Just how big is the student-loan bubble?

America’s college and university students now owe more than $1.2 trillion for their education, more than double the amount owed in 2007. The obligation impacts 37 million borrowers. The size of the debt is staggering, but of even more concern is the rate of expansion of the trend and the concomitant rate of default. In just the last dozen years, the total amount borrowed annually has rocketed from $65.2 billion to $110.3 billion. The number of individuals with federally subsidized and unsubsidized loans has increased by almost 70 percent during the same period. During the recent recession, student debt was the only debt to increase. Today, 5.4 million borrowers are in default, a 15 percent rate. The Congressional Budget Office projects that the federal loan program will cost taxpayers $95 billion over the next decade.

The origins of the crisis began with Sputnik, a satellite the Soviets launched into space. Afraid that America was losing its competitive position, Congress passed the National Education Defense Act in 1958, which set up the first, federal student-loan program. The law created loan-insurance funds at universities to attract students pursuing a post-secondary education in science, math, and foreign languages. To qualify, students needed excellent grades, ability and/or preparation in a relevant field, and an interest in teaching.

Limits on the program were lifted during President Lyndon Johnson’s Great Society agenda. Suddenly, all students with any interest were eligible. The new law created the Guaranteed Student Loan Program (now known as the Stafford Loan program), which granted the government the right to pay part of the interest on private student loans and capped the interest rates. In every decade thereafter, Congress expanded the program further, and in 2010, squeezed out the private-lender market, replacing it by making direct loans to students rather than just insuring them.

Throwing more money at it
President Barack Obama’s answer to the impending implosion of the federal student-loan programs is to throw more money at the problem — taxpayer money. With the stroke of his pen on June 9, he signed an executive memorandum that expanded the already generous terms of “pay-as-you-earn,” an option that limits monthly student-loan repayments to a borrower’s discretionary income. (Discretionary income is computed by subtracting the poverty line that corresponds to your family size and the state in which you live from your adjusted gross income.)

Our president lowered the repayment cap from 15 percent to 10 percent. The program includes loan forgiveness after 20 years if you work in the private sector and 10 years if you work for government or for a nonprofit corporation. With the stroke of his pen, our chief executive has shifted still more of the financial burden off the direct beneficiary of the largesse and onto the hapless taxpayer. How much burden? Secretary of Education Arne Duncan said that the administration doesn’t yet know how much the expanded payment cap will cost. “We’ll figure it out on the back end,” he said. Now, that’s reassuring.

His actions, however, do nothing to address the heart of the problem — the rising tuition cost of our colleges and universities. For at least three decades, the cost has risen, on average, 6 percent — or three times the rate of inflation. The driver is the very federal programs designed to help students attend institutions of higher education. Universal loan programs increase the number of people who can pay the tuition along with the supply of money available. As Judah Bellin points out in the spring 2014 edition of National Affairs, schools can continually raise their tuition because federal aid is tied directly to the cost of attendance at an individual school.

Bellin explains: To receive aid, a college first determines the total cost to attend. After computing a student’s contribution, which is determined by a Congressional formula, the college then calculates the aid a student can receive. After adding up all of the student aid available, the institution makes a request to the federal government, with no limit on the amount requested, as long as it doesn’t exceed the mandated formula for eligibility. Bottom line: the federal, student-loan program is an individually tailored subsidy for colleges and universities.

I recognize that our presidents and successive Congresses can’t resist expanding every federal program, especially one supporting education. They are largely oblivious to the law of unintended consequences, focusing only on the “noble” goal and perhaps knowing that the inevitable fallout will be someone else’s crisis. But I also have to take students and their parents to task for being sucked in by the lure of easy money. The dilemma is wrapped up in a few statistics: 75 percent of Americans think college is too expensive, 57 percent don’t think there is an adequate return on the investment, yet 94 percent of parents expect their kids to attend college. Go figure!

There are a number of answers to the problem of skyrocketing post-secondary education, including phasing out the government’s loan program, capping the federal commitment, instituting performance standards for student eligibility, introducing more technology into teaching to help drive productivity improvement, cutting administrative bloat, and using private-equity funds, to name a few. This would also be a good time to re-examine the idea that everybody should go to college and rethink our vocational-education track to provide industry with trained workers. Above all else, disconnect the current loan programs from the college administrators who set the tuition rates and light a fire under the parents and students to act like consumers. Stop shielding them from the marketplace.

College is an opportunity; it is not a right. The current system of funding student loans is unsustainable. Today, 45 percent of recent graduates either can’t find jobs or have jobs that don’t require a college degree. There are plenty of ways to fix this problem. The only thing lacking is the will.

Norman Poltenson is a regional staff writer and publisher emeritus with The Business Journal News Network. Contact him at npoltenson@cnybj.com