Wednesday, 22 October 2014

Student Loans

From the BBC

An activist group in the United States has been carrying out deeds that some might think the stuff of dreams - buying and cancelling other people's student debts.

Rolling Jubilee has purchased and abolished $3.8m (£2.35m) of debt owed by 2,700 students, paying just over $100,000 (£62,000), or as it says, "pennies on the dollar".

Blimey, that isn't much of a slice of the amount owed.

The group pulled off the deal to illustrate how cheaply the money owed can be sold on the secondary debt market, she says.

"We wanted to question the morality around repayment," she says.

"Your debts are on sale. They are just not on sale to you."

Which if true, is just terrible.

Many of Everest Colleges' debtors are single mothers and are on low income, she says.

"It is documented that they end up worse off and have no better chance of getting work than if they simply finished high school," she says.

Ah, right. So, the reason the debt was "pennies on the dollar" is because most of them took out student loans and are really bad risks. Single mothers on low incomes are not going to be paying back anything on their student loans, will struggle to get jobs that will mean they have to start paying back money or finding a rich man to pay it for them. A few will find something that pays well enough to start paying back and that's where the 1/40th of the original amount comes from.

Incidentally, I listened to a You and Yours program the other lunchtime about students saying they were worse off than their parents, that included a student complaining that she had to do a really boring job because there were no jobs for composers with her music degree (unlike Elvis Costello who worked as a data entry clerk and Mark E Smith who worked in a shipping office) and some freelance film bloke who for some reason had to be in London. Of course, the flip side was the idiots talking about how young people had lots of electronics, as though £600 for a phone is any more than a rounding error on people's costs compared to £250K for a house (I think when my father bought his Amstrad computer that it cost about the same as 2 months' mortgage).


Mark Wadsworth said...

I thought this was a great idea.

The issue highlighted is that poor credit risks can't buy back their own debts for cents in the dollar, they have to do it this round about way.

See also banks buying back their own bonds at a discount but moaning when Argentina tried the same trick.

Lola said...

Didn't Greece do the same thing?

(MW - quite)

Lola said...

Actually, and seriously, seeing as I am in FS this is a both a business opportunity and Good Thing. Hmmmm?

The Stigler said...


But for many of those cases why would they want to? Many of them aren't paying anything now, perhaps never will be paying anything.

Dinero said...

They could fund the process by selling the debt back to the debtors at 1/40.

Incidentally on secondary markets the Danish mortgage market system does ensure that mortgagers have access to the secondary market.

Kj said...

What Dinero says, the danish mortgage bond market is brilliant. But I'm not sure you could easily do the same with other types of loans, buying your own loan specifically discounted by the risk of all individual loans. The danish mortgage bonds are risk grouped AFAIK, and are priced by market risk, i.e. cycles.

Bayard said...

Lola, would it be legal to contact a bunch of ex-students who are currently deemed poor credit risks by the banks and check to see if any of them look as if they might be in a position to repay some of their debt at some point, in which case you could buy their debt at a discount and sell it to them at a slightly smaller discount?

Lola said...

B. I'll look into it vis a vis the regyewlayshuns and get back to you.

Graeme said...

TS Eliot worked in a bank for about 10 years...(loads of stuff in the Waste Land). Artists can do jobs.

Wallace Stevens and Charles Ives held high positions in insurance companies. William Carlos Williams was a practising physician. Work can be done while you are a high-performing artist.

Rich Tee said...

To be fair on the film chap, film directors and musicians do often say that you have to move to London to make it.

They used to live in squats or really cheap rented accommodation in downmarket areas, which is how they came to be socialising with ethnic minorities, resulting in new genres like Ska music. Even those downmarket areas are too expensive now.

Same thing happened in New York. Creative types used to live in old factories and warehouse lofts. Now its the trendy bankers and hipsters who do that.

Mark Wadsworth said...

RT, that process (cheap area = artists and creatives = fashionable = expensive) has been observed all over the world many a time.

I was about to write a post on it when I discovered that Wiki already has it taped.