Why the Education Bubble Will Be Worse Than the Housing Bubble

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    Jun 15, 2012 8:39 PM GMT

    Even when homeowners got hopelessly behind on their mortgages, two options helped. First, they could declare bankruptcy and free themselves of their crippling debt; second, they could sell their houses to pay down most of their loans. Students don’t have either of these options. It’s illegal to absolve student loan debt through bankruptcy, and you can’t sell back an education.
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    Jun 15, 2012 9:55 PM GMT

    Grieving Father Struggles to Pay Dead Son’s Student Loans

    A few months after he buried his son, Francisco Reynoso began getting notices in the mail. Then the debt collectors came calling.

    "They would say, 'We don't care what happened with your son, you have to pay us,'" recalled Reynoso, a gardener from Palmdale, Calif.

    Reynoso's son, Freddy, had been the pride of his family and the first to go to college. In 2005, after Freddy was accepted to Boston's Berklee College of Music, his father co-signed on his hefty private student loans, making him fully liable should Freddy be unwilling or unable to repay them. It was no small decision for a man who made just over $21,000 in 2011, according to his tax returns.

    "As a father, you'll do anything for your child,” Reynoso, an American citizen originally from Mexico, said through a translator.

    Now, he's suffering a Kafkaesque ordeal in which he's hounded to repay loans that funded an education his son will never get to use — loans that he has little hope of ever paying off. While Reynoso's wife, Sylvia, is studying to be a beautician, his gardening is currently the sole source of income for the family, which includes his 18-year-old daughter Evelyn.

    And the loans are maddeningly opaque. Despite the help of a lawyer, Reynoso has not been able to determine exactly how much he owes, or even what company holds his loans. Just as happened with home mortgages in the boom years before the 2008 financial crash, his son's student loans have been sold and resold, and at least one was likely bundled into a complex Wall Street security. But the trail of those transactions ends at a wall of corporate silence from companies that include two household names: banking giant UBS and Xerox, which owns the loan servicer handling the bulk of his loans. Left without answers is a bereaved father.

    The risk of cosigning on Freddy's loans seemed to have been worth it when he graduated in May 2008 and began looking for a job in the music industry. He was on the way back from a job interview on the evening of Sept. 4 when he lost control of his car and it rolled over. Freddy's family learned of his death the next morning.
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    Jun 16, 2012 7:56 PM GMT
    While I blame the government backed source of funds for the school loans, I also blame the schools and administration accordingly. With tuition prices rising exponentially, someone is getting an enormous raise the past few years.

    What's even more dreadful is the fact the targets are typically young kids, inexperienced and financially immature compared to the targets of the housing market for the most part.
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    Jun 17, 2012 6:53 AM GMT
    Interesting addendum/study from the OECD:

    The report cites an earlier study by the Organization for Economic Co-operation and Development that the biggest determinant whether young people will attend university is whether or not their parents had attended university. When controlling for other factors, a young Canadian is 4.6 times more likely to attend university if her parents had attended as compared to one whose parents had not. Other factors such as occupation and parental income have much smaller effects on attendance rates.

    The OECD report suggests that loans to low-income students may be of limited value, as students from disadvantaged backgrounds may underestimate the benefits of higher education and are often relatively risk-averse when taking on debt. Increasing the size of loan programs is of little use to low-income students if they are unwilling to take on those loans.

    Tuition is seen as the financial barrier preventing low-income students from attending college or university, but it is only one of the financial costs faced by students. An earlier OECD study found that rural Canadians are equally as likely to attend college as urban ones, but are much less likely to attend university than their urban counterparts. This difference is likely due to the fact that there are more colleges located in and near rural areas than there are universities. Having to move away from home poses an additional financial burden on rural Canadians that is not borne by their urban counterparts.

    Given the studies cited in the OECD report, reducing tuitions is an inefficient way of increasing access to higher education. Loans may not be pursued by low-income or disadvantaged groups, but an income-contingent loan repayment system, similar to that of the U.K. and Australia, could be more effective. The most effective way to increase access to higher education would be to simply give direct tuition grants to the three groups the least likely to attend university: lower-income households, rural and aboriginal Canadians and, most important, those who did not have a parent attend university.