The Silver Lining of Economic Collapse: Student Loans Crunch Starves Greedy Colleges
First came school vouchers, subsidizing private schools with public money. Now, as the economy contracts, the government faces mounting pressure to pour increasing amounts of our tax dollars into private colleges and universities as well.
The push comes from two fronts: a desire to make sure that student loans keep flowing in spite of the credit crunch, and to raise benefits for veterans returning from Iraq and Afghanistan who are guaranteed an education under the GI Bill.
Student loans are a big segment of the banking industry, amounting to about $85 billion last year. Until recently, they were also hugely profitable. But the credit crunch has caused some lenders to pull out of the federal program. As a result, the pool of money for college loans available has fallen 13 percent.
Congress is considering various ways to make sure students can continue to borrow the money they need. The Ensuring Continued Access to Student Loans Act of 2008 (ECASLA) would increase the amount lent directly by the government. Another Senate bill, supported by Bush, would let the government buy student loans from banks to free up capital for additional loans.
Other bills seek to make college more affordable for veterans, many of whom say they are getting screwed. "They were rather good at saying, 'Join the Marines and get an education; you'll have an opportunity to go to college,'" recalls Kevin Grafeld, 23, a part-time student from Long Island, New York. Despite serving five years in Iraq, he gets a mere $875 per month -- not even enough to pay for the community college he attends as a part-time student. "I was 18 and a little naíve," Grafeld told Newsday. A bill sponsored by Jim Webb of Virginia, a Democrat, would pay for tuition up to the cost of the most expensive public university in a veteran's home state, plus room and board.
How much would these bills cost? It's like Iraq: no one knows. Sponsors say the feds would actually come out ahead on ECASLA, earning a cool $450 million a year in interest and fees on the backs of college kids.
I have a better idea. Do nothing.
The economy may suck, but the last thing the nation's colleges and universities need is more money. There are exceptions, but most are awash in cash.
It's easy to see why: since 1980, tuition at private institutions has gone up at triple the rate of inflation, and twice the rate of people's salaries. As Timothy Egan noted in The Times, "If the cost of milk had risen as fast as college since 1980...a gallon would be $15."
Private schools, especially the elite, are getting an enviable return on their misbegotten windfall profits. Seventy-six colleges hold endowments over $1 billion. Harvard has $35 billion -- more than the GDP of 100 of the world's 179 nations.
Nationally, colleges got a 17.2 percent return on their investments in 2007--while spending a mere 4.6 percent of that tsunami of cash on their students.
Public schools are nearly as greedy. Over the last five years, they've hiked tuition 31 percent faster than inflation. According to the AP, it's "the worst record on college prices of any five-year period covered by the survey dating back 30 years."
Why do colleges raise tuition so much faster than the inflation rate? Because they can.
Since 1981, when President Reagan got rid of a financial aid system mostly based on grants (which don't have to be repaid), easy credit on student loans has made it possible for any student to borrow as much as he or she needs -- or, to put it another way, however much a college decides to charge. It's simple supply and demand; with no downward pressure on tuition, the warlords of college have an overwhelming temptation to gouge.
And gouge they do.
No one seems to question the wisdom of lending tens of thousands of dollars at above-market compound interest rates to children whose employment history amounts to, at most, a year at Burger King. 17-year-old borrowers have no idea what they're getting into; parents imagine (usually wrongly) that kids' college degree will guarantee them high enough wages to pay it all off and then some.
The average college graduate comes out owing $24,200 in student loans. And that's an average. Many owe more -- much more -- in a non-existent job market. Saddled with crushing monthly payments as high as a home mortgage in some areas, millions of young people are forced to move back home. According to a 2002 study for the student lender Nellie Mae, student loan debt forced 38 percent of college graduates to delay buying their first house, 14 percent to get married later, and 21 percent to wait until they're older to have children.
Bankruptcy rates among young adults in their 20s are soaring, but default rates on student loans remain relatively low, under five percent. (Laws have been changed so that bankruptcy doesn't relieve your obligation to repay student loans).
Students and taxpayers get poorer. Colleges get richer.
But what if the worst fears of the credit crunch worrywarts came to pass? What if the student loan system collapsed entirely?
For several years, few poor and middle-class kids would be able to afford college. To be sure, it would be a painful transition. Millions of kids would drop out, forced to defer their dreams. But it would be good in the long run -- for the country and even for them.
College CEOs (let's not call the heads of these mega-for-profit vampire capitalism firms mere "presidents") who wanted their companies to survive would be forced to recognize the new market reality. They would streamline their operations and reduce wasteful spending so they could cut tuition and other expenses. As Harvard and other Ivy League schools have already begun to do, they'd dip into the hundreds of billions of dollars currently sitting idly and uselessly in endowment investment accounts. And tuition would drop.
The collapse of the student loan racket -- banning them entirely would be ideal -- could be one of the best results of the recession. But only if we let it happen.
© 2008 Ted Rall