Are we on track for a colossal student loan default tsunami? The term "student loan bubble" appears more and more in various media outlets. With it come the denials that there really is a threat of massive student loan default.
I've seen comparisons of the subsidized student loan numbers to the housing bubble stats. The other side of the argument would be that this cannot be considered a bubble because student loan debt is not sold in bundled packages. Check out the graph below.
I do wonder if there may be some better questions that we should answer. Such as...
How did we get to this point of massive student loan default concerns?
Don't we need to invest in "human capital"?
How is it working so far?
Is there a better alternative?
We'll answer these questions is a sort of order, but they do tend to intertwine, so the considerations may fit in several spots.
Near the bottom of our home page we have a running clock in real time that is tracking the accumulating student loan debt in our country.
If you do an online student loan search, you'll most likely see "Sallie Mae student loans" and Wells Fargo. Two examples of where much of the borrowed money is found.
Over the years, it has become pretty easy to get an approval for subsidized student loans. Of course "subsidized," means tax payers are the co-signers. You may not realize it, but you are on the hook for a lot of this guaranteed money.
What would seem to be easy to recognize even from the beginning is that if colleges know that money is easy to receive, they will be very intent on getting that cash flowing to their accounts.
Which has led to expansion of degree offerings and the required additional staffing to support those programs. After all if students can "study" anything of interest, why shouldn't the colleges rake in the cash to set up that class offering? They know they will be paid. You as taxpayers guaranteed it. In the event of student loan default, you may get to pay for it.
It doesn't really matter if all the degree programs actually provide skills in fields in which the market requires such knowledge. The payoff for the universities remains the same whether or not the student actually benefits.
So tuition continues to go up. Administration excess grows. It doesn't matter because everyone can get guaranteed money.
Here is a link to a story that is being played out in homes around America.
Here is some input from a very successful business person. Please take a look at this two minute link.
The most recent numbers I've seen state that 37 million people have student loan debt. Half of those folk's payments are in deferral due to job loss or because they are still in school. With this easy money, many students are taking longer to get a degree and spending less time actually working in school. But the interest due continues to accrue. Any wonder the concern about student loan default is out there?
Richard Vedder is a professor of economics at Ohio University. He writes in a Forbes article that many students spend less than 30 hours per week in total school time which includes class time, study and paper preparation.
He suggests that the true low return on investment means that heavy public spending on universities has led to lower economic growth.
Richard Arum is the co-author of "Academically Adrift." His four year research concluded that a full third of students studied showed no increase in critical learning skills after two years in college. He adds...
“ There's a huge incentive set up in the system [for] asking students very little, grading them easily, entertaining them, and your course evaluations will be high."
So don't we need to invest in human capital? Of course the answer should be "Yes." But is the present "opportunity" really achieving that goal? The average student loan debt upon graduation is around $28,000. There are plenty of stories of grads with six figure debt.
But a greater concern is the prospects of a recent graduate having any chance to repay that loan. There are more people graduating than the number of jobs being created that actually require specialized skills.
I had intended to include a six minute discussion between Diana Carew and Peter Schiff regarding the dilemma of student loan default and whether this present system is actually just filling colleges with students but setting them up for failure. But they just talked over each other.
Diana Carew took the side that of course we should be investing in human capital. But her argument actually stated the biggest problem we face. She said that there just are not enough jobs being created. On that point she is absolutely correct.
I did add in a longer interview with Peter Schiff talking to a recent grad who in only carrying $190,000 in student loan debt. Click below for that interview.
Is there a better alternative? I think the better choice in this student loan default challenge is actually right in front of us.
Let the free market solve the problem. Stay with me on this one. If the government gets out of the subsidized loan business, it will put the onus back on students to finance higher education.
For a time, that will lead to lower enrollment. This will force tuition rates down. Dramatically. It will also require colleges to get better or get out. Degree programs will focus on skills the market actually needs.
I believe you will see a laser focus from nearly all students to get the job done as quickly and efficiently as possible.
And I really think this is the best chance we have to reform a dinosaur system of education that seeks to bring in cash and turn out test takers rather than prepare our graduates for the opportunity to succeed. No one gets the guarantee. Just the opportunity.
If the costs of education come back down to earth, everyone can work their way through college if that is their goal. We will even get a new wave of entrepreneurs who will actually create private sector jobs.
The government needs to defend the Constitution and provide for an army to protect the home land. If they get out of the subsidized loan business, the market will force the crusty old system to improve.
This will get huge blow back from the tenured folks who live off the public dime, either directly or indirectly. It will take resolve to fix the problem. But if we really want to invest in human capital, we need to do it in a way that those in which we invest are given the proper tools and those doing the investing are not just paying for a five year party.
Our federal government and our "centers of higher learning" need to learn a very basic lesson. They cannot spend what they do not have.
I could suggest a couple books that may help them with that problem. I'd bet Dave Ramsey would be willing to teach them a few things as well. Just below are two more pages about this important topic.