Good question. EG Why doesn’t everyone default on a loan? This is asking “how do loans work”.
Typically, a loan with interest is a gamble. You want to get your money back with a return. If you loan money you want to ensure you will get your money back by qualifying the applicant. There is a risk though because they might not pay it back, thus you increase the interest rate according to how qualified the loan is. Good investors really focus on getting a qualified applicant (one that can pay it back). Sometimes they don't get their money back and they are forced to write it off - it is apart of the loan business.
Basically, I am not trying to be insulting but I will end up explaining how a loan works - so I will stop there.
With college loans ALL basic loan concepts are wrong. You cannot default on a college loan by law. It follows you through marriage, bankruptcy, or even service in Afghanistan. The people which made these poor loans know they made poor loans backed by the US government. Thus, they have lobbyists pushing congress to ensure student loans are 'unforgivable'. SO! Investing in a student loan is a damn good deal. You have 0 chance of someone defaulting because it is illegal to default. The loan has zero risk. This is why tuition has exploded and why we have a crisis.
So, if you want to major in 18th century French Dance at Yale for 190k - there isn't an investor willing to stop you.
Tuition in your country has not expanded because of cheap loans.
People need jobs and you have a job shortage.
College is seen to be the best/only option for a middle class life - which is driving people to college.
College is not free in America. So people need to pay, but job pay is concentrated in certain fields, and any hitch in the process means that payment schedule gets extended.
To a certain extent, the problem is of course having loans.
But that would just make the main problem obvious - life is expensive and there’s now fewer ways to make a middle class life.
This is like the Indian job market- You are either a STEM / law/ CA / or bust.
How do you propose funding poor people's education then? Keep in mind education is not like a house where you generally pay 20% down and the bank gets to keep your house if you default which they can then resell to recoup some/most of their loan. Poor people have very little money to pay for education and all of the value goes towards their brain which a bank cannot just reposses which is why the government takes ownership of said loans and effectively repossesses your future earnings.
Wait, why is this a good question? I mean the OP said “it’s not that simple” which says he/she has a DEEPER understanding of loans that the previous post.
The answer to the OPs question is obvious to someone who understands loans (“the same things that keep everyone from defaulting on every loan”).
So, isn’t it actually a dumb question? Or rhetorical, and since its obvious and adds nothing, it seems best to just ignore it.
The original US student loan program gave loans which could be defaulted on just like any other loan. So, maybe a better question would be “why did the US congress change the rules just for student loans?”
If student loans can be defaulted, it doesn't matter what the investor thinks or what interest you get or if you're backed up by the government or not.
Even if you study [insert profitable degree], the rational action to do after graduating is to default, since students typically don't have much to lose.
ransom1538|7 years ago
Typically, a loan with interest is a gamble. You want to get your money back with a return. If you loan money you want to ensure you will get your money back by qualifying the applicant. There is a risk though because they might not pay it back, thus you increase the interest rate according to how qualified the loan is. Good investors really focus on getting a qualified applicant (one that can pay it back). Sometimes they don't get their money back and they are forced to write it off - it is apart of the loan business.
Basically, I am not trying to be insulting but I will end up explaining how a loan works - so I will stop there.
With college loans ALL basic loan concepts are wrong. You cannot default on a college loan by law. It follows you through marriage, bankruptcy, or even service in Afghanistan. The people which made these poor loans know they made poor loans backed by the US government. Thus, they have lobbyists pushing congress to ensure student loans are 'unforgivable'. SO! Investing in a student loan is a damn good deal. You have 0 chance of someone defaulting because it is illegal to default. The loan has zero risk. This is why tuition has exploded and why we have a crisis.
So, if you want to major in 18th century French Dance at Yale for 190k - there isn't an investor willing to stop you.
intended|7 years ago
People need jobs and you have a job shortage.
College is seen to be the best/only option for a middle class life - which is driving people to college.
College is not free in America. So people need to pay, but job pay is concentrated in certain fields, and any hitch in the process means that payment schedule gets extended.
To a certain extent, the problem is of course having loans.
But that would just make the main problem obvious - life is expensive and there’s now fewer ways to make a middle class life.
This is like the Indian job market- You are either a STEM / law/ CA / or bust.
mrep|7 years ago
mgleason_3|7 years ago
The answer to the OPs question is obvious to someone who understands loans (“the same things that keep everyone from defaulting on every loan”).
So, isn’t it actually a dumb question? Or rhetorical, and since its obvious and adds nothing, it seems best to just ignore it.
The original US student loan program gave loans which could be defaulted on just like any other loan. So, maybe a better question would be “why did the US congress change the rules just for student loans?”
vilmosi|7 years ago
If student loans can be defaulted, it doesn't matter what the investor thinks or what interest you get or if you're backed up by the government or not.
Even if you study [insert profitable degree], the rational action to do after graduating is to default, since students typically don't have much to lose.
anoncoward111|7 years ago
specialist|7 years ago