Who Really Inflated the Student Loan Bubble?

September 1, 2018 

The Rich Life Blog

Who Really Inflated the Student Loan Bubble?

  • One of the biggest financial disasters waiting to happen…
  • The black hole of financing higher education…
  • Why making loans too accessible can be a bad thing…

Dear Rich Lifer,

If you asked me to name the three biggest financial disasters just waiting to impact the greatest number of U.S. taxpayers, I’d answer:

Social Security woes…State and local pension problems…And the student loan bubble.

I’ve spoken about the first two pretty extensively in recent articles here. But what about the third one? Well, there’s about $1.5 trillion in outstanding student loan debt in the U.S. right now. Ten years ago, the number was about $600 billion. That’s a 150% jump in just one decade!

A lot of people think the solution to this problem is lower borrowing rates… refinancing existing student loans… or possibly forgiving much of the debt altogether. Not me. I think it’s almost the opposite. To understand why let’s start with soaring college costs.

According to the College Board’s latest Annual Survey of Colleges: Four-year tuition and fees for an in-state resident in Florida have risen 108% over the last thirteen years. In Nevada, they’ve gone up 153%. And nationally, the AVERAGE ANNUAL increase has been 4.4% over the last decade..In the 1997-1998 school year, the typical college student was paying something like $4,740 to go to their state’s public university.

In 2007-2008, they were paying $7,280. And this year, the same student paid $9,970 in annual tuition and fees. With room and board, the number jumps to $20,770. Again, that’s for in-state tuition, fees, room, and board at a four-year public university.

I don’t even want to tell you what PRIVATE non-profit school tuition and fees look like! Okay, I can’t help myself – the national average is $46,950 a year. Even more interesting, these ever-rising costs have come during a period that included one of the worst recessions in our country’s history.

This is where I come back to the argument I hinted at earlier. We have also had historically low-interest rates for much of the new millennium. So helping more students “afford” college through cheap loans isn’t something we should be worrying about.

It may actually be a big part of the problem.

Your typical family doesn’t have $30,000 or $40,000 saved for each of their kids to go to college. And if one or more children want to go to a private university? Well, a family would need a couple hundred thousand free and clear! Most American households don’t even have a fraction of that saved.

Enter the huge market for student loans, which aim to make college “more affordable.” You know, kind of how a 10-year car loan will make a Hummer more affordable. Or how zero-money-down adjustable-rate mortgages made all those McMansions way more affordable during the housing boom.

If I’m getting a little snarky, you’ll have to forgive me. It’s just that the similarities are so glaringly obvious that I can’t understand why more Americans don’t see them. Sure, it’s true that a college education may be a better long-term investment than a luxury car… but it certainly isn’t a guarantee.

Yet that idea hasn’t prevented Washington from perpetuating the myth that a college education is a sure-fire way to a better lot in life… finding new ways to control the market for student loans… and in the process, getting millions of new students to pledge their arms and legs to go to school whether it’s right for them or not.

So rather than worry about simply lowering borrowing costs, I think we need to recognize that the wide availability of student loans – many of them subsidized by taxpayers – are part of the reason that prices have been able to continue skyrocketing so sharply in the first place.

As with any other bubble, this process has become self-fulfilling: Money gets easier. Prices go higher.

As prices go higher, people need to borrow more money. And the cycle continues until it bursts. So yes, higher education is still a noble pursuit that can be a good investment for many students. Furthermore, academically qualified Americans should be able to attend universities regardless of their current financial situations.

At the same time, let’s recognize that schools squander plenty of this easy money on outrageous athletic programs, grandiose buildings and facilities, and bloated administrative salaries. Let’s acknowledge that plenty of students use their easy-money loans to rent luxury apartments and eat at fancy restaurants rather than pay for tuition and books.

And let’s admit that lots of Americans don’t even really want to go to college but do so simply because society tells them it’s the right thing to do. In the end, what we really need is a national dialogue about the advantages and disadvantages of higher education…

A pushback on colleges and universities engaging in an arms race that has nothing to with the actual education taking place in their classrooms. Plus, a financial ecosystem that creates opportunities without allowing even more easy money to simply exacerbate the current problems.

To a richer life,

Nilus Mattive

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