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NY Fed President Dudley Speaks Out Against Govt. Student Loans

The president of the New York Fed, William Dudley, firmly questioned the riskiness – as well as the effectiveness – of the current program of government backed student loans. Dudley finds fault with the status quo lending practice in a number of areas. The current method assigns a fixed rate to all student borrowers, with no consideration to their course of study or intended career. This increases both the risk profile of outstanding debt and encourages some students to take out lofty loans with no hope of repayment. For those students, Dudley claims, returns on the investment in college “may be negative.” In the end, the burden falls on the U.S. taxpayer.

Does anyone have any thoughts on alternative student loan programs? Perhaps one that is centralized around universities themselves – who might be able to better evaluate repayment prospects based on the student’s major and performance?


  1. Stephen Moore Stephen Moore

    I found the point about fixed interest rates for all students particularly interesting. I wonder what effect different interest rates for different majors would have on the labor market and student debt. By incentivizing certain majors through different interest rates, we would also see a large shift in the number of majors in certain areas. It is an interesting debate to consider essentially incentivizing certain majors for a large portion of the college student population.

  2. klinedinstc15 klinedinstc15

    I remember reading in an article that pell grants are only applicable to studies during the traditional school year. If we were to extend them to the summer classes, students could potentially graduate earlier, enter the labor market earlier, and ultimately have less debt to repay later.

  3. Be careful about assuming that “student” means at a 4-year college. Virtually all of the students at some for-profit trade schools pay their tuition through student loans. Note too that in personal bankruptcy you can’t force a refinancing of student loans, much less a writedown on the amount you owe, thanks to a special provision inserted by Congress into the bankruptcy code.

    The real issue isn’t likely to be the lack of variation in interest rates, it’s rather the guarantee that creates moral hazard. Schools benefit from tuition payments, who cares what happens to students!! — we have our cash, thanks and good riddance, our costs are lower if you drop out. That you may not pay on time doesn’t mean we have to give back the cash, we have no skin in the game….

  4. HeeJu HeeJu

    Student loan is infamous for having one of the highest default rate. I think its riskiness and ineffectiveness emerge from the loan’s high interest rate and short term of borrowing. Rather than varying the interest rate by potential major of a student debtor, what if the government decreases the interest rate and lengthen the borrowing term, so that way graduates have more time to pay off their student loans and thus eventually diminish the default rate overall?

  5. grieve grieve

    More and more students have begun to take out “party loans”, and been granted a loan with no academic purpose in mind. This can certainly increase risk of default, considering the lack of academic thought put into it. That said, I’m sure there are plenty of students who can afford their college costs, but take out these party loans to fund a social life, and then do not default on their debt.

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