Failure of the Student Loan Market

Failure of the Student Loan MarketA college spot is more than the culmination of learning processes. It is a credential that functions as a good, only in a unique centering because it allows the holder to compete more originfully in the labor commercialise. At the same time, accessing this good requires specific fiscal instruments in the form of grants, financial aid, awards, federal benefits, and of course, lends. The bookman bring market, as this essay will show, is a market also-ran. The put out of college degrees is insufficient compared to the supply of gives for college and be there is an information instability with these financial products because many seeking to buy them are not aware of the risks (e.g., the lack of consumer protection, the likelihood that they will not graduate) further, the more lendwords are sold, the more the value of the good state use them to get (i.e., a college or graduate degree) will decline. All of these factors point to the student loan market as a market failure. Short of dramatic remedies that might make education inaccessible for all but the 1%, one of the better(p) policy-related solutions to this dismal problem might be to make holding a loan less painful for those who are trying to repay it. Why is the student loanmarket an issue, and why does it exist in the first place? The ways thatAmericans finance their postsecondary education hold insight into the answers.As college costs pick up risen far faster than the rate of inflation (Lieber, 2009), and as the middleclass buying power has declined, most stack dumbfound been un adequate to(p) to finance theireducations out of their own pockets. For generations, many college students inAmerica have taken on loans to finance college and postgraduate education duenot just to the impudence that this will have a positive re liberate on investment(ROI), but also because of the perception that student loan repayment offers a benevolent tax bank discount. Howev er, as collegecosts skyrocket (Abel & Deitz, 2014)and jobs evaporate to the point where increasing numbers of people question itsvalue (Taylor et al., 2011),more people are asking questions about student loans and who really benefits.Muddying the water still further is the role of 26 U.S. Code 221, whichstipulates the details that govern the student loan interest deduction,including its level best deduction and the modest cost-of-living accession that mayincrease this maximum, in addition to details regarding definitions and theroles of dependents in calculating this deduction (Cornell Law School Legal reading Institute, 2017).In general, anindividual is eligible for this deduction if, and only if, he or she took out aqualifying educational loan, if they paid interest on the loan (as opposed tofees, principal only, or another arrangement), and if the individuals modifiedadjusted gross income (MAGI) is no more than $80,000 if filing as an individualor $160,000 if filing as a mar ried couple (Aranoff, 2015 Internal R heretoforeue Service, 2017).However, these deductions may seem overly modest, given that as of 2013, theaverage college graduate was deviation school with more than $35,000 of debt (Ellis, 2013). Increasing numbers ofpeople are taking out enormous sums to finance college or graduate school, andfewer are able to pay these off in time, leading to cascading economical problemswhen they are unable to buy homes, when they put off having children, or inmany cases, simply inattention on the loans. Information asymmetry isalso a critical component of this market and of its failure. Especially forthose who are first in their family to attend college, or who otherwise have nopersonal experience with higher education and its marketing techniques, theappeals of predatory for-profit schools are almost irresistible. Thesehigh-pressure schools use sales techniques to get students to insure to attend,helping them apply for loans but failing to give them a dequate informationabout the risks involved (to say nothing of the low value of a for-profitdegree). The people selling the loan products have information that thepurchasers do not. In some larger theoretical or symbolic sense, the veryinformation asymmetry is something that people want to overcome through theirpursuit of a college degree. Regardless, the studentloan crisis is widely considered to be more highly concentrated among those attend two-year schools. Economists have noted that there is a seriouspotential for an economic crisis to occur if many default on student loans,though the lack of collateralization, as was predominant in the housing bubble,may contain the damage but may also nonetheless cause severe declines inmiddle-class purchasing power (Looney & Yannelis, 2015).The authors of one study stated, it is interesting to compare the defaultout-comes of borrowers who took out subprime mortgages compared with those whotook out student loans to attend for-profit college s. Both types of borrowerstend to have poorer-quality realisation records, and the returns to theirinvestments were dependent on macroeconomic factors beyond their controlhouseprices in the case of subprime mortgages and wage growth in the case of studentloans (Looney & Yannelis, 2015, p. 81).This passage hints at the interconnected genius of mortgages and student loans,including the ways that student loan borrowers are disadvantaged by thesituation and by the informational asymmetry. The repayment systemsfor student loans, meanwhile, also represent market failures in a strong way. A2008 paper explored the ways in which various proposed loan forgivenessprograms effectively constituted a secondary tax (Dynarski, 2008, pp. 1920).The author concluded that even though college costs rise and student loanborrowers remain in debt for a very large amount of time, the degree itself isstill worthwhile. However, there is a mismatch in the timing of the arrivalof the benefits of college and its costs, with payments due when earnings arelowest and most variable. Ironically, this mismatch is the very motive forproviding student loans in the first place (Dynarski, 2008, p. 26).The market failure is apparent from the way that this mismatch occurs, and theways in which information asymmetry surrounds overmuch of the loan buying process.Dynarski also offers a discussion of the ways that the federal repaymentprograms such as Pay as You Earn and Income Based Repayment, as easily ashypothetical programs such as Pay It Forward (state-based, income-basedprograms that allow low earners to pay very little while high earners pay muchmore) constitute taxation, which segues into the larger policy discussion Thestudent loan interest deduction and the ways in which it can be remedied tobetter address this market failure. Because of thewidespread perception that student loan debt is good debt, and because of theways that this tax code provision is built on some complex assumptions abo utsupply and demand, it is clear that there is a market failure. The deductionassumes that the supply of college graduates will be smaller than the supply.It assumes that the cost of living will only increase modestly, and critically,it does not calculate the increases in college costs or the ways that they faroutpace inflation. In other words, it assumes that the demand for college loanswill outpace the supply of people taking them out and repaying, when theopposite is true. It also assumes that the economic demand for collegegraduates will be higher than the supply, to the point where incentivizingpeople to get an education is necessary to get highly skilled workers. However,the economy is no longer in need of these credentials, or perhaps college hasbecome so watered-down that people with degrees are seldom finding the kinds ofjobs they ideate of. In any case, many people with college or even advanceddegrees are not experiencing the return on investment that they hadanticipated. At present, the studentloan interest deduction is generally capped at $2,500 annually (Internal Revenue Service, 2017).For those who are repaying very significant loans, including for graduate school,professional school, or simply for attending high-cost, predatory schools, thisdeduction does not make a significant difference. More people than one mayinitially believe struggle with student loans of $100,000 or more (Kantrowitz, 2012), so the tiny taxdeduction is often laughable. Especially because of the market failure that hasitself promoted the situation, the government should intervene to increase thetax deduction. The mismatch surrounded by the good and its benefits facilitates themarket failure of the student loan interest deduction (Dynarski, 2008, p. 26). rase for those who have a modest amount of student loans and for whom theinterest deduction would be significant, an informational asymmetry means thatmany who qualify for this deduction do not even take it, since around 1 9% arenot even aware of what deductions they might quality for (Student Loan Hero, 2016).Revising the system sothat, for example, student loan interest and principal are both deductible,could reduce the failure of the market. Improving information about studentloans, as well as how to take advantage of the tax deduction, could also go along way towards reducing the information asymmetry that dominates the market.The failure of the labor market to adequately absorb college graduates,especially with wages that cause their debts to decrease over time, combinedwith the informational asymmetry that disadvantages some people more than others,means that there is a serious issue one potential remedy would be to improvethe student loan interest deduction. The student loan systemis a market failure, and the tax deduction has also failed to live up topromises because of the temporal mismatch. It has failed to account for therealities of college costs, the realities of the labor market, and the realities of economic life for young people. The policy is a market failure andneeds to be changed. Some ways to improve it could be to increase the maximumdeduction, to increase the MAGI ceiling at which the deduction is phased out,or to implement widespread loan forgiveness since doing so might add moreliquidity to the consumer economy, which would in turn help the economy togrow. Forcing colleges and universities to guarantee student loans could alsobe another solution to the problem of student debt, ensuring that widespreaddebt default has less of an effect on the overall economy than it did duringthe housing bubble. ReferencesAbel, J. R., & Deitz, R. (2014). Do theBenefits of College Still Outweigh the Costs? Current Issues in Economicsand Finance, 20(3), 112. https//doi.org/DOI ,Aranoff, A. (2015). Student Loan touch Deduction What YouNeed to Know HuffPost. Retrieved October 17, 2017, fromhttps//www.huffingtonpost.com/aryea-aranoff/student-loan-interest-ded_b_7486888.htmlCor nell Law School Legal Information Institute. (2017). 26U.S. Code 221 Interest on education loans US Law cardinal / LegalInformation Institute. Retrieved October 16, 2017, fromhttps//www.law.cornell.edu/uscode/text/26/221Dynarski, S. M. (2008). An Economists Perspective onStudent Loans in the United States (No. 5579). Munich.Ellis, B. (2013). Class of 2013 grads average $35,200 inloans, credit card debt. Retrieved November 1, 2017, fromhttp//money.cnn.com/2013/05/17/pf/college/student-debt/Internal Revenue Service. (2017). Topic No. 456 Student LoanInterest Deduction. Retrieved October 15, 2017, fromhttps//www.irs.gov/taxtopics/tc450/tc456Kantrowitz, M. (2012). Who Graduates College withSix-Figure Student Loan Debt? Washington.Lieber, R. (2009, September 5). Why College Costs Rise, Evenin a Recession. The New York Times, p. B1.Looney, A., & Yannelis, C. (2015). A crisis in studentloans? How changes in the characteristics of borrowers and in the institutionsthey attended contribu ted to rising loan defaults. Brookings Papers onEconomic Activity, (Fall), 189. https//doi.org/10.1353/eca.2015.0003Student Loan Hero. (2016). 19% of Americans Dont Know WhatStudent Loan Tax Benefits They Can Claim. Retrieved November 1, 2017, fromhttps//studentloanhero.com/press/19-percent-americans-dont-know-student-loan-tax-benefits/Taylor, P., Parker, K., Fry, R., Cohn, D., Wang, W., Velasco,G., & Dockterman, D. Is College Worth It? (2011).