Thursday, August 22, 2013

Student Debt Disaster

President Obama is in the midst of a two-day tour through New York and Pennsylvania speaking about student loans.  He is touting a new government rating system that will score colleges in areas such as average tuition, student loan debt and what graduates earn after earning their diplomas.  The rating would then determine which colleges would get more federal financial aid.

Student loan debt not exceeds $1.1 trillion. Here is a debt clock that shows the approximate amount of student loans outstanding up to the minute.  For perspective, total student loan debt was only $763 billion in 2009.  Student debt has increased almost 50% in the last four years.  All other forms of personal debt, mortgages, auto loans and credit cards, have declined during the Great Recession as I wrote about last year in "Degrees in Debt."

This chart by shows all household debt growth (reductions) since 4Q, 2007 to illustrate the explosive growth in student debt in the last few years.

As I also pointed out last year, loan payments are currently being made on just 38 percent of student loans.  The sad reality is that over 50% of recent college graduates are unemployed or underemployed as detailed in this AP story from last year that I cited.  If you have no money coming in, it is difficult to make payments on a loan.

About 1.5 million, or 53.6 percent, of bachelor's degree-holders under the age of 25 last year were jobless or underemployed, the highest share in at least 11 years.
Out of the 1.5 million who languished in the job market, about half were underemployed, an increase from the previous year.

Broken down by occupation, young college graduates were heavily represented in jobs that require a high school diploma or less.

In the last year, they were more likely to be employed as waiters, waitresses, bartenders and food-service helpers than as engineers, physicists, chemists and mathematicians combined (100,000 versus 90,000).
There were more working in office-related jobs such as receptionist or payroll clerk than in all computer professional jobs (163,000 versus 100,000). More also were employed as cashiers, retail clerks and customer representatives than engineers (125,000 versus 80,000).

Underlying all of this is the fact that there is no segment of the U.S. economy that has seen costs grow at a faster pace than tuition and fees for higher education in recent years.  Health care cost increases look modest when compared to the increase in the cost of a college education over the last three decades.  College costs have increased at about twice the rate of health care over that period.  Overall, college costs have grown at about five times the rate of inflation.

Credit: David L. Jones, Jr.

College costs could not go up without a supply of money to pay for it. Just as is the case with health care costs, college costs have become heavily dependent on the flow of federal money into the system.  Health care costs generally tracked overall inflation in the economy until Medicare and Medicaid were introduced and normal market forces were disrupted beginning in the mid-1960's.  The same has been true with student loan money.  As more student loan funds became available, the easier it became for colleges to raise tuition costs.  Ironically, a program that was designed to assist students to afford college seems to be making it more unaffordable with each passing year. 

Such is what occurs over and over when a well-intentioned "liberal" idea meets the real world.  A desire to do good by government ends up being the undoing of the very people it was intended to help.  

Matt Taibbi of Rolling Stone magazine chronicles the dismay, despair and damage that the federal government's student loan program is doing to our young people (and economy) in "Ripping Off Young America: The College Loan Scandal."  

Taibbi places blame on most everyone involved in the process-colleges and universities who live off the subsidies, the private sector contractors who profit by building palatial dorms, rec centers and athletic facilities, the federal government's predatory lending practices, Democrats, Republicans, naive students and clueless parents. It is worth the read.

When I went to college and law school in the 1970's, student loans were almost unheard of.  In college, a good percentage of my friends worked part-time jobs during the school year to pay the bills.  Almost everyone worked summer jobs.  A good paying summer job and part time work could be enough to finance most of what you would need for the year.  That is no longer possible because of the high costs of college.  And the high costs of college would not be so high without the massive amount of federal student loans.

At one time, colleges could not get away with costs that vastly outstripped incomes because they would not be able to attract students.  My grandfather dropped out of college after one year because his family simply could not afford it.  My father worked in a washing machine factory after he graduated from high school.  College was simply out the question for him financially.  He only was able to make it through due to the GI Bill and a number of part time jobs.  Today you simply  sign your name and you are good to go.  Until you have to start paying it back.  And the federal government goes to extraordinary lengths to make sure you pay it back with no relief even in bankruptcy.

At the same time, you now are considered practically disadvantaged if you don't study in Europe over the summer or take a winter break trip to China.  And we keep telling our children to follow their dreams rather than tell them to prepare themselves to be able to sustain and support themselves in a world where they are competing with a couple billion other young people on the planet.  People who want the lifestyle and luxuries that your children grew up with. However, the same lifestyle for them is in doubt  over their own lifetimes if merely due to student and other debts that will be left to them to pay. 

Taibbi sums it up this way.

In a way, America itself is violating the Truth in Lending Act. It's cheering millions of high school graduates toward college every year, feeding them into the debt grinder under the banner of increased opportunity, when full disclosure would require admitting that there isn't a hell of a lot waiting for them on the other side, where the middle class has nearly vanished and full employment is going the way of the dodo.
We're doing the worst thing people can do: lying to our young. Nobody, not even this president, who was swept to victory in large part by the raw enthusiasm of college kids, has the stones to tell the truth: that a lot of them will end up being pawns in a predatory con game designed to extract the equivalent of home-mortgage commitment from 17-year-olds dreaming of impossible careers as nautical archaeologists or orchestra conductors.

It think it is great that President Obama is paying some attention to the student loan issue. However, it seems like it is many days too late after many more billions and billions of dollars have been wasted. I am not optimistic about any near-term solutions.

If any good is to come from this it should be to consider this as yet another example where the most well-intentioned government plans results in unintended consequences. We see it over and over and over again. Ronald Reagan said it well and we should remember it.

"Government does not solve problems; it subsidizes them".

Truer words have never be said.

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