Student Loan Bubble

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This issue has been on our minds for some time, but may be coming to a head. Every one of us has, at one time or another, had a discussion about the rising cost of a college education. We all know of private and public schools where the cost of just a four year undergraduate degree is about the same as the average home price in this country! How many of us stop to dig deeper and ask "why" this price increase continues while at the same time prices of almost everything else are falling as a result of the recession and credit crisis. Last time we
checked, falling demand leads to falling prices. Sure, there are select universities that are always in high demand. However those schools are in the minority when compared to the total number of universities across this country. Why do prices continue to rise across the board? We can all thank Uncle Sam for this situation. The federal student loan program is a great example of an idea that would seem to have tremendous benefits and very little costs. Who can argue against providing very cheap loans to almost any student



so they can achieve their dream of getting a college education? Think of all the lower income students that would not have been able to afford a degree if not for our student loan program. Well, it's not that simple. Thanks to all this free money gushing from the faucet, universities have free reign to continue to raise tuition rates across the board. Why not, students can just go out and get more loans to cover the increase. In fact, when enrollment falls, universities usually RAISE tuition to offset the budget shortfall! How many businesses do you know of that operate in that manner? All those students that fulfilled their dreams thanks to student loans are left with huge loans that if not handled perfectly can be a burden for their entire lives. This generation of college graduates now finds themselves in a very difficult situation. Very few jobs for recent grads, and mountains of student loans higher than any other generation in history!! Sound like a bad situation, well it is and it likely will not last forever.

Again, this is one of those perfect examples of how we have all been brainwashed just because we have lived with the status-quo our entire lives. "Student loans, of course they are a good thing. We have always had student loans. Anyone against student loans is crazy!" The federal government along with the big banks have created a situation that if left alone, would have functioned like many other free market industries. The quality of education should increase, while the cost should be decreasing. That is how any free-market works, just look at all kinds of examples such as technology. Far more students would have been able to go to college and would not have been saddled with any loans upon graduation.

This article from CommonDreams.org outlines the current situation. We have taken out a few key excerpts as a summary, but we recommend you read the entire article carefully.

A Primer on the Student Loan Bubble

January 11, 2011

CommonDreams.org

It was announced last summer that total student loan debt, at $830 billion, now exceeds total US credit card debt, itself bloated to the bubble level of $827 billion. And student loan debt is growing at the rate of $90 billion a year.

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The extraordinary growth of student debt paralleled the bubble years, from the beginnings of the dot.com bubble in the mid-1990s to the bursting of the housing bubble. From 1994 to 2008, average debt levels for graduating seniors more than doubled to $23,200, according to The Student Loan Project, a nonprofit research and policy organization. More than 10 % of those completing their bachelor’s degree are now saddled with over $40,000 in debt.

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There is about $830 billion in total outstanding federal and private student-loan debt. Only 40% of that debt is actively being repaid. The rest is in default, or in deferment (when a student requests temporary postponement of payment because of economic hardship), which means payments and interest are halted, or in forbearance. Interest on government loans is suspended during deferment, but continues to accrue on private loans.

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As tuitions increase, loan amounts increase, as do private loan interest rates, which have reached highs of 20%. Add that to a deeply troubled economy and dismal job market, and we have the full trappings of a major bubble. As it goes with contemporary bubbles, when the loans go into default, taxpayers will be forced to pick up the tab, since just about all loans extended before July, 2010 are backed by the federal government.

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Two out of every five students enrolled at proprietary schools are in default on their education loans 15 years after the loans were issued. In spite of this high extended default rate, for-profit colleges are in no danger of losing their access to federal financial aid because, as we have seen, the Department of Education does not record defaults after the first two years of repayment.

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According to the National Association of Colleges and Employers more than 50 % of all 2007 college graduates who had applied for a job had received an offer by graduation day. In 2008, that percentage tumbled to 26 percent, and to less than 20 % in 2009. And a college education has been producing diminishing returns. For while a college degree does tend to correlate with a relatively high income, during the last eight to ten years the median income of highly educated Americans has been declining.

UPDATE 8/22/2011 - Great article from The Atlantic on the explosion of student loan debt