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Student loans are a real financial bubble and this may start to become a big education problem, says a recent report by Moody’s about the student lending industry. According to the credit rating agency:
The long-run outlook for student lending and borrowers remains worrisome. Unlike other segments of the consumer credit economy, student loans have not demonstrated much improvement in performance despite some improvement in the broader economy. Origination volumes have remained elevated and are projected to continue to grow with rising demand.
Students [could] …find themselves in worse financial positions and unable to earn the projected income that justified taking out their loans in the first place. Fewer people may pursue higher education should the returns fall and the required debt burdens continue to rise.
Why is this happening? Perhaps the best explanation comes from Gawker’s Hamilton Nolon, who writes that:
Colleges are steering students towards ever larger private loans, and that, since demand for education actually rises during bad economic times, we’re now smack dab in dynamic consisting of more people taking out more loans for school that will not provide them with a job that will enable them to pay back those loans, leading to higher loan defaults and, ultimately, the risk of a collapsing bubble.
Moody’s recommends that “students limit their debt burdens [and] choose fields of study that are in demand,” which seems like a solution that’s both inefficient and unrealistic, since students are notoriously bad at making those kinds of crucial life decisions at 18.
A more meaningful way to reduce loan burdens without hurting enrollment would be for colleges reduce costs and pass those reductions to students. It’s not students who are responsible for escalating college costs; it’s the institutions themselves. Cheaper college is the real path to decreasing student loan debt.
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Christopher Crockett on August 03, 2011 1:29 PM:
Mr. Luzar's proposal at the end of this piece does not adequately address the real problem: that there are few, if any, jobs for students to acquire once they leave school because of the rapidly changing economic dynamic in the United States. Furthermore, with Obama's proposed trade agreements with South Korea and other nations that will undoubtedly funnel more jobs overseas while jacking up imports to an increasingly strapped (and disappearing) middle class, going to college will be a huge waste of time and precious resources for individual applicants. Lower costs at schools? Get real. With ironclad business contracts at universities that force students to accept plans they don't want and don't need (try looking at a meal plan contract), and universities creating Wild West like opportunities for (some) professors to foist their overpriced texts on students, the concept of American higher education "philosophy" is rapidly returning to pre-World War II standards: the rich go to school, the rest scramble for jobs as undereducated pawns. Tell me more, Mr. Luzar, why schools will want to lower their prices?
Jimo on August 03, 2011 3:40 PM:
"which seems like a solution that’s both inefficient and unrealistic, since students are notoriously bad at making those kinds of crucial life decisions at 18."
That seems a bit uncharitable.
More accurately: young people are optimistic and believe that they will be lucky and not face difficult and unsatisfactory outcomes in life. Expecting young people to act as if they were pessimists is like asking a cat to bark.
The better solution is for governmental financial assistance to shift from direct to indirect assistance, from loans to grants to colleges and universities to aid students themselves ... and with standards and expectations to be enforced by the U.S. government on the schools. This aligns student financial aid with the many other forms of governmental influences on higher education and equalizes better the check on schools' desires to over-weight benefits to faculty and administrators and under-weight benefits to students.
pujols on August 05, 2011 3:20 PM:
An important distinction between the student loan debt bubble and other bubbles has gone unmentioned here: student loan debt is difficult-to-impossible to discharge in bankruptcy, differentiating it from credit card debt, commercial debt, and home loans (which is further differentiated from this situation by being secured with real property).
This makes the bubble difficult to burst. Student loan lending is made very attractive to financial institutions because of it will almost always be repaid by the borrower unless s/he dies or becomes incapable of ever repaying it (e.g. via physically or mentally crippling injury). As a result, lenders will be very willing to extend these sorts of (ever growing larger) loans to students; because of that colleges and graduate programs face very little downward pressure on price.
The end result? We have created a generation of debt slaves for no discernible reason. Hooray.