College Bubble

John Schwenkler has an interesting piece about college loans and the culture of debt surrounding them. As a college graduate who is still working on loans that I never really needed, I have already made a personal promise to myself that my oldest will not borrow to get through college. Obviously that commitment means that her options are going to more limited than someone willing to borrow for college, but graduating debt free will be worth it.

The thing that makes me maddest in retrospect, besides my own extraordinarily bad judgement, is the ease at which that money was offered. I spent about 15 minutes in an office on campus, signed some paperwork and soon had a check for about $3,000 more than I needed to pay my tuition. This was theoretically supposed to cover books, rent, etc but instead it went mostly towards bar tabs, Christmas presents and taking dates out for prime rib. There was no accountability and no difficulty in getting more money when the first loan ran out.

Schwenkler compares the college loan culture to the recent housing bubble:

 

Borrowing has doubled over the past decade, to roughly $85 billion in new student loans in the 2007-08 academic year, bringing total student debt owed to well over half a trillion dollars. The average borrower went $19,200 into debt for a diploma in 2004, a 58% increase after inflation since 1993, according to the Project on Student Debt.

The proportion of students who graduate with more than $40,000 in debt jumped sixfold during that period, to 7.7% of the 1 million grads in 2004, or 77,500 people. Most will struggle for more than a decade to work it off, assuming relatively low 6.8% interest rates, the Project on Student Debt says.

The underlying dynamics, as Kristof goes on to explain, make for exactly the sort of cycle that characterized the housing bust: government-subsidized lending gives way to lending from private institutions, and the push to keep up with the Joneses leads people to borrow more and more, and to do so less and less responsibly.

 

A lot of the pressure to enter this system comes from colleges themselves who market aggressively and lead the charge on declaring a college education as critical to later success in life. There is a real denial there of the basic realities that one can still do very well in America without a four year degree. In many cases those with a 2-year degree or some kind of technical training can do much better financially than your typical liberal arts major. But we are still selling the notion that a BA or BS is the minimum starting point for a successful adult. And who are we are hurting the most with this idea? Schwenkler addresses that question as well:

 

And of course the people hardest hit by this are precisely the ones whom the expansion of access to higher education was supposed to help: those from underprivileged backgrounds and lower income brackets, who start with less, borrow more, and will take decades to pay back their loans even as they are especially unlikely to maximize their degrees’ full economic potential. It’s a horrible situation, and one that’s unlikely to change so long as we continue to treat four-year colleges as the only acceptable training grounds for entry into the white collar workforce.