Who could have possibly predicted that extending a practically unlimited line of credit to 18-year-old college students could have turned out so poorly? Yesterday, student debt levels reached a new milestone: “The proportion of U.S. student loan balances that are in delinquency — that is, unpaid for 90 days or more — surpassed that of credit-card balances in the third quarter for the first time, according to the Federal Reserve Bank of New York.”
The student loan bubble, largely financed by federal tax dollars, is an entirely predictable and avoidable financial catastrophe. Students, in spite of their estimated future earning potential, are given the ability to borrow tens of thousands of dollars to attend any institution of higher education in the country, regardless of that institution’s ability to produce degrees of equal or higher value. According to CBS Moneywatch, “for all borrowers, the average debt in 2011 was $23,300, with 10 percent owing more than $54,000 and 3 percent more than $100,000.” That’s an incredible statistic when you consider that two-thirds of students currently pursuing a bachelors degree are borrowing in order to do so — over 6 percent of students attending college right now will walk away with more than $54,000 in loans. The average amount of debt for a bachelors degree is $23,300; for students that went on to obtain medical, law or other specialized degrees, that average skyrockets.
The average graduating law school student at the California Western School of Law owes more than $153,000 and over 89 percent of students graduate with debt of some kind. Students graduating from Columbia University and Georgetown University graduate with an average of more than $132,000 in debt. The average amount of debt of all graduating medical students is more than $160,000 and students graduating from seven schools in the U.S. walk away with at least $200,000 in debt on average.
There is no easy fix to the student debt crisis. American students already owe over $950 billion and the president’s solution only limits how much students are required to pay back according to their income levels without limiting how much they are able to borrow or how much schools are reimbursed. The president’s plan would make it possible, starting in 2014, for payments to be capped at 10 percent of a borrower’s “disposable” income for 20 years, at which point the debt will be forgiven (10 years for public-service employees). Under this plan, schools can continue raising tuition far beyond inflation rates with no consequences to their bottom lines and students can continue to borrow knowing they have the option of a governmental safety net down the line. This leaves taxpayers on the hook for the remainder, an amount that is increasing at a remarkable rate (student borrowing increased 20 percent from the third quarter of this fiscal year to the fourth).
These reforms will do nothing but grow the student loan bubble to an even more unmanageable size and force students to pay up to 10 percent of their income for up to 20 years of their lives, hampering their ability to obtain financial independence from their parents, buy homes and have children. Instead of changing how students pay back their loans, why not change the way they take them out? Given that there are estimated income projections for college majors, why not limit the amount of federal loans given to students based on their projected ability to pay them back in ten years’ time? If colleges and universities produce students unable to find employment sufficient enough to stop their graduates from going into default, why not give the government the ability to obtain a refund for the cost of degrees of those who go into default?
For the sake of the American economy and a generation of students graduating college in the last 10 years, the student loan bubble cannot be ignored for much longer. If Obama were serious about solving the problem and earning the votes of the 67 percent of young people who voted for him, these reforms would only be step one. Yesterday’s news of soaring and record-setting delinquency rates is just one sign of many that the student loan bubble isn’t going anywhere.