Sub Prime Student Loans?

Glenn Harlan Reynolds:

It’s officially a crisis. Student loan debt has hit the $1 trillion mark, exceeding Americans’ total credit card indebtedness. Unemployed graduates with huge loan balances are camping out in “Occupy” camps -- the Hoovervilles of our age -- around the nation. And President Obama, perhaps afraid those camps will be dubbed “Obamavilles,” as indeed they have already been by some, has unveiled a new proposal that promises to help graduates who are drowning in debt. 

Unfortunately, “promises” is the correct word. Though unveiled with much fanfare, the Obama proposal doesn’t really do much. First, as the Chronicle of Higher Education pointed out in an article characterizing it as mostly political, “The benefit is available only to current students. Those jobless college graduates who are protesting on Wall Street and at similar events elsewhere won’t qualify.” 

Second, even for those who do qualify, the benefit doesn’t amount to much. Daniel Indiviglio of The Atlantic Monthly calculated that the president’s plan will save the average grad less than $10 a month. (Even those with $100K in debt will save only $28.50 a month). You can make that sound like more -- and the White House tried -- by touting total savings over the life of the loan, but this isn’t going to rescue anyone who’s financially underwater. It’s a beer and a slice a month, more or less. 

At best, it’s a band-aid solution. The real problem is that we’ve been running a higher education bubble, one that -- like the real-estate bubble -- has been pumped up by cheap government money. Since 1999, student loan debt has increased by 511%, while disposable income has increased by only 73%. 

That’s because when the government subsidizes something, producers respond by raising prices to soak up as much of the subsidy as they can. College is no exception. Tuition has been increasing much faster than disposable income, and families -- believing that a college education is a can’t-lose investment, much as they used to think houses were -- have been making up the difference with debt. After all, we’re told, student loan debt is “good debt,” because a college degree guarantees more earnings. 

Tell it to the Occupy Wall Street protesters, many of whom note that they’re deep in debt for fancy degrees that didn’t get them jobs. 

The problem is, “college” isn’t an undifferentiated product. Companies can’t hire enough mechanical engineers, but there’s no bidding war for majors in Fine Arts or Women’s Studies, degrees that cost just as much, but deliver a lot less in terms of employment. In an economically rational market, it would be harder to borrow money to finance fields of study that were unlikely to produce enough income to pay back the loans. But since the federal government subsidizes everything --and makes student loans un-dischargeable in bankruptcy -- there’s no incentive for lenders to care, and even less incentive for colleges and universities to care. They get their money up front, after all -- just like the people who wrote the subprime loans that fueled the housing crisis.

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The huge underlying problem is the excessive cost of college today.  It is an over priced commodity that is not delivering as it has in the past.  Most liberal arts degrees are of value only if they can get you into grad school for a degree in a field that is actually hiring.  In other words history majors should look for a masters program in law enforcement or for a MBA program.  A masters in history is unlikely to get you a job.

Rick Perry has been one of the few political leaders who has at least started a conversation about the high cost of higher education.  He has challenged administrations to develop lower cost degree programs that people can actually afford without going into significant debt.  It is a good idea and he needs to find a way to get it into the debate over the direction of the country.  I think it could help revive his campaign and appeal to not only conservatives, but also to those protesting on Wall Street about their student debt.