Note that all of the incentives are in favor of initiating the loan. Lenders love it because the loans are non-bankruptable and they get their fees up front. Colleges love it because they are seeing both increased enrollment and increased tuition rates. They now have extra money to spend on all the great programs and projects they have been dreaming about. And besides, high tuition rates bring prestige to the college, and that is always a good thing. Government bureaucrats love it because they get to be the heroes. Parents love it because they get to enroll their child without having to worry about affordability. Even students love it initially.
But eventually the loan is just a loan and not a grant. It must be repaid. And unfortunately it must be repaid when the new graduate is just starting out in a career (assuming they have graduated and were wise enough to actually prepare for a career). Even without student loan debts, this is a period of increased financial pressure due to housing, transportation, food and medical costs now being borne directly by the graduate.
Screw U. Government inflated the college loan bubble, but Obama isn’t fixing it - Glenn Harlan Reynolds
The real problem is that we’ve been running a higher education bubble, one that -- like the real-estate bubble -- has been pumped up by cheap government money. Since 1999, student loan debt has increased by 511%, while disposable income has increased by only 73%.
That’s because when the government subsidizes something, producers respond by raising prices to soak up as much of the subsidy as they can. College is no exception. Tuition has been increasing much faster than disposable income, and families -- believing that a college education is a can’t-lose investment, much as they used to think houses were -- have been making up the difference with debt. After all, we’re told, student loan debt is “good debt,” because a college degree guarantees more earnings.
Tell it to the Occupy Wall Street protesters, many of whom note that they’re deep in debt for fancy degrees that didn’t get them jobs.
The problem is, “college” isn’t an undifferentiated product. Companies can’t hire enough mechanical engineers, but there’s no bidding war for majors in Fine Arts or Women’s Studies, degrees that cost just as much, but deliver a lot less in terms of employment. In an economically rational market, it would be harder to borrow money to finance fields of study that were unlikely to produce enough income to pay back the loans. But since the federal government subsidizes everything -- and makes student loans un-dischargeable in bankruptcy -- there’s no incentive for lenders to care, and even less incentive for colleges and universities to care. They get their money up front, after all -- just like the people who wrote the subprime loans that fueled the housing crisis.
Chart of the Day: Student Loans Have Grown 511% Since 1999 - Daniel Indiviglio
Obviously the number of students didn't grow by 511%. So why are education loans growing so rapidly? One reason could be availability. The government's backing lets credit to students flow very freely. And as the article from yesterday noted, universities are raising tuition aggressively since students are willing to pay more through those loans.
This student loan growth sure looks unsustainable. But it's hard to see how this bubble's inevitable pop might look. Ultimately, it might look more like a balloon slowly deflating, if a large portion of college graduates decide to strategically default on their debt over time.
All this college debt could put the U.S. on a slower growth path in the years to come. As Americans grapple with high student loan payments for the first few decades of their adult lives, they'll have less money to spend and invest. All that money flowing into colleges and universities is being funneled away from other industries where it would have been spent in future years. Of course, this would be a rather unfortunate irony: higher education is supposed to enhance a nation's growth, but with such an enormous debt burden, graduates might not be able to spend and invest enough to allow that growth to occur.
Some great charts at the Federal Reserve Bank of New York.
Rather than rack up a bunch of debt, maybe just go to MIT for free.
More free online resources: 12 Dozen Places To Educate Yourself Online For Free
