Market Overview

The Higher Ed Bubble, and the Coming Student Loan Crackup

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The Wall Street Journal on yet another Obama administration-sponsored mess — student loans:

Washington's Quietest Disaster
Student loan defaults are growing, and the worst is still to come.

When critics warned about rising defaults on government-backed student loans two years ago, the question was how quickly taxpayers would feel the pain. The U.S. Department of Education provided part of the answer this month when it reported that the default rate for fiscal 2009 surged to 8.8%, up from 7% in 2008.

This rising default rate doesn't even tell the whole story. The government allows various “income contingent” and “income-based” repayment options, so the statistics don't count kids who were given permission to pay less than they owed. Taxpayers shouldn't expect relief any time soon.

… Universities have been efficient in pocketing the subsidies by increasing tuition after every expansion of federal support. That's why education is a rare industry where prices have risen even faster than health-care costs.

This is also the rare market where the recent trend of de-leveraging doesn't apply. An August report from the Federal Reserve Bank of New York found that Americans cut their household debt from a peak of $12.5 trillion in the third quarter of 2008 to a recent $11.4 trillion. Consumers have reduced their debt on houses, cars, credit cards and nearly everything except student loans, where debt has increased 25% in the three years.

Perhaps this is because most federal student loans are made without regard to income, assets or credit history. Much like the federal obsession to finance a home for every American regardless of ability to pay, the obsession to finance higher education for every high school student ignores inconvenient facts. These include the certainty that some of these kids will take jobs that don't require college degrees and may not support timely repayment.

Like almost every federal program one sees, one word applies: unsustainable, this time with a bitter twist, in the form of so many young people who borrowed $50,000 or more, only to learn that their degrees qualify them in the POR (Pelosi-Obama-Reid) economy to drive cabs and dispense coffee. There's nothing wrong and something noble about every job, so that's not the point. The point is that kids and parents have been sold an expensive bill of goods by formerly affordable colleges who jacked up their rates far beyond what a normal market for education would ever have allowed, while the same politicians who enabled the situation messed up the economy to the point where the market for the services college grads could provide has seriously contracted.

I'm not optimistic that those affected understand why they are where they are, and who's really responsible. “At least” the fact that the federal government nationalized the student loan business, by eliminating banks as the possible source of the blame, increases the chance that some will figure it out.

The preceding article is from one of our external contributors. It does not represent the opinion of Benzinga and has not been edited.

Posted-In: bubble debt economics higher education student loansTopics Economics General

 

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