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US student loans bubble
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[QUOTE="Jelis, post: 10908812, member: 260067"] So, in what sense do student loans constitute the next subprime? I think the best analogy comes in the so-called for profit sector of the education market. The For Profit (FP) sector is to be distinguished from traditional public or not-for-profit private institutions. FP institutions have enjoyed massive growth in recent years, largely by addressing the underserved student market, that is, those students that do not attend traditional colleges or universities. Since only about 25% of high school graduates complete a degree from traditional colleges and universities, this underserved market is huge. While it is surely true than many young people do not aspire to continue their education beyond high school, there are others who are prevented from doing so by financial or other obstacles. The positive case for FP institutions is that they have significantly expanded access to higher education for those who do not attend traditional colleges or universities. However, students at FP institutions have less positive financial outcomes than students at the traditional schools. Research by Harvard economists Deming, Goldin and Katz* shows that FP students have higher dropout rates and debt levels than students at traditional schools. They also find that the value added of the schooling in terms of increasing wages is lower. This can be due to lesser aptitude (FP students have lower high school ranking), other commitments (FP students are more likely to be working full-time) and the high cost of the typical FP school. Assuming that the FP institution experience involves less value added, higher costs and higher dropout rates, the average return on investment in the FP programs is going to be lower than it is in traditional programs. Therefore, the potential for financial difficulties for students of FP schools is greater than it is for students of traditional schools. This is somewhat akin to the situation in subprime mortgages. While the motivation to lower underwriting standards so as to expand the home ownership rate may have been laudable, the end result has been a worsened financial position for many subprime borrowers. Still, the fact that higher proportions of subprime borrowers and FP students end up with worsened financial outcomes does not necessarily mean that these programs are inherently fatally flawed. For one thing, you should look at the successes as well as the failures. Suppose 90% of FP students were better off for the experience and 10% were worse off. Does the negative result for 10% negate the positive outcome for the 90%? I think it is likely that the positive outcomes outweigh the negatives. Rather than attempt to curtail FP institutions, we should look for ways to reduce the percentage of negative results. One way to do this is to improve the predictive modeling of returns that is, given the student characteristics including current employment and training, the prospective educational program and its cost, what is the likelihood of completing the program and achieving greater income? This modeling can form the basis for guidance counseling offered by the FP school or by third parties. * David Deming, Claudia Goldin and Lawrence Katz, The For-Profit Postsecondary School Sector: Nimble Critters or Agile Predators? Journal of Economic Perspectives, Winter 2012. by Jeff Speakes [/QUOTE]
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US student loans bubble
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