Sunday, February 17, 2013

Student Loan Bubble, Continued

From Salon, a stinging rebuke of the student loan racket that threatens to set off another credit-fueled systemic financial crisis:
In effect, the system allows any 22-year-old American University chooses to admit to borrow a sum equal to the average home mortgage, but without a single one of the actuarial controls that are supposed to minimize the risk that homeowners will borrow too much money.

After all, even at the height of the housing bubble, home buyers who got so-called liar loans that misstated their actual income still had to jump through certain hoops to do so. In addition, if they defaulted on their loans, there was a house the lender could foreclose on that in most cases still had some value. Of course, that system proved to be far too unregulated, and led to a financial disaster that would have wrecked the nation’s banking system if not for hundreds of billions of dollars of federal bailout money.

Still, even that system was a model of rationality in comparison to the federal government’s funding of higher education. As long as they are technically “nonprofit” institutions, schools can charge whatever they like, without having to provide a shred of proof that their graduates will be able to pay back the incredible debt loads they will be incurring. And, of course, when graduates default on these loans there’s no house to sell off to cover at least some of the deficiency.

This is all a foregone conclusion.  The coming student loan credit bubble is due to burst and there isn't anything of tangible value, like a physical house, to sell off in order to salvage something from the implosion.  People are graduating with over 200 large in student loan debt ALL THE TIME and no one wants to think about the consequences of a mass default, along the lines of the housing crash. 

We rightfully put a premium on higher education.  An educated population is the crucial factor in differentiating between wealthier nations and the third world.  It is the key to maintaining a sustainable, broad-based middle class.  It's crucial that college education remain a viable option for the average American.  We cannot allow the complete commercialization of higher education wherein a college degree becomes just another commodity to market and sell for maximum profit.  Harvard and Yale and Stanford are sitting on billion dollar endowments.  For-profit institutions like University of Phoenix rake in billions every year.  And yet if a 24 year old grad has a hard time landing a decent job after forking over $150,000 for a degree from Penn or Cornell, she is on the hook for the entire amount.  She has no recourse to bankruptcy.  Student loan debt is entirely non-dischargeable.

It's about time we subject the world of higher education to the same quality metrics and performance evaluations that health care is now subject to.  For now on, if taxpayers are going to fund incoming freshman classes, we need to see the results.  What are the graduation rates?  What percentage of grads are getting jobs and what is the average salary?  How many are able to meet loan payments without declaring "financial hardship"?  This should all be reportable information.  Those institutions that fail to meet standards ought to be subject to cuts in the federal student loan treasure chest. 

Or better yet, why don't we use some of this expected post-Iraq, post-Afghan "peace dividend" and expand the number of need and merit based scholarships.  Institute tuition freezes/cuts at state schools.  Make college education, for the those who have the intellectual tools, a guarantee of citizenship.  Our youth shouldn't have to mortgage their future for a piece of paper that guarantees nothing. 



Anonymous said...

Student loan default can also prevent renewal of your license to practice in my state. Tough on new nurses these days with the glut of newly minted nurses unable to find work. In my state, renewal is every 2 years... and most hospitals will not let an RN work as a tech while they wait for things to change due to the legal gray area. Talk about a wasted education for many.


Anonymous said...

Real issue of college cost is comparable to Medicare 25 years ago. Make unlimited money available for loans and encourage an arms race in facilities ( ever see average health club at a college) , increase "administrators" and you get tuition growing at 2-3 times rate of inflation. Books are cheaper, lab equipment is cheaper and libraries are probably not needed. Have CMS run the damn places and then you have progress