Okay, let's unpack this. We're doing a deep dive
into this enormous, structurally complex, and
let's be honest, often anxiety -inducing financial
world of student loans. It really is a world
unto itself. Right. This is debt that's designed
specifically for, you know, university or college
tuition, books, living expenses, and right away
it's just... It's a unique beast. Completely
different. It's not like a standard consumer
loan or a mortgage. Exactly. They often have
these lower interest rates at the start, and
this is the big one deferred repayment while
you are still in school, while you're actually
learning. And that sounds so consumer friendly
on the surface, doesn't it? It really does. It
does. But those borrower friendly features, they
kind of mask the fundamental distinction that
makes this debt so different and so risky across
the globe. OK, what's that? We're talking about
the really strict legal protection that these
loans get specifically around renegotiation and.
And bankruptcy. Once you sign for a student loan
in many places, it is incredibly difficult. I
mean, almost impossible to get rid of that debt,
even if you face, you know, genuine dire financial
trouble later in life. So that legal shield,
it just it. shifts all the financial risk. It
does. And what's so fascinating is seeing how
different countries manage that risk. In some
places, the risk is carried by the state or,
and this is surprising, sometimes even the universities
themselves. So our mission today is to be your
guides through this global financial maze. We've
got sources that compare systems all over the
world and others that take a... you know, a razor
sharp look at the behemoth that is the United
States system. We're going to dissect everything
from countries where, you know, debt collection
is handled like a supplementary tax. All the
way to places offering zero interest incentives.
And we have to grapple with the sheer, just daunting
size of the U .S. system, that $1 .6 trillion
debt load from 2020. Exactly. We need to understand
the policy choices that decide whether this investment
is, for you, a path to financial freedom or if
it becomes a decades -long ball and chain. We're
looking for those aha moments in how these policies
are designed. You know, how do different governments
structure this to encourage access but also try
to avoid massive default risk? Precisely. And
I think we should start with what are, to me,
some of the most radical and efficient approaches.
Systems where repayment is just, it's built right
into the national income and tax structure. Making
it almost automatic. And totally conditional
on you earning a living wage. When you look at
countries like... Australia, New Zealand, the
UK, they seem to have recognized that education
is this kind of conditional public investment.
That's a great way to put it. The government
invests in your education and you pay that investment
back when and if you get a direct financial benefit
from it. It's a complete philosophical pivot.
It's moving away from treating education debt
like a normal commercial contract. Let's start
with Australia's system, the Higher Education
Contribution Scheme, or HECSHLP. Okay. The key
insight here, and this is so crucial, is that
the student funding from HECS HLP is legally
and functionally not considered a normal commercial
debt. OK, let's unpack that. If it's not a normal
debt. Yeah. What does that mean in like practical
terms for someone who just graduated? It means
the whole collection process is completely separate
from traditional banking or credit enforcement.
Repayment happens through a supplementary tax.
No tax. Yes. And it's on a sliding scale that's
directly tied to your annual taxable income.
This makes sure that repayments are only made
when you, the former student, cross a specific
income threshold that can actually support those
payments. So if you're unemployed. Or you're
earning below that line. You owe nothing. The
debt just sits there patiently waiting for your
income to rise. It creates this powerful. built
in safety net. It protects borrowers from financial
ruin during, you know, low earning periods or
career changes. Sounds incredibly fair. But our
sources flagged a really interesting behavioral
response to this. A big policy consequence. Yeah.
If repayment is tied to filing an Australian
tax return, what happens if I graduate as a highly
skilled engineer and I decide to take my skills
and my high salary to London or Silicon Valley
for the next decade? That is the critical flaw.
Or maybe, you know, the unintentional incentive
that the HECS HLLP scheme has been criticized
for. Right. Because they tied repayment exclusively
to their own internal tax system, any highly
educated person who moves overseas and stops
filing an Australian tax return, well, they effectively
stop making repayments. So Australia educated
you. You have all this human capital, but they
lose the financial return on that investment.
It's a perfect real world example of policy design
accidentally creating an incentive for a brain
drain. The country invests in talent only to
lose it to global competitors who didn't pay
that initial cost. And the economic cost of educating
and then losing those higher earning graduates
has to be huge. You're losing both the tax revenue
and the. productivity of that worker. Absolutely.
They actually had to bring in new laws recently
to try and track and compel people overseas to
repay, which just goes to show how serious that
leakage problem became. Okay, so now let's look
at New Zealand. They take this conditional repayment
idea and add another layer, an even more aggressive
incentive to keep their talent at home. Zero
interest for residents? That's a huge deal. New
Zealand system is a masterclass in incentivizing
residency. The loans are pretty comprehensive.
They cover fees and living costs for full -time
students. Part -time students just get fees covered.
But the core mechanism, this zero interest rule,
it changes the entire equation. How so? As long
as you are a resident of New Zealand, no interest
is charged on your loan balance, period. So the
debt doesn't grow? You're only ever paying back
the principal, the money you actually borrowed
in the first place. That completely changes the
math for long term financial planning. It makes
the debt so much more manageable. And like Australia,
they've automated the collection process beautifully.
Repayment kicks in when your income goes over
a minimum threshold. And the employer just takes
it out. Yep. Employers automatically deduct the
repayment from your salary. It's a fixed rate,
12 cents on the dollar. And it's collected directly
by New Zealand's tax authority, the IRD. It's
integrated, it's efficient, and because the principle
isn't ballooning, it really feels more like a
public service arrangement than a crushing financial
burden. All right, let's pivot to the United
Kingdom. We're moving across the Tasman Sea.
The UK uses that tax collection mechanism too,
but they handle the interest part very differently.
This is where we start to see a bit of a compromise.
Yeah, a compromise between, say, consumer protection
and fiscal reality. The UK system, which is run
mostly by the state -owned student loans company
or SLC, is famously complex. It's evolved through
all these different plans, Plan 1, Plan 2, now
Plan 5. And unlike New Zealand, the interest
starts ticking right away. Immediately. Interest
begins to accumulate as soon as you get the loan
funds. However, like Australia, repayment is
deferred until the tax year after you finish
or, you know, drop out of your education. So
the debt is growing from day one, but the actual
obligation to pay is paused until you're theoretically
out there earning an income. And since 98, they've
also used the HMRC tax system for collection,
just like their Commonwealth neighbors. Precisely.
Repayments are collected by HMRC and are calculated
based on your current income. If your income
falls below a certain threshold and that threshold
changes depending on your loan plan, you don't
have to make any repayments. Could you give an
example? Sure. For loans taken out in the 2012
-2013 tax year, the threshold was £21 ,000. So
if you earned £20 ,999, you paid nothing, but
the interest kept on accruing. That accumulating
interest is the critical difference, isn't it?
It means the loan balance is constantly getting
bigger, which could be devastating if you spend
years in a lower paying field. It can be. But
the U .K. system offers the ultimate safety valve
forgiveness. The long term safety net. Exactly.
It's built right into the structure. Loans are
always canceled if the borrower dies or becomes
permanently unable to work. And they're also
canceled after a specific amount of time. Traditionally,
this was 30 years. But our sources flagged a
huge policy shift here. It seems to reflect the
rising cost of education and the government trying
to get more of its investment back. This is a
major area of controversy right now. It's the
shift to what they're calling Repayment Plan
5. For this newest group of students, starting
from January 2025, the cancellation period is
being extended from 30 years to a staggering
40 years. 40 years. Let's just pause there and
process that. If you start making payments at,
say, 22. you will be on the hook for that student
loan until you are 62 years old. Potentially
well into your retirement years. It basically
converts the debt into a lifetime obligation
for anyone who doesn't earn enough to pay it
off faster. It creates enormous financial uncertainty
that can span an entire career. It really raises
questions about whether that's a safety net or
just a prolonged commitment. And speaking of
prolonged commitments, the UK also has this fascinating,
complicated history with its early 1990s loan
portfolio. Right. This highlights the administrative
nightmare that can happen when you try to move
debt collection away from that central tax system.
Exactly. Loans that were issued between 1990
and 1998 were not collected through the seamless
tax system. Instead, the student was totally
responsible for proving their own financial distress.
So the burden was on you, the borrower. The onus
was entirely on the loan holder to actively prove,
usually every year, that their income fell below
the deferment threshold if they wanted to pause
their payments. That sounds like a constant bureaucratic
headache. It was. And then, in 2013, this specific
portfolio of early loans was sold by the government
to a private company called Erudio. So suddenly
you're not dealing with the government anymore.
Nope. Suddenly, graduates who signed up for a
government -managed plan were dealing with a
private entity where they had to constantly prove
their poverty to avoid having to make repayments.
And what happened? What were the consequences
of that? Collection issues just soared. We saw
complaints that even graduates who had fully
repaid their loans or who were properly deferred
were still having large amounts. We're talking
up to 300 pounds a month. taken from their accounts
without reason. And I imagine getting that money
back was a nightmare. Oh, an immense administrative
labyrinth to get those deductions stopped and
get the money refunded. It goes to show that
even in a highly centralized system, selling
off debt portfolios carries huge risks for the
borrower. So we've seen that tax -based collection
is a really powerful global model. But if we
expand our view, we see countries... using these
unique, sometimes surprising enforcement tools
that go way beyond just tax collection. Absolutely.
The contrast between these systems and, you know,
the U .S. system we're about to get into really
emphasizes the sheer range of solutions out there.
Let's look at Canada, specifically British Columbia.
They introduced a non -financial penalty that's
a really powerful compliance tool. What's so
interesting here is that the penalty doesn't
hit your bank account or your credit score in
the usual way. It hits your mobility. That's
exactly right. In British Columbia, the Insurance
Corporation of British Columbia, the ICBC, which
manages all driver's licensing in the province,
they can actually withhold the issuance or renewal
of your driver's license if you're delinquent
on student loan repayments. They enforce it alongside
other debts like unpaid court fines or child
support. I have to stop there. Just imagine that
for a second you can't drive to your job, which
is how you earn the money to pay the loan because
you haven't paid the loan. That's a textbook
debt trap. It's a drastic measure for sure, but
it highlights the immense policy control the
government has over the system. And it's all
directly government controlled, which lets them
use these really specific non -traditional enforcement
tools like a driver's license freeze to make
sure people comply. Okay, moving over to Asia.
South Korea adds this incredibly nuanced layer
to the discussion that links financial risk directly
to... your academic choices. This is one of the
most compelling bits of data we found. South
Korea's loans are managed by the Korea Student
Aid Foundation, or COSAF. It was set up in 2009
with this very ambitious philosophy. No student
should quit studying due to financial reasons.
A noble goal. Very. They see their role as helping
students grow into talents that will serve the
nation. But the market reality seems to clash
with that idealism when it comes time for repayment.
How so? It absolutely does. COSAF found that
the default rate is direct correlated to a student's
academic major when you compare them to other
fields students in for example fine arts and
physics have a statistically higher default rate
that is counterintuitive I would expect maybe
some vocational degrees but physics it suggests
that while the ultimate payoff from a physics
or fine arts degree might be immense you know
in research or teaching or cultural contributions
The immediate job market and the predictable
salary trajectory are riskier. This leads to
higher rates of initial unemployment or underemployment.
Which in turn makes it harder to repay the debt.
Exactly. So the data is telling the government
that an investment in certain fields carries
a higher financial risk of not being paid back.
And COSAF recognizes a broader implication here.
What's that? They acknowledge that a long period
of unemployment right after graduation tends
to lead to an inferior quality of human capital.
This means the default is... isn't just a number
on a ledger, it's a social and economic problem
where your educated workforce isn't being used
efficiently. It forces the question, if the government
values those fields, shouldn't the financial
risk be shared differently? That's the heart
of it. That kind of data makes the decision of
what you study an immediate, potentially punitive
financial calculation, not just an academic one.
Now switching gears to India. We see a focus
not on enforcement, but on this massive rapid
scaling by the government to manage the sheer
volume of student financing they need. India
had an enormous logistical challenge. I mean,
how do you coordinate loan access for that massive
student population? So to deal with it, the government
launched the Vidya Lakshmi portal in 2015. A
central hub. Exactly. A single centralized hub
for any student looking for an educational loan.
It streamlines the whole discovery and application
process. To pull something like that off in a
country the size of India must have taken incredible
cooperation. It was a huge undertaking. The portal
was developed under three major government forces,
the Department of Financial Services, the Department
of Higher Education, and the Indian Banks Association.
And the adoption was lightning fast. By August
2020, just five years after launch, 37 different
banks were on the portal, offering 137 different
loan schemes. That level of centralization is
about efficiency, but it also reflects the massive
growth they were expecting in that sector. Oh,
the projected growth rates were astronomical.
It shows a huge reliance on debt financing. The
sector was expected to grow by over 32 % in 2009
-2010, then almost 40 % in the next two years,
and peaking at a projected 44 .8 % between 2020
-2022. 12, and 2015. So a big government pivot
toward access through loans. Yes, rather than
just public funding alone. It's also important
to note they did launch a countermeasure, the
Vidya Sarathi portal, which was specifically
to help students find scholarships, trying to
balance the loan -heavy growth with grant aid.
And lastly, let's briefly touch on Hong Kong,
which is an interesting case study in a more
historical geographical rollout. Hong Kong gives
us a clear example of a phased, risk -managed
implementation. The original loan scheme was
introduced pretty early, back in 1969, but it
was initially restricted to students at just
two major universities, the Chinese University
of Hong Kong and Hong Kong University. So they
could test the model in a limited way. Exactly.
And as the scheme proved it was viable, they
expanded it institution by institution over the
next two decades. So they rolled it out slowly.
Very deliberately. to the Hong Kong Polytechnic
in 76, then the Hong Kong Baptist College in
82, and finally the City Polytechnic in 84. This
slow approach minimized systemic risk. They also
had a strict residency requirement. Applicants
had to have lived in Hong Kong for three years
right before applying to make sure the public
investment benefited long -term residents. All
right, we've seen integrated tax models, driver's
license penalties, even risk based on what you
study. Now we pivot to the system that is arguably
the most confusing, complex, and financially
burdensome for the average borrower, the United
States. And if we connect this to the bigger
picture, the U .S. system is really defined by
its massive scale, its unique public -private
structure, and its very specific rules about
risk. Or a lack thereof in some cases. Well,
exactly. The U .S. system is this complex landscape.
You have federal loans, which are either subsidized
or backed by the government, and then you have
private loans. The distinction is so important
because the overwhelming majority, a staggering
92 % of all student debt, is federal. And that
92 % figure is why we have to focus so heavily
on federal policy. Within that federal category,
you have subsidized versus unsubsidized, which
is all about how the interest works while you're
still in school. That's the first hurdle for
any borrower to understand. Subsidized loans
are the gold standard. The interest does not
accrue while you're enrolled in school at least
half time. Which is a huge benefit. A massive
benefit, but it's restricted. They're only available
to undergraduate students who can demonstrate
financial need. Unsubsidized loans, on the other
hand, start accruing interest immediately from
the moment the money is sent out, regardless
of your financial need or academic status. So
even while I'm in school, that unsubsidized loan
balance is already growing before I've even earned
my first paycheck. It's also really important
to understand the big structural change that
happened in 2010 about who was actually lending
the money. That 2010 change was a major restructuring.
Before then, federal loans were split between
direct loans, which were funded and originated
by the government, and guaranteed loans. Which
came from private lenders. Right. They were originated
by private lenders, but the government guaranteed
repayment if the student defaulted. That guaranteed
lending program was eliminated in 2010. Why?
Why was government guaranteeing private loans
to begin with, and why did they stop? The initial
idea was, you know, to leverage private sector
efficiency. But the system came under heavy criticism
because the government guarantee essentially
removed all the risk for the private lenders.
So they couldn't lose. Exactly. Critics argued
this just boosted the profits of private student
lending companies without actually reducing costs
for students. It created a perverse incentive.
The private lenders made money whether the loan
was repaid by the student or by the taxpayer.
Getting rid of that brought all federal lending
into the direct loan program, consolidating both
risk and control within the government. And if
a borrower has multiple federal loans. From different
years. There's a way to simplify that, right?
Yes. The federal government offers direct consolidation
loans. The new interest rate for the consolidated
loan is based on a weighted average of your previous
loan rates. It's generally straightforward and
designed to make repayments simpler. But, and
this is key, private loans are completely excluded
from this. And private loans have totally different
interest rate dynamics anyway. That's right.
Federal rates are set by law, by statute. But
the interest rate for a consolidated private
loan depends on external market factors, usually
the London Interbank Offered Rate or LIBOR or
its reporsement. It just highlights the fundamental
difference. One is a regulated government product.
The other is a market product. This brings us
to what I think is the most unique part of the
U .S. system, the qualification paradox. In normal
lending, I qualify for a loan based on my assets,
my credit history, my ability to repay. Federal
student loans just... Throw that model out the
window. They completely turn traditional underwriting
on its head. Here's the key takeaway. Most U
.S. college students qualify for federal loans,
period. They can borrow the same amount of money
at the same price, regardless of their own income,
their parents' income, their expected future
income, or their credit history. Wait, so we're
just, we're giving out loans blindly, assuming
an ability to repay later. That sounds incredibly
reckless from a financial perspective. It is
from a traditional perspective. But it's an explicit
policy decision. It's designed to ensure universal
access to education. It's a deliberate choice
to decouple the investment in education from
personal credit risk. Which is great for access.
But it transfers all the risk of that loan not
being repaid onto the government and therefore
the taxpayer later on. The exclusions for who
can't get a loan are minimal and very targeted.
So who actually gets excluded from federal loans?
It's a very short list. Generally, only students
who have previously defaulted on a federal loan
or those who have been convicted of a drug offense
and haven't completed a rehab program are excluded.
For the vast majority of people, the federal
money is available. And the amount you can borrow
is capped each year based on your academic status.
Correct. The borrowing limits depend on your
education level, undergrad versus grad, and your
dependent or independent status. Graduate students
can borrow a lot more per year, and that's a
point we'll come back to, because it makes those
loans particularly profitable for the federal
government. So if I'm a student and I need more
money than the federal limits allow, say my private
university tuition is sky high, that's when the
traditional credit -based private lender comes
in. That's exactly when. Private lenders are
the source of funds only when a student has maxed
out their federal borrowing limits. And they
use traditional underwriting criteria. They're
looking at your credit rating, your income levels.
The system essentially funnels the students with
the greatest need for more money into the hands
of traditional lenders who charge higher REITs
based on that risk. Some scholars we looked at
argue for just eliminating the federal borrowing
limit entirely. Why would they suggest that?
The argument is purely pragmatic. If the government
allowed students to borrow according to their
full need covering tuition plus reasonable living
expenses, they would eliminate the reliance on
these high cost private loans. If you can get
enough lower interest federal aid, the need to
go to a high interest risk assessed private lender
just disappears. It would, in theory, make financing
cheaper and safer for the neediest students.
That's the argument. Now let's talk about the
financial dynamics of the federal system. because
this is where politics and budgeting really intersect.
Federal interest rates are not market rates.
They are set by Congress. That's the key structural
difference. Federal student loan interest rates
are set explicitly by congressional statute.
And because the rate is dictated by a political
body and influenced by budgetary goals, it has
historically resulted in a profit for the federal
government. That sounds incredibly problematic.
The government is making money off its citizens
who are investing in their own education. It
is a major, major point of criticism. In 2010,
the federal student loan program generated what
is officially called a multibillion dollar negative
subsidy. Which is just government speak for profit.
Exactly. The profit comes from the difference
between the government's low cost of borrowing
money and the higher interest rates that students
are required by law to pay. It raises a serious
policy question. Should a government entity be
designed to profit from education debt? And compounding
this is the tax disadvantage. If I take out a
loan for a business, the interest is tax deductible.
But for my education, it generally isn't. This
is a major structural criticism from economists.
Interest on most business investments is tax
deductible to incentivize growth. By contrast,
student loan interest isn't treated the same
way. Critics argue that this tax disadvantage
effectively penalizes investing in human capital.
By making it financially harder to service education
debt, the system contributes to a shortage of
educated labor and slower economic growth. It
sends the message that investing in equipment
is a better financial move than investing in
people. Precisely. And this leads back to that
idea of societal returns we mentioned earlier.
If the government is profiting but the student's
degree provides immense public benefit, why should
the student carry all the financial risks? So
this is proposal. Yes, this fascinating proposal
that federal loan rates should be adjusted based
on the specific course of study relative to its
rate of risk and the societal returns it generates.
A societal return calculation would look beyond
just your personal salary. It would consider
things like reducing stress on public services,
think health care professionals or teachers,
or promoting general employment rates. It shifts
the financial calculus from how much will this
person make to how much public good will this
field generate and then adjust the loan rate.
The U .S. system, with its wide access and minimal
underwriting, absolutely needs a strong safety
net for when students actually start repaying.
This brings us to the core mechanism for that.
Income -based repayment, or IBR. IBR is a lifeline,
but it is complicated. It's an alternative repayment
plan and it's only for federal student loans,
which is a major distinction from private debt.
Its fundamental function is crucial. It lets
you base your monthly payments on your current
income, not on the massive amount of money you
actually owe. So it's kind of like the income
link tax systems we saw in the UK and Australia.
The payment is proportional to what you can afford.
How is it calculated? IVR plans generally cap
your loan payments at 10 % of your discretionary
income. This means if your income is low, your
payment will be low, sometimes as low as $0.
But... And here is the crucial complication,
the source of immense anxiety for millions of
borrowers. While your payments are capped, deferred
interest still accrues. So you could be making
your 10 % payment every single month. feeling
responsible. But because that payment doesn't
cover all the interest that's adding up, you
look up after five years and realize you owe
way more than you did when you graduated. The
principal is growing even while you are faithfully
paying. That's the growing balance problems like
only make the minimum payment on a high interest
credit card. Your debt just compounds. But this
growing balance is eventually dealt with through
loan forgiveness, which is the big incentive
to stay in the program. And the timeline for
that forgiveness is different depending on where
you work. which is a clear government attempt
to incentivize public service. Exactly. It's
split between public and for -profit sectors.
If you work in the public sector for the government
or a nonprofit, forgiveness is granted after
only 10 years of qualifying payments. And this
is vital. Loans forgiven through the Public Service
Loan Forgiveness Program, PSLF, are not considered
taxable income. Which makes PSLF a really powerful
financial benefit. It's huge. But if you work
in the for -profit sector, the forgiveness period
is much longer. It extends out to 25 years. And
those 25 -year cases come with the huge risk
of the tax bomb. They absolutely do. Under standard
IBR forgiveness, the forgiven debt is currently
treated as taxable income by the IRS, unless
you're bankrupt or insolvent. at the time. So
imagine getting a tax bill in year 25 based on,
say, $100 ,000 or $200 ,000 of forgiven debt.
That one massive tax bill could be financially
ruinous. It could. It leaves borrowers wondering
whether to celebrate the end of their debt or
panic about the immediate tax hit. Let's zoom
out now to the scale of this problem. We're talking
about $1 .6 trillion in debt. This crisis is
tied directly to a fundamental policy shift over
the last few decades. Yes. The rising debt crisis
is tied directly to how federal aid policies
evolved. The government expanded loan eligibility,
making it easier to borrow, while at the same
time shifting the emphasis dramatically away
from grants money you don't have to repay and
squarely toward loans. And you can see that shift
just by looking at the Pell Grant, which is the
main federal grant. The numbers show the gap
perfectly. For the 2019 -2020 school year, the
maximum federal Pell Grant was $6 ,195. That's
the most free money available to the neediest
students. Now contrast that with the average
annual tuition for a four -year in -state public
university for that same period, $26 ,590. That's
a massive shortfall. That one comparison alone
shows why students are forced to rely on loans.
The gap between the max grant and the cost of
school is just too wide to bridge with savings
or income alone. Exactly. The government made
access easier, but they drastically cut back
on the free money, forcing students deeper and
deeper into debt to make up the difference. And
this was made so much worse by public spending
cuts at the state level, which is where many
public universities get their funding. Between
2002 and 2012, public funding for education dropped
a lot, while enrollment skyrocketed. That's a
perfect storm for tuition hikes. It really was.
Between 2002 and 2012, public spending on education
dropped a massive 30 % per student. In that same
time, total enrollment at public colleges jumped
34%. More students, less public money per student.
Meant the cost had to be shifted somewhere. It
was shifted to student tuition, leading to drastically
more debt. The burden of funding public education
was transferred from the state budget to the
individual student borrower. And we can't talk
about rising debt without highlighting the disproportionate
impact of for -profit universities. This data
is so critical for understanding the risk here.
For -profit universities enroll about 10 percent
of active college students in the country, but
they hold nearly double that share, almost 20
percent of all federal student loan debt. So
a huge concentration of debt. Yes. And it suggests
that these institutions, which often have low
graduation rates and high costs, are generating
a lot of borrowing without delivering the positive
income outcomes that you need for repayment.
Let's focus now on the default crisis itself.
Who is most likely to default? What are the demographic
factors? The risk of default is not spread evenly.
Data consistently shows that default rates are
higher for women than for men. They're also much
higher for borrowers from low income families,
which you'd expect. But there's one factor that
points directly to inefficient investment. Borrowers
who enter repayment after only their sophomore
year. So students who dropped out, they didn't
get the degree that would dramatically increase
their earning potential. But they still have
the debt. Precisely. They took on the debt but
got an insufficient return on their human capital,
putting them in the highest risk category for
default. On the flip side, some loans are considered
exceptionally profitable for lenders. And those
are the loans to grad students. Loans to graduate
and professional students? Yes. They're especially
profitable for both the federal government and
private lenders. Why? Because they typically
have high interest rates but are associated with
the lowest default rates, given the generally
higher and more stable earning potential that
comes with an advanced degree, like from law
or medical school. The Great Recession also had
a big impact on student loan defaults, right?
Right. It connected this debt crisis to the broader
economy. The recession was a shockwave. Default
rates grew to nearly 30 % during that period.
Studies from that time show that the default
rate is strongly related to non -traditional
issuers and, critically, the price of tangible
assets. There's an inverse correlation. Meaning?
When tangible asset prices, like housing, fall
rapidly, like they did in 2008, default rates
tend to rise. The collapse of the housing market
and the rise in unemployment directly linked
the student debt crisis to the broader economic
recession. And while we often focus on young
graduates, the data on older generations carrying
this debt is just sobering. It truly is. As of
2013, we had data showing that for borrowers
aged 65 to 74, a staggering 30 percent of their
own education loans were in default. On top of
that, around 17 percent of parent PLUS loans
debt taken out by parents for their kids for
that same age group were also in default. So
the debt burden extends well into retirement.
Yes. Impacting seniors who should be financially
secure but are instead dealing with collections
and wage garnishments. All right. Let's turn
to the legal foundation that makes U .S. student
debt such a financial prison. The Bankruptcy
Shield. This protection is the single biggest
factor that separates it from almost every other
type of consumer debt you can take out. This
is the legal cornerstone of the whole controversy.
Student loans cannot be discharged in bankruptcy
unless the borrower can prove that repaying the
loan would create an undue hardship for them
and their dependents. And that undue hardship
standard is notoriously high. Incredibly high.
It generally requires proving that you can't
maintain a minimal standard of living, that this
is likely to persist for most of the repayment
period, and that you've made good faith efforts
to repay the loan. It's a very difficult bar
to clear. And it wasn't always this way for all
student debt. A big law change in 2005 expanded
this shield to cover private loans, too. That
2005 change was transformative and highly controversial.
It changed the bankruptcy laws to prevent even
private educational loans from being easily discharged.
Before this, private loans, which are often riskier
and have higher interest rates, were treated
more like regular unsecured consumer debt. And
critics argued this created a, what was the term,
a credit risk free loan for lenders. A credit
risk free loan. Think about the financial incentive
that created for the lender. It meant that lenders
knew, no matter what happened to the borrower
financially, that the debt would follow them
forever. It couldn't be erased through bankruptcy.
This certainty let lenders average returns of
about 7 % a year because they no longer had to
price in the risk of the loan being discharged.
It fundamentally changed their risk profile.
And did this change borrower behavior? There's
evidence to suggest that since bankruptcy was
no longer an option for these loans, it may have
reduced a debtor's intention of trying to reduce
costly defaults by declaring bankruptcy. If that
ultimate safety valve is shut off, you're just
left to deal with the consequences of default
instead of seeking a managed legal reset of your
finances. Now here's where it gets really interesting.
We have concrete evidence of misconduct and anti
-competitive practices within the industry itself,
which led to some high profile legal battles.
The most notable example is the 2007 investigation
led by the New York attorney general at the time,
Andrew Cuomo. This investigation targeted lending
practices and these anti -competitive relationships
between major lenders and universities. What
exactly did they uncover? about these relationships.
The investigation found that many universities
were steering their students toward a select
group of preferred lenders. And while these were
advertised as being good for students, the preferred
lenders often offered higher rates than other
options on the market. And there was more. Yes.
Here's the most concerning part. Some of these
preferred lenders allegedly rewarded university
financial aid staff with kickbacks, payments,
gifts, other financial benefits for directing
students toward their high -rate loans. That
is a clear conflict of interest. The financial
aid staff, who are supposed to be helping the
student, are recommending expensive loans for
personal gain. What was the fallout from that?
The fallout was significant. It led to major
policy changes and cleanups in lending practices
at many American universities. And millions of
dollars in fees and interest were rebated back
to the students who were affected. It exposed
a systemic effort to exploit students. And there
was another major case, a whistleblower suit,
from a former Department of Education researcher.
That was the 2007 false claims lawsuit filed
by John Oberg against major players like Sally
Mae and Nelnet. Oberg alleged that these massive
lenders had been knowingly overcharging the U
.S. government on interest guarantees and administrative
fees, defrauding taxpayers of millions. And that
case was settled. It was. Nelnet settled the
lawsuit in August 2010, paying $55 million. These
cases just show that the complexity of the system
created so many opportunities for misconduct
aimed at both the student and the taxpayer. Despite
the staggering $1 .6 trillion debt figure, the
debate over whether this is an economic bubble
is still going on with comparisons to the housing
crisis. That's a common point of contention.
As of 2013, some economists were predicting that
this estimated $1 trillion of debt could trigger
a new economic crisis by impacting the spending
power of millions of graduates. But it's important
to note that most economists and investors at
the time believed there was no true student loan
bubble in the same systemic sense as the housing
market. Risk was high for individuals but not
catastrophic for the whole system. Right. It
was seen as high for individuals and certain
parts of the economy, like car sales or home
purchases by graduates, but not systemically
catastrophic in the same way mortgage backed
securities were. But regardless of what you call
it, a systemic bubble or a humanitarian crisis,
the debt burden has become a central political
issue. Absolutely. The sheer size of the debt
has forced a political response. During his 2020
campaign, Joe Biden promised student loan forgiveness
and that prom. was backed by a lot of public
demand. A 2022 survey showed that 64 % of Americans
supported $10 ,000 in student loan forgiveness
for individuals earning up to $150 ,000 a year.
It just highlights the widespread recognition
that the current debt levels are financially
unsustainable for a majority of borrowers and
that some kind of policy intervention is needed.
So what does this all mean for you, the person
listening to this? We started by saying that
student loans are a highly unique kind of debt.
But this deep dive really shows just how radically
different the policy choices are around the world.
That's right. In Australia, the UK and New Zealand,
repayment is tied to your income and collected
like a tax. They've effectively built an income
based safety net right into the system. And that
stands in such stark contrast to the United States,
where the debt is heavily shielded from bankruptcy.
It creates a near permanent high risk financial
obligation for you, the borrower. The U .S. system's
fundamental failures really involved expanding
eligibility while cutting back on grants, which
led to the federal government actually profiting
that negative subsidy from its own students.
So income based repayment while it's a vital
necessity. It's ultimately a reaction. It's a
reaction to a debt that's almost impossible to
discharge and that continues to balloon because
of all that accruing interest. What's so fascinating
here is this persistent global tension, this
push and pull between public investment and private
burden. We highlighted that proposal that federal
loan rates should be adjusted based on the rate
of risk and societal returns from different fields
of study. And that raises the final provocative
question that really defines this entire policy
area. Let's go back to that South Korean example
where students in fields like fine arts and physics
face a demonstrably higher default risk, suggesting
their fields have a poor immediate market outcome.
If the financial burden in the U .S. or anywhere
shifted away from the individual student's market
capacity to repay and instead shifted toward
the proven quantified societal value of their
educational fields, say clean energy research
or early childhood education, Would a physics
or fine arts student still face that higher default
risk? Or would the government, recognizing the
long term non -monetary benefit their contribution
provides to society, choose to heavily subsidize
that field through lower or even zero interest
rates? That is the ultimate policy decision.
Is education treated merely as a consumer good
or is it recognized as a fundamental public good
worth protecting with our collective resources?
That is the question we leave you to ponder.