Student Loan Bubble?

I read this article from
Gary Jason with American thinker, and thought I would share it with you.

For a number of years now, a number of critics of the American system of higher education have rightly insisted that there is a "bubble" in the system, with more and more students running up loans in amounts they will find difficult to pay back. This bubble has been fueled by the federal government’s lavish subsidization of the student loan program (which was nationalized four years ago), in a way similar to how the housing bubble was fueled by government agencies pushing subprime mortgages.

This extensive government largess has produced a number of unintended — though not necessarily unforeseeable — negative consequences. First, it has dramatically driven up the tuition and fees charged by colleges, which in turn has forced more students to take out loans. This should have been easy to foresee, since the agents running the colleges would know that their clients had access to government-backed loans and so would jack up tuition quickly to extract that money.

Second, this flood of money has only encouraged administrative bloat, which in turn has increased college costs with no increase in the quality of education. Again, this should have been foreseeable. The administration would be rationally well-informed about the new honey-pot of taxpayer-backed loans, and the self-interested administrators are the ones who decide where to spend the money, so you don’t need to guess where they will (and did) spend it.

Third, the rising price of college tends to erase the potential returns of a college education for students of only average ability. In effect, like homeowners who refinance their homes only to squander the increased equity, many students are spending more (and borrowing more) of whatever future extra earnings their college educations will bring.

Two recent studies suggest that this bubble is indeed real and is beginning to burst. The first is the recent Department of Education report on student loan default rates. The report shows that the two-year default rate rose from 8.8% in FY (fiscal year) 2009 to 9.1% in FY 2010. This marks the fifth year of increases in the two-year default rates

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About defaultprevention

Default Prevention Specialist since 1998.
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