Over the last several months, there have been a lot of reports and commentary on the “higher education bubble.” According to the theory, while the cost of higher education is rising, the returns of a college degree are decreasing and the soundness of the student loan industry may be threatened by increasing default rates. Back in 1992, Congress raised the amount of money a student can borrow from the federal loan program. At the same time, the reauthorization of the Higher Education Act enabled easier access to college funding. Now we see student loans dominating the higher education industry and accounting for 50% of all financial aid packages. Student loans allow an 18-year-old to finance some or all of the next four years of his or her life, including living expenses. Morally, is it right for young people to start their lives immersed in debt?
A massive amount of speculation is being placed on these borrowers with no indication of them being able to afford repayment. Many find themselves with degrees of questionable worth, or worse, never finish the degree programs that they start but still owe tens of thousands of dollars for their forays into higher education. Although many educational institutions try to sell the notion that a great job awaits the student at the completion of his or her degree, this is not necessarily true. With the U.S. unemployment rate at 9.8 percent, many college graduates aren’t finding jobs and are piling up debt. Even if they do get a job, statistics show that 80% of college grads end up working in a field unrelated to their major. College students who fail to find employment at the level needed to pay back their loans in a reasonable amount of time have been compared to the debtors under sub-prime mortgages whose home are worth less than what is owed to the bank.
According to the Clemson Institute for the Study of Capitalism, “Over the past few decades, college and graduate tuitions have climbed much faster than the rate of inflation and the growth of household income, with the difference being made up by debt taken on by students who assumed they’d have no trouble paying it off after graduation. Now students are graduating with big debts, but no jobs.” It’s often said that a process that cannot go on forever, won’t. This seems just as unsustainable as the financial system that collapsed within the past few years. As shown in the accompanying chart, the housing bubble resulted from a 4-time increase in home prices between 1978 and 2006, while college tuition has increased by more than a factor of ten times! Also note that the tuition costs began their big upswing right around the time the feds made subsidized loans more readily available for college expenses. Since the students could get more government money, the colleges decided to raise their rates!
Some students, because they don’t have prior experience with debt and loan amortization, don’t understand how much their loans will cost them in the long run. Many borrowers take longer than 15 years to repay their student debt, and borrowers who default on those loans face significant personal and financial burdens. They become ineligible for additional federal aid, and they may have their wages and tax refunds seized by the government. Their negative credit records make it harder for them to obtain car loans, mortgages, credit cards, apartments, and even jobs. If they are able to get a loan, they pay higher interest rates. Unlike credit-card debt or sub-prime mortgages, student loan obligations can rarely be discharged in bankruptcy.
It’s interesting to note that while community colleges serve many low income students, community college students tend to borrow less, and the number of defaulted loans of former community college students is smaller. On the other hand, students at for-profit colleges, which rely on federal financial-aid programs for as much as 90% of revenue, carry the biggest loans in higher education. Bachelor’s degree recipients at for-profits have a median debt of $31,190 as compared to $17,040 at private nonprofit institutions and $7,960 at public colleges according to Education Trust, a Washington-based nonprofit research and student advocacy organization. Besides graduating with more debt than students at public or private nonprofit colleges, students at for-profit institutions have higher student loan default rates. When the government can’t collect on those loans, taxpayers end up footing the bill for millions of dollars.
While the number of students enrolled in for-profit colleges has skyrocketed in the past decade, these for-profits still educate less than 10 percent of students. However, they accounted for 44 percent of defaults among borrowers who entered repayment in 2007, according to the Institute for College Access and Success, a nonprofit organization that advocates making higher education more affordable. To make matters worse, the Government Accountability Office released data in August 2010 regarding an undercover investigation of 15 for-profit colleges in Arizona, California, Florida, Illinois, Pennsylvania, Texas and the District of Columbia. Investigators posing as applicants found examples at every school of officials misrepresenting their programs, and four cases in which campus officials actually encouraged applicants to make fraudulent statements on financial aid applications to obtain more government funds.
How can students protect themselves? Students need to reconsider whether the four-year college model is worth the investment when you can spend much less on two years in community college and then transfer to a four-year school. Some universities have recently started partnering with community colleges to let students obtain their Bachelor’s degree by taking three years at the community college and one year at the university granting the degree. Students should avoid going into debt if at all possible. Be especially wary of college officials who push the student loan paperwork on you even before discussing any other forms of financial aid such as grants and scholarships. Consider attending a college that refuses federal funds altogether, of which there are only a handful of colleges don’t accept government money on principle. These include: Christendom College, Grove City College, Patrick Henry College, and Hillsdale College. It should also be noted that these colleges have lower tuition rates than other schools of similar caliber.
In summary, as writer Elizabeth Dias stated in a Time Magazine article, “Government money, lightly supervised institutions, unchecked supervising bodies and debt-trapped students – it all sounds similar to the subprime-mortgage collapse that is still fresh in America’s mind.” Glen Reynolds of the Instapundit blog adds, “So my advice to students faced with choosing colleges (and graduate schools, and law schools) this coming year is simple: Don’t go to colleges or schools that will require you to borrow a lot of money to attend. There’s a good chance you’ll find yourself deep in debt to no purpose. And maybe you should rethink college entirely.”