Easy Credit Is Inflating a Massive Student Loan Bubble

July 1, 2013

Americans are still talking about the recently deflated housing bubble, but there's a new bubble in town. It's the student loan bubble and when this one pops, it might dwarf the wreckage we've witnessed in the real estate markets, says Steven Greenhut, vice president of journalism at the Franklin Center for Government and Public Integrity.

  • The Federal Reserve's Board of Governors recently warned that soaring student loan debt has "parallels to the housing crisis," according to a May report in Bloomberg.
  • As with housing, free-flowing cash will lead to widespread default.
  • Of course, it's easier to repossess a tract house than to take back a potentially worthless degree.
  • Federal Reserve Chairman Ben Bernanke dismissed these concerns by saying that most of the money in the student loan sector is federal money, which just means taxpayers (rather than lending institutions) will take the initial hit.

Policymakers insist that there is insufficient funding for education and that getting a college degree is the pathway to a better life. But as the bankers noted, the sea of student loan money artificially boosts the cost of tuition, which creates a new cycle of indebtedness by students. Higher tuition makes "pay-as-you-go" a less-likely option.

Lax student loans make it easier for colleges to spend money poorly.

  • If the federal government provides a loan to virtually anyone who applies for one, then university administrations can spend foolishly.
  • There's so much money, why not hike salaries and pensions for professors? Why not offer programs and majors that are of questionable intellectual or economic merit?

In 2012, Congress debated controversy surrounding for-profit colleges, which receive about a quarter of the total federal Title IV student aid programs. The impetus was the latest iteration of the GI bill for active military and veterans, who often choose for-profit education programs. The alleged abuses at some for-profit colleges have reminded some critics of abuses by the subprime mortgage industry. But these problems are almost solely the result of easy access to government dollars.

Indeed, public universities do the same thing -- lure students into long-term debt commitments based on a free flow of federal dollars, even if they don't use the high-pressure tactics used by some recruiters in the private educational business.

Source: Steven Greenhut, "Easy Credit Is Inflating a Massive Student-Loan Bubble: Those Degrees Are About to Cost Taxpayers A Lot of Money," Reason Magazine, June 21, 2013.

 

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