Is the bubble bursting? Outstanding student loan debt now stands at over a trillion dollars, and millions of borrowers are in dire straits. From the Wall Street Journal:
More than 40% of Americans who borrowed from the government’s main student-loan program aren’t making payments or are behind on more than $200 billion owed, raising worries that millions of them may never repay.
The new figures represent the fallout of a decadelong borrowing boom as record numbers of students enrolled in trade schools, universities and graduate schools.
This rolling crisis, which is inflicting serious economic pain on millions of Americans, reflects a series of massive institutional failures—of secondary schools that have failed to teach students about financial management and credit markets, of colleges that are more interested in sustaining their blue model bureaucracies than in giving students skills they need to be competitive in the 21st century economy, and, most of all, of the federal government, which has propped up the entire edifice with a free-flowing subsidized student loan spigot. The WSJ:
Carlo Salerno, an economist who studies higher education and has consulted for the private student-lending industry, noted that the government imposes virtually no credit checks on borrowers, requires no cosigners and doesn’t screen people for their preparedness for college-level course work. “On what planet does a financing vehicle with those kinds of terms and those kinds of performance metrics make sense,” he said.
The latest grim data provide still more evidence that the higher education system as we know it isn’t working—that the investments our society is making in its colleges and universities are no longer producing the returns necessary to make them worthwhile. Fortunately, experimental efforts to remake the system are already underway, from online-oriented elite universities to vocational education. Sooner or later, the education sector might find a way to right itself organically.
In the meantime, however, the federal government should take a number of steps to try to arrest the student loan meltdown: It should require that any student who takes a loan has completed a course in financial literacy, preferably in high school; it should require the institutions receiving federal loan money to have skin in the game—if the student can’t repay his loans, the institution should lose money; and it should shake up the accreditation system, so that innovative new academic programs can get a foothold in the market, bring down costs, and restrain the growth of debt over the long run.