Student Loans Drive Up Tuition, Create Demographic Time Bomb and Higher-Education Bubble

by Hans Bader on April 30, 2012

in Deregulate to Stimulate, Economy, Employment, Legal

Professor Glenn Harlan Reynolds writes in the New York Post about how student loan programs have contributed to skyrocketing debt and rising defaults:

The student-debt problem is that too many students are borrowing too much money to finance educations that won’t earn them enough to repay the loans. This leads to misery. A recent Wall Street Journal story noted that many students are postponing marriage, children and home-buying because of the difficulty — in some cases, the impossibility — of keeping up student-loan payments. This is bad for them and the economy, because they won’t be available to soak up the excess houses built during the housing bubble, which also was fueled by cheap government loans. If they postpone having kids, fewer taxpayers will exist to fund Social Security and other programs in a few decades.

If these younger people had gone into debt flipping houses in 2005, they’d be able to declare bankruptcy and get a fresh start — but the law doesn’t allow that. Student-loan debt is treated like child support, meaning that it’s almost impossible to get out of. People who paid six-figure sums to universities that happily pocketed the money in exchange for gender-studies degrees that would never produce a job are now debt slaves, like the coal miners in Tennessee Ernie Ford’s “Sixteen Tons.” Although 37 million adults owe student loans, only 39 percent are actually paying down balances. Some 5.4 million have at least one loan past due; loans totaling $270 billion are at least 30 days delinquent. These numbers are likely to climb in coming months and years as US job-creation remains stagnant.

. . . another Obama policy is adding to the woes. Back when Democrats ran Congress, the president engineered a federal takeover of student-loan processing. Now the Chronicle of Higher Education reports that this is producing huge paperwork screwups that have thrown thousands of borrowers into default, more than doubling the number of defaulters since December.

In the Boston Globe, Jeff Jacoby notes that tuition has risen in response to rising financial aid: “government outlays intended to hold down the price of a college degree have ballooned, in inflation-adjusted dollars, from $29.6 billion in 1985 to $139.7 billion in 2010, an increase of 372 percent since Ronald Reagan’s day.” “Year in, year out, Washington bestows tuition aid on students and their families. Year in, year out, the cost of tuition surges, galloping well ahead of inflation. And year in, year out politicians vie to outdo each other in promising still more public subsidies that will keep higher education within reach of all. Does it never occur to them that there might be a cause-and-effect relationship between the skyrocketing aid and the skyrocketing price of a college education? That all those grants and loans and tax credits aren’t containing the fire, but fanning it?”

Jacoby is right. When the government increases financial aid spending, it drives up college tuition, as I noted recently in the Washington Post, and as economists like Andrew Gillen have found.  The same conclusion has been reached by many researchers and academics. When the higher-education bubble pops, taxpayers will be on the hook for countless billions of dollars (many graduates already are not repaying their student loans).

Law students now routinely graduate with debts of well over $100,000 just for law school, not counting what they borrowed for their undergraduate studies. Yet much of what law students learn is useless drivel, as I can attest from my time at Harvard Law School, and as news stories in the New York Times and other papers illustrate. As David Segal of The New York Times noted, law schools fail to teach basic skills, and they rely on inflated claims about their graduates’ job prospects, and list graduates as employed in their misleading placement data, without mentioning that the graduates have found only temporary jobs, or menial non-legal jobs at Applebee’s or Home Depot. Law schools’ ability to charge a high price for a lousy quality education is buttressed by state regulations requiring students to attend an ABA-approved law school to practice law, an unnecessary requirement that the ABA uses to demand that law schools provide tenure (which prevents dismissal of incompetent faculty) and to demand that law schools operate wasteful politically-correct programs and use racial preferences in admissions and faculty hiring.

Ironically, even as Obama encourages every high school student to go to college (even though many young people are not interested in academics), the Obama administration has sought to cut back on useful training for the skilled blue-collar workers who are in desperately short supply in much of the country. That has prevented the expansion of operations at some factories that would otherwise be able to hire large numbers of unskilled workers (among whom unemployment is very high) if the smaller numbers of skilled workers needed to work along with them were available.

Thanks to rising federal subsidies and the strings attached, there are now “more administrators than teachers” at many colleges. As tuition grew, and federal regulation expanded, Wake Forest University increased its administrative staff by 600 percent.

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