Question

Propose a policy to reduce loan default rates?

Why is taking out a student loan to pay for college a risky investment?

How does the choice of college affect the riskiness of a college loan?

Answer 1

You should first compare these two numbers:

• The interest rate of your student loan, and the probability of that interest rate going up or down in the coming years. You should also factor-in any tax deductions for the repayments made to the student loan.
• The expected rate of return on your investment in a portfolio whose risk you are comfortable with. You should also factor-in the tax implications of that investment.

Depending on how these two numbers compare, you can make a data-driven decision on whether to invest or to pay off your student loan.

People borrow the money and figure that in some way, at some unspecified point in future, things will somehow work out for the best.

People want to believe that things are orderly and fair in society. It doesn’t occur to them that there could be a system that would let them borrow vast sums of money, only for them to find that that the degree they “purchased” with that money is not marketable.

So, many graduates find themselves either unable to find a job or unable to find a job that pays them well enough to meet their monthly payments. That’s the sad reality of student loans today. Not all degrees are equally valuable. It’s the logic of a ruthless capitalistic economy. Young people only ignore it at their peril.