When enough people get into trouble with too much debt, there is always a righteous search for evil lenders. Think subprime mortgages and those rapacious bankers and realtors. Payday lenders get comparable treatment. (Borrowers are presumed to be innocent lambs.)
So, who are we to blame for the on-coming tidal wave of defaulting federally-guaranteed or issued student loans? There were $1.23 trillion (yes, trillion) of student loans outstanding as of late last year, the bulk of which were underwritten by taxpayers . Their effective delinquency rate, according to the New York Federal Reserve Bank in its quarterly report on household debt and credit, was about 20%.
If these loans financed education at a for-profit institution, its allegedly rapacious owners/managers get the blame. However, the trustees, administrators and faculty at nonprofit institutions, such as the vast state-sponsored university systems, are not accountable, in the popular mind, for student loan defaults at those institutions.
But, just as the subprime loan bubble and bust had a gaggle of promoters, so does the student loan debacle. And just as the mantra of “affordable housing” fueled the political pressure for more and more federally-sponsored subprime mortgages, so the mantra of “a college degree is a must” has fueled the growth of student loans. The student loan market even had its own version of housing’s Fannie Mae – “Sallie Mae” – which has now been broken up into SLM Corporation which deals only with privately-issued student loans and Navient Corporation which services federally-guaranteed debt. (SLM Corporation’s effective delinquency rate is on the order of 6%.)
An attitude problem. Underlying the explosive growth in borrowing for education has been a shift in attitudes towards personal indebtedness. The widespread use of credit card borrowing privileges for students has helped to erode resistance to borrowing for current expenditures. (At one point, credit card companies kicked back some of their profits if they were allowed to solicit customers on college campuses.) Borrowing for education was rationalized by eminent economists who promoted the concept of investing in “human capital” (e.g. higher education at their institutions) as of equal importance as traditionally-defined investment capital. Borrowing for education was put on an equal footing as borrowing to build a new power plant.
Finally, there was the mantra that “you need a college degree to succeed” promoted by educators, politicians ranging from state legislators to U.S. Presidents, and brainwashed parents. No matter that the graduation rates for students enrolled in private and public not-for-profit colleges and universities are dismal. According to studies cited by Joel and Eric Best in “The Student Loan Mess” in 2009 the rates were 55% and 65% respectively – and for-profit schools did even worse at 22%.
The Bests and others point out the logical consequences that have flowed from the easy availability of student loans:
- The availability of loans reduced pressure on state legislatures to fund state-sponsored university systems.
- The program encouraged students to shop around more and attend higher cost schools than they otherwise would have chosen.
- Since students were shopping around more, colleges struggled to make themselves more attractive with food courts, higher grade on-campus housing, fitness centers and the like.
- Easy-to-get loans made both colleges and students less price sensitive. Students responded to higher tuition or dormitory charges by borrowing the extra $1,000 or more.
- Parents felt less pressure to finance their children’s education, for example by insisting that they attend local institutions and live at home (although they might still be asked to co-sign student loans).
- Institutions of higher learning have grown to depend upon students’ loans for a substantial proportion of their revenues – in some cases up to 90%, the maximum allowed under federal regulations.
- The burden of repaying student loans has deterred graduates from buying homes and getting a mortgage. (At least the borrowers are learning the lessons of too much debt and the arithmetic of compound interest.)
How will it end? A major restructuring of the federal student loan program is inevitable. Already Congress has passed legislation allowing borrowers to write off a portion of their debt if after graduation they enter an expanding list of professions, such as teaching science and mathematics. Delinquent borrowers can ask to suspend payments for a period of time (“forbearance”). Loan repayments can be limited to 10% of discretionary income and any debt remaining after 20 years fully forgiven.
But the enormity of the problem is concealed by the reluctance of the Department of Education to write off “bad” loans and the continuously compounding interest on them, which is treated as income by the government.
The first step in a lasting solution to the problem is for all the players, particularly university administrators and parents, to recognize that higher education is not a slam-dunk “good investment.” And that borrowing to finance it can be a risky proposition. Indeed, because student loan debt cannot be removed through bankruptcy, it can be even more onerous than a residential mortgage.
As pointed out earlier, one-third to almost half of students admitted to non-profit institutions of higher education fail to graduate in six years and nearly 80% of those in for-profit institutions fail to make the grade. The majority of these dropouts carry with them student loan debt they struggle to repay. A “good investment?”
The second step is to replace federal government student loans (outright or guaranteed) with tuition-only cash grants to students but only those with reasonable prospects for graduating within six years. This would make the cost of the program a transparent Federal budget item, subject to annual appropriations and Congressional review as is the case with the Pell grant program. Such transparency, coupled with the higher standards, would undoubtedly lead to a reduction in the flow of government-supported revenues to higher education and a reversal of many of the factors, some of which are listed above, that have been driving the cost of higher education ever upward. A number of institutions would have to shut their doors, a trend that already appears to be underway.
Bottom line. The parallels between the history of the student loan program and the expansion of the higher education behemoth and the subprime-fueled housing boom and bust are obvious and ominous. While the “bust” phase of the student loan bubble is unlikely to have the financial reverberations that accompanied the subprime collapse, the ultimate cost to taxpayers of a sizable chunk of that $1.23 trillion in student loans outstanding will be equally painful.
But somehow, when we get to the finger-pointing stage, I doubt that university administrators will be subject to the same opprobrium as Wall Street bankers.