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August 16, 2013 4:58 PM The Debt Disaster

By Daniel Luzer

Matt Taibbi has an interesting new piece at Rolling Stone about student loans and what they’re doing to America and, more specifically, how President Barack Obama isn’t fixing the problem. The situation is pretty bad.

As he writes:

The thing is, none of it - not last month’s deal, not Obama’s 2010 reforms - mattered that much. No doubt, seeing rates double permanently would genuinely have sucked for many students, so it was nice to avoid that. And yes, it was theoretically beneficial when Obama took banks and middlemen out of the federal student-loan game. But the dirty secret of American higher education is that student-loan interest rates are almost irrelevant. It’s not the cost of the loan that’s the problem, it’s the principal - the appallingly high tuition costs that have been soaring at two to three times the rate of inflation, an irrational upward trajectory eerily reminiscent of skyrocketing housing prices in the years before 2008.

And whatever the Obama administration has been doing lately with regard to the interest rate on student loans, that has virtually no impact on the real problem, the size of the loans themselves. Taibbi explains that there are two culprits:

First in line are the colleges and universities, and the contractors who build their extravagant athletic complexes, hotel-like dormitories and God knows what other campus embellishments. For these little regional economic empires, the federal student-loan system is essentially a massive and ongoing government subsidy, once funded mostly by emotionally vulnerable parents, but now increasingly paid for in the form of federally backed loans to a political constituency - low- and middle-income students - that has virtually no lobby in Washington.
Next up is the government itself. While it’s not commonly discussed on the Hill, the government actually stands to make an enormous profit on the president’s new federal student-loan system, an estimated $184 billion over 10 years, a boondoggle paid for by hyperinflated tuition costs and fueled by a government-sponsored predatory-lending program that makes even the most ruthless private credit-card company seem like a “Save the Panda” charity. Why is this happening? The answer lies in a sociopathic marriage of private-sector greed and government force that will make you shake your head in wonder at the way modern America sucks blood out of its young.

And we wonder why college costs keep rising. During the middle of the last century, public university tuition cost about four percent of an average American family’s annual income. In 2010 it was 11 percent.

All of this is true, but he glosses over an important point, which is declining state support for public colleges, which about 80 percent of American students attend.

He’s very critical of colleges, as rightly he should be, but colleges are simply economically rational actors. It appears what happened was that colleges got less money from their states to operate (and as the costs of operations increased for normal reasons, since infrastructure costs money) and they figured if students were taking out loans for college, well, why not have them take out more loans? Then the colleges could charge even more and use the extra money to buy stuff.

For a time this strategy didn’t even look so irresponsible. College debt was good debt. Before the economy collapsed we just didn’t see student loans as a problem. Sure having college debt was annoying, but no one really seemed to have trouble paying it off. It just meant they had a little less money.

But the mortgage crisis of 2008 not only left college graduates scrambling to find professional jobs to service their debt, it also caused states to cut appropriations for college. And so the student loan problem actually got worse. The average person who takes out student loans leaves school $27,000 in the red.

As President Obama begins his bus tour of college affordability next week, let’s keep this in mind. The cost of college is not about the interest rates. The problem is the principal. For the last 50 years we’ve attempted an intriguing and sophisticated policy idea: funding higher education with student and parental debt. This worked pretty well when the economy was good and everyone was feeling rich due to overvalued real estate. But it doesn’t work so well in times of economic turmoil.

This policy has failed. It’s time to find a new way to pay for college.

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer

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