Student Loan Consequences: Real, Costly, and Personal

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The consequences of making low-interest loans to unqualified buyers created the real-estate bubble that popped in 2007, resulting in the Great Recession. According to Gary Jason at the American Thinker, it's about to happen again, only this time over student loans.

He wrote: u201CThis bubble has been fueled by the federal government's lavish subsidization of the student loan program … in a way similar to how the housing bubble was fueled by government agencies pushing subprime mortgages.u201D

Under the Student Aid and Fiscal Responsibility Act (SAFRA) signed into law as part of ObamaCare in March of 2010, students may borrow money directly from the federal government regardless of their credit score or any other financial u201Cissuesu201D they may be facing. They are not priced according to any u201Cindividualized measure of risku201D nor are there loan limits. They are instead politically determined by Congress with undergraduates receiving lower interest rates than graduate students, but graduate students allowed to borrow more than undergrads.

This forced entry by the government into what was once a private market transaction has numerous consequences, nearly all of them negative, and most of them predictable.

First, private lenders disappeared from the market as they could not compete with taxpayer funds and taxpayer guarantees and the resulting below-market interest rates that became available.

Second, the growth in the education industry expanded far beyond what was normal as college administrations saw their opportunity to dip into the u201Choney bucketu201D of federal funds, with the consequent growth in administration overhead and higher tuition fees. According to a study by Bain & Company (yes, Mitt Romney's Bain), u201Coperating expenses are getting higher [at major colleges and universities such as Cornell, Harvard, and Princeton] and they're running out of cash to cover it.u201D According to that study, the growth in those colleges' debt and rate of spending on new buildings and equipment rose far faster than did their spending on actual education itself. Said Bain, “Boards of trustees and presidents need to put their collective foot down on the growth of support and maintenance costs. In no other industry would overhead costs be allowed to grow at this rate – executives would lose their jobs.”

Thirdly, this growth in the cost of obtaining what was once a coveted possession, a college degree, makes any mathematical justification or cost-benefit analysis highly questionable. Many students are entering a job market with degrees that over-qualify them for what the market is able to provide. According to Jason, u201Cover half of all recent college grads are unemployed (or employed only at jobs not requiring a college education).u201D

The unnatural increase in the flow of funds into the education industry has predictably driven prices higher. As Jason Bower pointed out at The Freeman,

Since 2000, tuition at public, four-year colleges has risen by an inflation-adjusted 72 percent, and over the past 25 years it has increased at an annual rate 6 percentage points higher than the cost of living. [Emphases added.]

Fourth, when the deferred payments on these loans start, the newly-minted grads without work cannot make them and they go into default. In a recent Department of Education study, loan default rates have risen in each of the last five years, and at an increasing rate, touching almost one in every seven students with a loan.

Fifth, those loans cannot be dissolved or forgiven in bankruptcy except in extreme circumstances, leaving students in a figurative u201Cdebtors' prisonu201D interminably. As The New American noted,

Inasmuch as the student borrowers are uniquely required by law to repay under [nearly] any circumstances, the student loan business is the closest thing … to debtor prison in modern society.

With such a debt burden, students are forced to make, or avoid making, life choices, such as getting married or buying a home. Who would want to take on a partner who owes tens of thousands to the federal government on the day of the wedding?

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