Student Debt Reflects Unsustainable Bubble in Education Costs

Wed, May 21, 2014 - 8:00am

In yesterday’s “Single Best Chart,” Bloomberg’s Scarlet Fu displays the rising level of college debt for the class of 2014 compared to their earnings potential coming out of school. Here is a direct video link.

Government-backed education loans may sound like a good thing. But once we realize that schools have been able to escalate education costs the past decade by surreal amounts only because students were able to pay by taking on student loans, we see the self-defeating circle for young people and for our economy as a whole.

Without easy access to endless student loans, schools would not have enough customers who can afford to pay their current fee levels. This would be the natural free market factor that would reorder education costs to a manageable level. Without that free-market constraint, schools and their management teams have been able to extract ridiculous fees for their product over the past few years. In the end however, the path is unsustainable, because costs have risen so much and students are now so encumbered with debt when they graduate that outcomes are bleak: best case is that they are enslaved to their repayments for many years which means they are less able to consume–get married, start families and buy homes. Or worse case they are not able to find employment sufficient to repay the debts and simply don’t, leaving a debt which cannot be extinguished in bankruptcy hanging endlessly over their heads like a life sentence. Such hopeless situations for the masses have historically led to anarchy and social unrest.

[Hear More: Charles Hugh Smith: Healthcare, Education Cartels Devastating Our Economy]

Several people have been calling for a “bail-out” for students the way governments bailed out banks over the past few years. And I am all for an intelligent restructuring of loans that can never be repaid. But simply writing off the debt will not solve the larger problem which is unaffordable education in America. Meaningful reforms must include a restoration of free-market pricing to education costs. On-line study will continue to be an increasingly attractive option for students who are seeking a more cost-feasible education. But we all have an interest in a more educated populace, and making it possible for young people to pursue higher learning is a foundation of every progressive, strong nation. After the credit bubble, there is every reason for schools to admit they have grown into garish cathedrals of fees and reform themselves to a new affordable pricing structure, similar to what US housing did once its price bubble burst from 2006 to 2009. Ironically endless government underwriting of loans has become a menace to prosperity in education just as it was in the housing bubble.

“While just a few of our national political leaders — such as Rep. Karen Bass and Sen. Elizabeth Warren — have spoken out on the issue of student loan debt, and none of our leaders in higher education have said much of anything, grassroots activists have taken the lead. This should not be a surprise — it’s always been the case that change is driven by the people, not by their reputed leaders.

If we the people have been forced to bail out the banks, why can’t we exert our political will to demand that Congress and the President to do the same for students who are required to repay their student loans in the midst of what seems to be a perennially sluggish job market? In a horrible irony, the very banks we bailed out reaped profits from student loans, and now it is the federal government that is profiting, even as unemployment benefits have been cut.”

See: Student Loan Debt: the need for a mass movement, for a good discussion of various factors and initiatives in this area.

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