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Human Events ^ | 06/21/2013 | Steven Greenhut

Posted on 06/22/2013 1:40:12 PM PDT by SeekAndFind

Americans are still talking about the recently deflated housing bubble, but there’s a new bubble in town. It’s the student loan bubble and when this one pops, it might dwarf the wreckage we’ve witnessed in the real-estate markets.

In the latest news, the Federal Reserve’s Board of Governors warned that soaring student-loan debt has “parallels to the housing crisis,” according to a May report in Bloomberg. As with housing, free-flowing cash will lead to widespread default. Of course, it’s easier to repossess a tract house than to take back a potentially worthless degree.

Federal Reserve Chairman Ben Bernanke dismissed these concerns by saying that most of the money in the student-loan sector is federal money, which just means taxpayers – rather than lending institutions – will take the initial hit. But the board of governors makes a salient point as student loan debt soars to $1 trillion and exceeds the nation’s level of credit-card debt.

“The bankers said student lending shares features of the housing crisis including ‘significant growth of subsidized lending in pursuit of a social good,’ in this case higher education instead of expanded home ownership,” according to that Bloomberg report. “The lending has put upward pressure on tuition, just as the mortgage lending boom led to rising home prices, they said, calling both examples of a ‘lack of underwriting discipline.’”

For my entire life, I’ve heard policy makers insist that there is insufficient funding for education and that getting a college degree is the pathway to a better life. But as the bankers noted, the sea of student-loan money artificially boosts the cost of tuition, which creates a new cycle of indebtedness by students. Higher tuition makes “pay-as-you-go” a less-likely option.

Lax student loans make it easier for colleges to spend money poorly. If the federal government provides a loan to virtually anyone who applies for one, then university administrations can spend foolishly. There’s so much money, why not hike salaries and pensions for professors? Why not offer programs and majors that are of questionable intellectual or economic merit?

I know people with six-figure loan debt, multiple degrees and few job prospects. There were few lending standards – hey, it’s only government money – so they racked up loan after loan. Others use loans to gain useful degrees with lucrative job potential, but these graduates come out of school with a crushing load of debt that will take decades to repay.

In 2012, Congress debated a controversy surrounding for-profit colleges, which receive about a quarter of the total federal Title IV student aid programs. The impetus was the latest iteration of the GI bill for active military and veterans, who often choose for-profit education programs.

“These colleges use high-pressure sales tactics to ensnare veterans, promising them a high-quality education and a ‘guaranteed job,’ and urging them to sign up on the spot,” according to Jerome Kohlberg, in an opinion piece in the Pittsburgh Post-Gazette. “They lock themselves into long-term commitments, turn over their GI education benefits and sign up for student loans to cover the difference.”

The alleged abuses at some for-profit colleges have reminded some critics of abuses by the subprime mortgage industry. But these problems are almost solely the result of easy access to government dollars. Indeed, public universities do the same thing – lure students into long-term debt commitments based on a free flow of federal dollars, even if they don’t use the high-pressure tactics used by some recruiters in the private educational business. For-profit and non-profit universities rely heavily on government tuition subsidies.

Many government employees, by the way, receive automatic pay boosts when they receive additional education, so this government-funded system ratchets up government spending throughout the entire taxpayer-funded system.

When I attended college, only the rarest student stayed on campus beyond four years. Many received degrees in less than four years. Now, it’s typical for students to take six years to get through a California State University program. The education establishment claims the problem is the result of too little money, but it’s the opposite. There is so much money available to anyone with a pulse that there are too many students on campus and not enough classes for them.

Look at the large portion of students taking remedial courses, which reminds us that more college doesn’t always equal a better education.

Given that students who get themselves in financial trouble can’t unload their debt through bankruptcy, easy college tuition money can mean a lifetime of personal debt problems. These problems are the result of government officials pushing a social good – i.e., broader college attendance, or, in the real estate market, broader home ownership.

The housing bubble was inflated by government-dictated lending policies designed to expand home ownership by requiring banks to make loans to people who couldn’t meet traditional down-payment and credit standards. And government policies designed to expand educational opportunities have inflated the cost of tuition, cheapened the value of education and burdened new generations with crushing debt loads.

Yet those of us who call for less government meddling and more private-sector discipline are the ones considered heartless.

TOPICS: Business/Economy; Education; Society
KEYWORDS: bubble; college; credit; studentloans; studentloansbubble; tuition

1 posted on 06/22/2013 1:40:12 PM PDT by SeekAndFind
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To: SeekAndFind

Blank checks issued all in the name of education. 60%+ of them shouldn’t be going to college. They would be better off going to trade school or straight to work.

2 posted on 06/22/2013 2:10:21 PM PDT by boycott (CAL)
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To: SeekAndFind

A college ‘education’ is mostly a waste of time, not to mention money. This bubble was created to prop up the Leftist cesspool known as academia.

3 posted on 06/22/2013 2:19:00 PM PDT by AdaGray
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To: SeekAndFind

Not to worry; with the Trillion that we will get from Amnesty, we can use the Taxpayer money to buy the Yewt vote by “forgiving their Tuition Loans” (so the Bankers are not going to lose a dime, as always)

4 posted on 06/22/2013 2:30:56 PM PDT by traditional1 (Amerika.....Providing public housing for the Mulatto Messiah)
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To: AdaGray

The problem, of course, is that student loans are nondischargeable, so there is no way to default and walk away from them, unlike a mortgage. So the bubble is more like a permanent albatross, never to burst. Not that you’d want to be near a bursting albatross...

5 posted on 06/22/2013 2:31:50 PM PDT by socalgop
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To: SeekAndFind
Yes, and now all the politicians -- Democrat and Republican alike -- are wailing that Obama must stop the interest rate increase that's coming. Keep the bubble inflated.

Nothing ever changes.

6 posted on 06/22/2013 2:36:29 PM PDT by BfloGuy (The Eurozone policy might best be described as "Laurel and Hardy Carry a Piano Upstairs.")
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To: SeekAndFind

The student loan bubble was built on the presumption that more socio-political instruction from universities would improve the economy...or something. ;-)

7 posted on 06/22/2013 3:19:32 PM PDT by familyop (We Baby Boomers are croaking in an avalanche of rotten politics smelled around the planet.)
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To: familyop
My idea would do the following:

  1. Write off 30% of all debt, 25% to the borrower, 5% to the educational institution which generated the loan.
  2. The educational institution is then on the hook to collect the remaining 70% and remit it over time.
  3. They are free to sell it to factoring companies or freeze transcripts and suspend degrees for students in default. It is their choice. That's why they get the 5% to work with.
  4. If they still can't collect, the loan holders are free to put liens on their endowments, real estate and other assets. Colleges which have sold mostly worthwhile marketable degrees have little to worry about. Those which have not perhaps deserve to go out of business.

Everybody gets something under the above plan. And the taxpayers get minimally screwed. Best of all, the government loan monster gets phased out. Permanently.

If tiny little Hillsdale College in Michigan can line up their own group of lenders to finance their student's education, then there is no reason why a Harvard, Yale or Penn State can't do the same.

8 posted on 06/22/2013 3:42:17 PM PDT by Vigilanteman (Obama: Fake black man. Fake Messiah. Fake American. How many fakes can you fit in one Zer0?)
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To: SeekAndFind

The problem is, how can you tell that the bubble has burst?

Remember that Obama effectively nationalized the student loan program, so the government is effectively the creditor to this foolishness.

All told, there are an estimated 37 million Americans with outstanding debt from student loans, with about 12 million added each year. About $1 trillion is outstanding debt.

So the big question becomes, how much old debt is being retired compared with new debt being added each year?

If there is a major economic downturn, much less of this debt will be retired. Then the question becomes will the US government continue to provide new loans?

From a different perspective, states also heavily subsidize universities, and they could seriously reduce the student loan bubble by refusing to pay for “worthless” majors and classes. Worthless in that they do not result in gainful employment in that field.

All told, if any party to this stops playing the game, the bubble collapses. But this collapse will be quite different from other collapses. Think of it more as a contraction.

9 posted on 06/22/2013 3:44:17 PM PDT by yefragetuwrabrumuy (Best WoT news at
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To: SeekAndFind

The whole student loan scheme is predicated upon kids graduating from college and getting good paying jobs to repay the loans. 0bama has seen to it that THERE ARE NO GOOD PAYING JOBS, so the whole scheme collapses, EXCEPT for the kids of congress, who are "forgiven" and don't have to pay back the loans.

10 posted on 06/22/2013 4:03:38 PM PDT by The Sons of Liberty (Jesus, Please Save America!)
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To: socalgop

Nah, there are all kinds of ways to walk away from your student loans. Take just about any job in the booming public sector, for example:

11 posted on 06/22/2013 4:15:11 PM PDT by 9YearLurker
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To: boycott
trade schools take work and expect you to learn something, unlike many liberal arts degrees
12 posted on 06/22/2013 4:37:19 PM PDT by Chode (Stand UP and Be Counted, or line up and be numbered - *DTOM* -ww- NO Pity for the LAZY)
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To: AdaGray
A college ‘education’ is mostly a waste of time, not to mention money.

Now, that's an interesting statement. Somehow, I suspect that your shadow has never darkened the doorway to a college classroom. IOW, you don't know what you're talking about.

13 posted on 06/22/2013 8:59:38 PM PDT by OldPossum
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To: OldPossum

How easily the ignorant are fooled. BA ‘cum laude’, MA Columbia Univeristy. Feeling better? You make my point.

14 posted on 06/24/2013 5:02:22 AM PDT by AdaGray
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To: AdaGray

Hold it there! Aren’t you the one who says that she was fooled? After all, you spent all those years in college and now states that a college education is a waste of time and money. Isn’t that an admission of your poor judgment?

I don’t think it’s a waste of time and money but you do.

15 posted on 06/24/2013 6:34:38 AM PDT by OldPossum
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