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Bob Samuels

Bob Samuels

Posted: March 15, 2010 12:44 PM

In reading Steven Hill's brilliant Europe's Promise, I came across this shocking statistic, "Over a third of all students in college are now using credit cards to pay for escalating tuition costs". Hill goes on to detail how many of these cards come with initial teaser interest rates followed by variable rates just like the famous subprime mortgages that helped to cause the global fiscal meltdown. This means that students are not only being squeezed by private and public loans, but they are also being set up for a lifetime of fiscal servitude due to the easy credit that these cards promise.

Standing back a bit, we see that as states have reduced their funding for public colleges and universities, tuitions have skyrocketed, and students have been asked to take out multiple forms of credit to finance their educations. Sallie Mae reported in 2008 that the average undergraduate in 2007 carried $3,173 in credit card debt; surely, this number has gone up in the last two years. In fact, according to USA Today, "In 2008, college seniors with at least one credit card graduated with an average of $4,138 in card debt, up 44% from 2004. By comparison, freshmen's average credit card debt jumped 27% to $2,038."

From Need to Merit

What most people do not understand is that one of the driving forces behind growing student debt is the move to base financial aid on merit and not need. This change has been made so that selective universities and colleges can attract the students with the highest SATs by offering wealthy students "competitive" merit-based financial aid. In turn, the main way that higher education institutions fund financial aid for the wealthy is to raise the tuition rate for everyone else. Not only have private universities mastered this art of the "high fee, high aid" model, but several states and public universities have gone down this path by replacing state aid based on need with state aid based on merit.

As Peter Sacks shows in his Tearing Down the Gates, states like Georgia, have decided that the best way to attract wealthier students with higher SAT scores is to make state-funded grants available for students with high test scores. The end result is that some of the schools from Georgia have increased their ratings in the U.S. News & World Report College Rankings, but students on average are paying more and taking on more debt as students without wealthy parents are being replaced by students who come from the richest families.

To be precise, a transfer of wealth and opportunity is being made from lower- and middle-class families to upper-class families, and to add insult to injury, the non-wealthy students are being forced to take on a lifetime of debt to subsidize the aid for the wealthiest students. Meanwhile, many people are profiting from the student debt bubble that is now being securitized and leveraged at record rates.

Majoring in Debt at the University of California

In fact, at the University of California, many of the people in charge of increasing student fees and debt are directly involved in the student loan business and other related financial industries. For instance, regent Richard Blum is a major stake-holder in a company called Career Education Corporation. This organization invests in for-profit colleges and has recently been sued several times for providing subprime loans to students at institutions that do not provide the services they advertise.

It turns out that the median graduation rate at proprietary schools is 38%, and many students end up without a degree, while accumulating huge student loans with interest rates in the double digits. Moreover, a new law passed by congress uses governmental funds to guarantee these loans, and since over 70% of these loans go into default, taxpayers are left paying the bill, while profiteers like Blum, turn a hefty profit.

Blum was the head regent of the UC system until last year when Russell Gould, the former Senior Vice-President of Wachovia Bank, took his place. It is important to note that when Gould was at Wachovia, he helped to oversee subprime mortgages. Moreover, while Blum's company funds for-profit schools, Gould helped to supply high-interest, high-default student loans. Gould and Blum thus have a long history of profiting off of student loans and seem to have no qualms about raising student fees to increase their own profits.

Solutions

It should be clear by now that the federal government needs to get involved in regulating tuition costs and student debt. A first step would be for the government to take over the student loan business, and this may become a reality this year. However, a larger issue is the move from need-based to merit-based financial aid and the growing student credit card industry. Certainly, the federal government can step in and stop the exploitation of college and university students.