Today’s Courier Herald Column:
In retrospect, we should have seen the financial bubble coming. Virtually anyone that applied got a loan. There was no consideration given to how the loan would be repaid. No calculations for repayment ability were required. Most borrowers overestimated the value of their purchase and underestimated the income that would be available in the future to retire the debt. The government subsidized an unlimited amount of borrowing, and then the problem was so large that when an alarm was sounded, too many people were invested in the status quo that the system could not be changed until it was too late.
No, the above paragraph isn’t a retrospective of the housing bubble. Instead, it’s a forecast of the student loan debt bubble which is yet to burst, but is also becoming hard to ignore.
President Obama visited the University of Colorado on Tuesday to campaign for extending current subsidized student loan rates. Without a change in current law, rates are expected to double from 3.4% to 6.8% this July. Yet continued subsidies on easy credit only continue to mask the real problem. If this were the housing problem, it would be called “extend and pretend”.
From a policy standpoint, we have accepted without question that all college degrees have value, and will provide a positive return on investment. Colleges have expanded their facilities and offerings in a bid to attract students, and passed those costs on to consumers. The cost of a college education has risen faster than inflation for decades, with the federal government willing to provide the financing for almost anyone who asks. No one asks if today’s higher expenses are worth the cost to most students.
Those entering college are not required to do any analysis to determine how they will repay the debt. Many are encouraged to stay in college for a 5th year or longer to enjoy their undergraduate experience. Many are now finding that their expectations of a certain financial lifestyle were inflated during their college years as they are unable to afford things as employed young adults that they freely spent money on during their college experience. And that’s for the recent college grads who are actually able to find jobs.
It is relatively easy for current young adults to graduate with over six figures of student debt. Only then is a student required to figure out how to make student loan payments while also figuring out how to afford housing, transportation, and other basic costs of living.
To make matters worse, graduates who find they borrowed more than they can afford to amortize are unable to declare bankruptcy on student loan debt courtesy of the bankruptcy reform act of 2005. Thus, lenders who entice students to borrow freely during their college years and the universities that freely accept their checks have no interest in educating their customers about managing their debt or doing a cost/benefit analysis. It is just assumed to be the student’s problem when they graduate and get smacked in the face with reality. The lenders and colleges will both get paid eventually.
This is not a small isolated problem. The amount of total student loans outstanding is estimated between $870 Billion and $1 Trillion according to the Associated Press, an amount that has doubled in the last five years. To put that in perspective, total credit card debt held by Americans is estimated at $693 Billion and total auto loans outstanding are about $730 Billion according to the Bank of New York. The amount of student loan debt and its role in our economy is not inconsequential.
Instead of extending and pretending, we must have an honest policy discussion with regards to deflating this bubble. Why are degrees in philosophy and art history subsidized at the same level as math and science fields? Why are borrowers allowed to receive loans without demonstrating they have conducted an analysis of how they expect to pay the loan back? Surely they should be able to complete a simple pro-forma of the average income for a graduate in their field and then deduct the expenses for the cost of living in their chosen city plus the debt payments they will have to make. Why is this not part of the application process?
And if credit card customers and mortgage holders are able to declare bankruptcy to get out from under crushing debt, why are students told that they must pay back debts they incurred when they were just old enough to sign a legal contract while those lending them money and profiting from their borrowings have a vested interest in them not understanding the consequences of their spending?
College students are adults, and should be treated as such. To do so, however, requires an adult policy discussion and not a promise to keep the cost of their futures that they are mortgaging cheaper for a little longer.