Student loans build to unsustainable debt burdens

William Bennett:

A college degree was once synonymous with academic excellence and workforce readiness. Today, it seems synonymous with debt and underemployment.

Last week, the Federal Reserve Bank of New York reported thatstudent loan debt increased to $956 billion, more than auto loan debt or credit card debt. More worrisome, the student loan 90-day delinquency rate increased to 11% this past quarter and for the first time exceeds the "serious delinquency" rate for credit card debt.

Student loan debt is reaching bubble-bursting levels. By comparison, in October 2007, the start of the subprime mortgage crisis, 16% of subprime mortgages were 90 days delinquent, according to Federal Reserve Chairman Ben Bernanke. By January 2008 it accelerated to 21%. If the economy heads off the fast-approaching fiscal cliff and tax rates spike for lower- and middle-class Americans, it may accelerate student loan defaults to crisis levels. The big banks got their taxpayer bailout; taxpayers may soon be on the hook for another.

Even if the markets manage to avoid another debt crisis, the mountain of student loan debt is already taking its toll on a weak economy.

In September, Pew Research Center reported that a record one-in-five households owe student loan debt. The average student loan debt in 2011 was $23,300. 

Unlike credit card debt or automobile loans, student loans are virtually impossible to liquidate, even after declaring bankruptcy. So 20- and 30-year-olds buried under student loan debt are forced to put off other purchases crucial to the health of the economy, like buying a car or home or investing in the markets. Many are moving back in with their parents and delaying marriage and starting a family, two of the most vital building blocks to a healthy and prosperous economy. Valuable human capital is withering before it can even set its roots. 

The problem now rests in the hands, and wallets, of taxpayers. In 2010, the federal government consolidated its power in the student loan industry so it could eliminate private middlemen and directly issue and guarantee loans. By 2011-12, the federal government issued 93% of all student loans. 

By nature, student loans are inherently risky. Students have hardly any credit worthiness. But the government is making a bad situation even worse. Federal lenders are notoriously lax. For example, they don't distinguish between loans to students pursuing highly employable fields such as health and education, and students pursuing majors that have a high unemployment rate, like architecture and arts.
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The government is now facilitating predatory loans to unsophisticated borrowers.  Students are not getting disclosure on what outcomes they can expect from their degree choices in terms of job availability and salaries if they find work.  Universities need to be asking themselves questions about why they invest so much in gender and ethnic studies when the job prospects are so limited.

Now a good petroleum engineer graduate might get a hiring bonus that would pay off his student loan debt.  Engineers looking for work with a defense contractor will probably find a tougher road to success with Obama's defense cutbacks.  Working for the media usually means poor pay unless you become a TV personality.  There are way too many lawyers right now and many graduates have to find work in other fields.

What this crisis also tells us is that administrators have done a very poor job of controlling cost and the availability to student loans is probably a culprit there too.  Texas Gov. Rick Perry has shown leadership in pushing for lower cost by urging the state schools to come up with a $10,000 four year degree program.  It is a start.  There has been resistance from many administrators, but it is a much needed move to save these institution from themselves.