
That's a start. An end to debt-based financing of post-secondary education should be something to push for.


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