At $1 trillion dollars, student loan debt has eclipsed credit card debt for the first time in American history. To make matters worse, come July 1 the interest rate on federally subsidized Stafford student loans will automatically double, from 3.4% to 6.8%, unless Congressional action is taken to extend the lower rate before then. Depending on which side of the aisle you choose, extending the lower rate will cost between $3 billion and $7 billion per year (estimates from the center of the aisle hover around $5.5 billion).
The problem is not simply the interest rate. Loans for college are often taken out directly by parents, or guaranteed by them, and the debt can easily run into six figures. This could ultimately threaten their credit ratings, retirement funds, and even their homes. All of this boils down to a simple truth that just about anyone who is either actively paying for college or contemplating it already knows. When it comes to financing higher education in the United States, we've got a major problem. But if you're like me, intuition isn't enough. So allow me to paint you a thoroughly disturbing picture.
According to Finaid.org, parent debt relating to their children's education has more than doubled in the last 10 years. In 2010, for the first time ever, $100 billion in student loan debt was disbursed. That's about 10% of all outstanding student loan debt handed out in one year. It is not a problem associated with any particular tax bracket. The willingness of parents to cosign for tuition loans exists across all levels of income.
President Obama was recently criticized for his stance regarding the need for an education (I believe the exact word used was "snob"), but the desire for higher education has been part of the American persona for centuries. Around 1780, John Adams observed:
"I must study Politicks and War that my sons may have liberty to study Mathematicks and Philosophy. My sons ought to study Mathematicks and Philosophy, Geography, natural History, Naval Architecture, navigation, Commerce and Agriculture, in order to give their Children a right to study Painting, Poetry, Musick, Architecture, Statuary, Tapestry and Porcelaine."
He also observed: "There are two types of education... One should teach us how to make a living, and the other how to live."
God love him, Adams was part, and a perfect harbinger, of the problem that we face today. The first part of that problem is that somewhere along the way it became politically incorrect to suggest that college might not be right for every young American. Although the student loan problem was created by loans for all kinds of post-secondary education, tuition for college programs represents the vast majority of the debt especially in cases where the amount owed is large. It became government policy to encourage kids to go to college, just like it became government policy to assist everyone in buying their own home. It's a laudable goal, and statistics indicating the lifelong value of higher education are compelling. The problem is, somebody's got to pay for it, and with the US getting relatively poorer--straddled with huge national debt, dependence on foreign oil, and high unemployment--the burden on American families is growing geometrically with no relief in sight (other than increasing government assistance).
The second part of the problem is that while a traditional liberal arts education may be able to teach a student how to live, it often doesn't do as well when it comes to teaching them how to make a living (unless there's a few million in a trust fund). A study recently released by Young Invincibles, a nonprofit advocacy group for young adults, found that almost two-thirds of U.S. student-loan borrowers did not understand at least some elements of their loans or the student-loan process. About 20 percent of the respondents, who had an average of $76,000 in student debt, reported that the size of their monthly payments was a surprise. Granted this is not about the nuances of how to live well---it's a question of how to get by, and it's fair to say that those folks weren't too well prepared for that.
They are also not too well prepared for making a living. A 2010 GAO report criticized the high-pressure sales tactics, lack of job placement, and student loan abuses found at many online and for-profit colleges. To qualify their students for federal loans and other benefits under Title IV (which is the provision of the Higher Education Act of 1965 under which most government-backed student loans are made), educational institutions must show that their programs offer "Preparation for Gainful Employment." The rules require measurement of criteria such as how many students from a given school are delinquent in loan repayments, job placement success, annual gross and discretionary income of the former students once they've entered the workforce, and so on. Bear in mind that some for-profit schools have literally hundreds of thousands of students, and derive as much as 90% of their gross tuition revenue from Title IV financing.
The underlying cause of this proliferation of big-box education is the rapidly accelerating cost of higher education in America. According to the College Board, average inflation-adjusted tuition at public four-year colleges rose by 29% in the last 10 years; the increase at private four-year colleges was 22% during the same period. In other words, the price of a college education is rising at more than double the rate of inflation.
That said, has the value of a college education increased commensurately?
And, as prices have risen, so have student loan defaults. According to the U.S. Department of Education, the default rate rose from 7 percent in fiscal year 2008 to 8.8 percent in fiscal year 2009. Defaults increased in all sectors --- from 6 percent to 7.2 percent for public institutions, from 4 percent to 4.6 percent for private institutions and from 11.6 percent to 15 percent at for-profit schools.
So let's recap:
We start with an impulse that is part and parcel of the American dream. Well-meaning federal policy is then promulgated to encourage the pursuit of that dream, largely by means of government-guaranteed loans. The availability of that funding creates a sort of moral hazard. Enter well-meaning and not-so-well-meaning guys who encourage--fairly or fraudulently--lots of folks to take advantage of those loans so that the not so well-meaning guys can make a very large and very fast buck. Many (or most?) of the citizens who take that loan money really don't understand what they're getting into, and many of them (if we are honest about future potential earnings) shouldn't be dreaming that dream in the first place. The demand created by the availability of those loans drives up the price of the dream; and then defaults increase precipitously.
[Related Story: Defaulting on Private vs. Federal Student Loans]
It's a bit like the real estate bubble, no?
If the interest rate on student loans is doubled this summer, the camel's back will break and we will be facing yet another large-scale crisis like the one that crippled the economy in 2008. There are a lot of people who want a college education for themselves or their kids--as there are a lot of people who want to own their own home. In the glare of hindsight they couldn't afford it. But because they already paid for it with government-guaranteed largesse, one way or another it will become the taxpayers' burden, unless perhaps the government does something to regulate how much a college education can cost.
This article originally appeared on Credit.com.
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You would be required to take until you could explain why price controls, government subsidies, etc do not work.
NOTE: Keynesian economists need not apply to teach. Only real economist please.
Price controls will only result in shortages.
Kids...go to school in some other country....save yourselves the money, and the serfdom.
colleges have invested their money inappropriately. In non-academic luxuries that don't involve a quality education...education has become a business. A salespitch.
The other thing that is missed is simple economics. The most students who graduate college, the less quality jobs available. This is for all those idiots who say "everyone needs to go to college"...More and more people are attending college, but the job market hasn't demanded greater college graduates...and jobs can't be made out of thin air.
The second culprit is big government. Backing all these student loans. By giving loans to anyone who seeks it, they are perpetuating the same flaw in the housing market collapse...
I don't care if we are the strongest country in the world, the laws of economics and common sense still apply to us. There is no way to avoid them.
total sticker shocl. when I first went to college in the late 70's I paid a little over 20 bucks a credit hour at the local campus of a major big 10 school it is now $259 a credit. this is way beyond any measure of inflation.
my question is what value has been added to the college degree that can can justify over 12 times cost increase?
The problem is that people in our country do not understand the concept of value...and so the inflation of college cost and depreciation of the college degree is lost because they must carry their naive altruism around at all times.
Honestly, try to debate someone sometime. They will either a) blame big business b) think that government reforms can fix the problem or c) think that "college" is good in its own sake and so worth the cost of money a person does have.
Liberals also do this for healthcare, education, and poverty programs.
It would certainly change the face of campus, as funding would be focused upon some majors and not upon others. But it would also spread the risk that students are currently facing.
Either way, I completely agree that both the universities and the lenders need to have a stake in whether or not this investment made on the part of the student is going to pay off. Right now, the lender is guaranteed its money back, the university is guaranteed its tuition, and the student is guaranteed a piece of paper that may or may not result in a better job. Reciprocity needs to go both ways.
Everything the government subsidizes or buys seems to cost more.
The First Crack: $270 Billion In Student Loans Are At Least 30 Days Delinquent
Fitch believes most student loan asset-backed securities (ABS) transactions remain well protected due to the government guarantee on Family Federal Education Program (FFELP) loans. The Federal Reserve Bank of New York recently reported that as many as 27% of all student loan borrowers are more than 30 days past due. Recent estimates mark outstanding student loans at $900 billion- $1 trillion. Fitch believes that the recent increase in past-due and defaulted student loans presents a risk to investors in private student loan ABS, but not those in ABS trusts backed by FFELP loans.
Why is the bubble starting to pop now?
Several macroeconomic factors are putting pressure on student loan borrowers. The main ones are unemployment and underemployment. The Bureau of Labor Statistics estimates the current unemployment rate for people 20 to 24 years old at nearly 14% and for those 25 to 34 years old, 8.7%. Underemployment is difficult to measure for these demographics, but it is likely having a negative impact.
Actually, no: the unemployment for 18-24 year olds is 46%. Yup: 46%.
And as a courtesy reminder to our young up and coming "thinkers", this is $270 billion in debt that can not be discharged. Go ahead - file for bankruptcy - see what happens.
for contributions for the past decade? RAY-publicans. Democrats
are involved to a lesser degree. How has republican Susan Collins kept her job
as an elected Republican "moderate" for as long as she has?
Through her husband who headed one of the main for profit college corporations.
A big source of contributions. These so- called collages the on-line
"teachers" double as loan officers for the very students they help to
ripoff. Every response by the borrower is anticipated to get that
loan approval signature just like predatory mortgage loans and
Roland Arnall and his infamous Ameriquest Mortgage.
The housing & US economic meltdown was engineered
to happen at just the right time to hamstring's the next
administration in 2008. This allows the party out of power
to call the shots in the Congress while out of power during
the near depression which they helped bring about while in power.
Heck, there are a lot of new avocations and careers that weren't available before. Blogging, for instance.
I do not know who holds your friend's loans, but if she has the money for a car, she has the money for the loans. My saving grace has been the willingness of the Student Loan People to work with me to avoid default. It has not been easy. My bachelor's degree is currently worth $7.60 an hour. I do not own or lease a car. I do not have a television. I do not spend money frivolously. My problem isn't consumerism, it's the scarcity of gainful employment in my area.
No. It's time to eliminate government backed student loans.