Examining Sanders' argument on student loans...and why he's wrong [View all]

[hill2016]

Sanders is saying that housing and car loans have lower interest rates so we should lower the interest rates on student loans.

OK, he chose to make this argument and NOT "investing in students is good for society in the long-term as a mattter of public policy".

It's like saying "if the glove doesn't fit, you must acquit!". Sure there may be good reasons to acquit and whether the glove fits isn't necessarily the best argument. However since you (Sanders) chose to focus on the glove, we shall examine your argument in light of your proposal (lowering student loans).

Firstly, interest rates on loans are set as a function of:
(1) term: the longer the loan the higher you want your interest rate to be
(2) risk free rate: since you could lend the government risk free, you always want a premium over the risk free rate if you are lending to a non-government entity
(3) likelihood of default: how likely is the borrower going to stop repaying the loan?
(4) recovery in default: what can you get back if the borrower defaults.
(5) credit score, taking into account your ability to pay


On #1, student loans can stretch out decades while car loans are only 5 - 7 years.

On #3, student loan defaults have been climbing very high.
http://www.usatoday.com/story/money/personalfinance/2015/08/23/credit-dotcom-student-loan-crisis/32015421/
According to one calculated number, 23% of student loans that are not in deferment are seriously delinquent (> 90 days late). This is far far higher than the equivalent numbers for housing and car loans.

On #4, many people have pointed out that federal loans are not dischargeable in bankruptcy. That's true but if you owe $100,000 you will never repay the principal even if the federal government takes your Social Security income and income tax refunds. So often many of these loans will never be repaid. Also there are other government programs (IBR) that result in forgiveness of loan principal. On the other hand, if you default on a car or housing loan, the borrower can just seize the underlying collateral. You can't repossess a degree.

on 5, most of the time you are lending to somebody with no income and no assets and not even the certainty of completing the degree


Now given all these can somebody explain why the interest rate on a student loan should be the same as a car or housing loan, assuming no public policy intervention (which isn't Sanders argument here)?