Student loans set to burst

By Editorial Board

With Occupy Wall Street’s focus on the student debt crisis, revelations on its severity seem to be coming out of the woodwork every day. However, some have seen the storm clouds brewing for a while. A study by the Center for College Affordability and Productivity—released in the relatively optimistic days of 2008—draws a stark comparison between the housing bubble and the student loan crisis. The study, called “A Tuition Bubble? Lessons from the Housing Bubble,” succinctly describes how the housing-market collapse of 2007 occurred and why student loans could be the next sector of our economy to burst.

Colleges charge more each year because they can, and students and their families choose to pay more because the income difference between college- and high school-educated workers demonstrates that a college degree is a good investment. Colleges do not operate in a normal economic marketplace, though. Even as more students go to college each year, the number of institutions generally does not grow—hence, the rapid price appreciation. Colleges, unlike for-profit businesses, actually turn away applicants. No matter how many apply, there are only a certain amount of spots open at many schools, and so it makes no sense to lower tuition.

Federal loans act as subprime loans in this comparison. The government guarantees federal loans, so the credit-worthiness of the borrower is irrelevant. This wide availability of credit allows too many students to attend college. As in subprime loans, it is uncertain whether student borrowers will be able to pay back the money.

In a booming economy flush with new jobs, this isn’t a bad thing. A society is better off when its citizens are well-educated, and most grads get careers that easily pay off the college investment. However, with 9 percent unemployment, grads are leaving school with no opportunities. Thus, more and more default on their loans, creating a generation that will be swamped with debt. This is a catch-22—students should be encouraged to go to college, yet the current system is unsustainable. The more high school students who go to college and take out loans, the worse the crash will be.

No one should be discouraged from getting the education he or she deserves, and the high price of college shouldn’t deter hard-working lower-class students. The best part of America is the ability to move upward in society—yet no one will move up if only the wealthiest can go to a good university. The only option to defuse this ticking time bomb is for the federal government to invest more heavily in Pell Grants, which do not have to be repaid. State universities can be further subsidized and their prices reduced.

It’s unlikely that any major federal action will be taken to avert this crisis. There are some Band-Aids, though, that could slow the hemorrhaging. Transparency in how private institutions spend money could lead to lower tuition by keeping expenses accountable and lowering prices. Universities should also accept more community college credits. Many students don’t realize the severity of the commitment they’re making as 18-year-olds signing off on loans. Financial counselors should be available to review this with prospective students.

None of these small fixes will avert a student loan bubble from bursting and tanking the economy even further. Real action must be taken. Until then, smart students can plan for their future and minimize the loans they take out. Putting responsibility off until the future is what created this mess, and it threatens to dig the hole even deeper.