Latest posts by Chris Talgo (see all)
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Newsflash: The student loan debt bubble has reached epic proportions. More than 44 million young Americans are on the hook for a mind-boggling $1.56 trillion in student loan debt. In fact, outstanding student loans now exceed auto loans and credit card debt as the second-highest type of consumer debt held by the public. Only mortgage debt tops student loan debt — for now.
The colossal college tuition bubble is frightening in size and scope. Unfortunately, the bubble is beginning to burst: 11 percent of student loans are more than 90 days delinquent. Even if you have paid off all your student loans (or never took any in the first place), you’ll still have to bear the burden when the $1.56 trillion bubble pops.
Just a decade ago, we experienced the destruction wrought by another debt bubble debacle. The college tuition crisis is eerily similar (in origin, at least) to the housing meltdown that rocked the world economy in 2008. How so? Both of these bubbles were born, fueled, and perpetuated by (presumably well-intended) government intervention.
First, a quick history lesson. The housing bubble was formed when politicians decided it was a good idea for more Americans to buy homes. In 1977, President Carter signed into law the Community and Reinvestment Act (CRA), which essentially demanded banks, under penalty of the law, provide mortgages to minorities and individuals with dubious credit scores.
Eventually, government-sponsored enterprises (GSE) Fannie Mae and Freddie Mac became the backstop for trillions in mortgage obligations. Long story short, in 2008 the house-of-cards came crashing down when too many borrowers did not pay their mortgages. Of course, taxpayers footed the gigantic $700 billion bailout. This massive backfire is what happens when government engages in social engineering. In other words, it is a bad idea to incentivize people to take out loans they cannot afford.
In similar fashion, the college tuition bubble was birthed when politicians haphazardly decided more Americans should attend college. In 1972, Congress created the Student Loan Marketing Association (SLMA), a GSE to provide loans so more Americans could attend college.
Unfortunately, the SLMA, like the CRA, has led to financial disaster. For decades, the SLMA (now known as Sallie Mae) pumped billions into the college loan market via federally subsidized grants and loans. According to Sallie Mae’s website, “Higher education creates opportunity and opportunity should be within everyone’s reach.” This is true; however, taxpayers should not have to pay for these opportunities.
Moreover, as the federal government flooded the market with cash for college, universities raised tuition to snag the onslaught of federal dollars.
When determining whether people could actually pay back these loans, the government, unlike private institutions, was very poor at assessing risk. In the land of government, it does not matter if the loans are repaid. Unlike private banks, the government can print money and collect taxes. And unlike bank presidents, politicians need not worry about the bottom line.
Almost all politicians worry deeply about one thing, though: getting re-elected. And there is no better way to ensure re-election than giving people stuff, especially “free stuff.” No wonder the government sponsors home loans and college loans, not to mention a bevy of other societal functions that are much better handled by the private sector.
Although many Democrats are calling for “free college” and student loan forgiveness, these policies would only make the crisis infinitely worse. So-called “free college” would completely subtract the law of supply and demand from the college tuition equation (and eliminate the “skin in the game” mentality needed for success). In all likelihood, the cost of secondary education would skyrocket even more. Even worse, the quality of education, which is already quite pitiful, would plummet as well.
In these cases, politicians from both parties wanted to help Americans buy homes and attend college. Although their intentions were likely noble, the consequences of throwing “free money” at the situation has ultimately made everyone worse off.
Hopefully the next time a politician touts a government program, we will all be more cynical. The unintended consequences are almost always worse than anyone can anticipate.
[Originally Published at The Daily Caller]