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Old 31-10-2013, 04:57 PM   #1
whiterabbit33
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Default Student loans in a deflationary crash?

If there is a massive deflation ahead, how would that affect people with debt, such as student loans?

What effect would deflation have on real and nominal interest rates? Could falling nominal interest rates not be helpful?

Could politics force the government to cancel all debt owed on student loans?

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Old 31-10-2013, 06:36 PM   #2
serpentine
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Are we talking about a negative RPI here?
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Old 31-10-2013, 09:21 PM   #3
whiterabbit33
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Are we talking about a negative RPI here?
Yes, real deflation, not just the disinflation of a fall in the rate of inflation that typified the 1980's boom.

Probably worse than the deflation of the 1930's.

By RPI, you mean one of the price indexes, like the Consumer Price Index or the Producer Price Index? Yes, prices themselves would fall, not just the rate of price increases falling.

House prices could tumble.
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Old 31-10-2013, 10:17 PM   #4
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Well if the Tories succeed and a million people lose their houses in the coming years and we all start looking like people from a Lowry painting something might happen to the current student loan set up.



In the meantime this is a good place to start.

https://en.wikipedia.org/wiki/Studen...United_Kingdom
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Old 31-10-2013, 11:39 PM   #5
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Quote:
Originally Posted by serpentine View Post
Well if the Tories succeed and a million people lose their houses in the coming years and we all start looking like people from a Lowry painting something might happen to the current student loan set up.



In the meantime this is a good place to start.

https://en.wikipedia.org/wiki/Studen...United_Kingdom
I finally realised RPI is the Retail Price Index.

If repayments are linked to inflation, so that there is no interest cost, then what happens with raging deflation?
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Old 01-11-2013, 01:15 PM   #6
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Quote:
Originally Posted by whiterabbit33 View Post
If there is a massive deflation ahead, how would that affect people with debt, such as student loans?

What effect would deflation have on real and nominal interest rates? Could falling nominal interest rates not be helpful?

Could politics force the government to cancel all debt owed on student loans?

During deflation the value of money increases as the price of goods drop in value, for example 1 may be able to purchase 2 loaves of bread during deflation whereas 1 could only purchase 1 loaf of bread before deflation. Deflation has the effect of increasing the value of debt because the value of the money you use
to pay back the debt is more valuable than the value of the money you borrowed. During deflation the lender wins and the borrower loses.

During hyperinflation the value of money decreases as the price of goods increase in value, for example 5 may be able to purchase 1 loaf of bread during hyperinflation whereas 1 would purchase 1 loaf of bread before hyperinflation. Hyperinflation has the effect of decreasing the value of debt because the value of the money you use to pay back the debt is less valuable than the money you borrowed. During Hyperinflation the lender loses and the borrower wins.

This would be the case if you had a loan with fixed payments.





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