Saturday, October 10, 2009

Student Loans, Bad Credit Risk, Changing the College System

The 'democratization of credit' era is over. Hmm. This started in the '70s and gained steam later as banks moved away from the idea of rejecting people for loans when they were a bad risk and started to just assign higher and higher rates for worse and worse risks. This had its beginnings in the Community Reinvestment Act, and exploded as banks found more ways to pump up profit margins by lending to the poor. There was probably a good reason banks for years did not loan to poor security neighborhoods or poor people in general, as they make less money to pay back loans. Kind of common sense. Hmmm, might have prevented that housing bubble. No bank in their right mind would have ever made loans with my paternal grandparents. You could give them a bag of money, wash your hands, come back and find it spent on mac & cheese and Red Sox merchandise. I love them but wouldn't trust them with a $5 bill.

Now the blog I linked to does properly criticize the fact that this young women spent 26K in loans on a 2 year associates degree from a community college. My question is in her home state of NY how did she not go to one of the great SUNY schools for close to 13K a year? Who was giving her advice? Any teacher, coach or guidance counselor out there who might lend a hand? One thing to consider is that there are many decisions in the lives of young adults between age 17-22 that will affect their lives that, despite good/bad advice or lack of advice, they have to make on their own. This is why I like that Congress tried to protect consumers with recent legislation, but the idea that someone between 18-21 has to get their parents signature for a credit card is kind of foolish. We can try a teenager as an adult in heinous crimes but we won't let them make a decision on a credit card by themself. I do like that this Ms. King is dealing with her choices and has the freedom to make them & live with the consequences (not requiring a bailout like big banks).

As we march towards the financial future, we do have to consider how the removal of credit to large portions of America is going to affect education consumption. Many folks took student loans out for useless 2 & 4 year degrees. Remove their easy access to credit and does enrollment drop? Yes. Marginal enrollees will not attend school. Lower demand, means lower revenues for the schools. Schools will have to meet the new demand like many other businesses and either offer a product that will give its users greater value or reduce cost. My prediction is lower costs. Top notch schools will even feel the pinch, but engineering focused schools might be able to weather the storm better. Colleges are going to have to curtail spending on ancillary things like dorm rooms built like townhome condos, gym facilities better than most private gyms, and yes, even the benefits of their ees to help rein in costs. While fancy dorm rooms and gyms can draw more students, the game changes when the access to low interest rate loans is gone. The game changes when people don't think a degree can get them more marginal money to justify the expense/loans or the degree from that university is not going to get them more marginal earnings than a cheaper university. This transformation will come in the American university system, and it will be an interesting one to observe.

I can't wait for the day American businesses stop having a college degree as a requirement even if you have 30 years of experience and grew up in an era when college was a luxury. This has been a horrible trend in the Northeast which fucks over a lot of baby boomers who now find themselves out of work after 20 years with a company.

1 comment:

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