President Obama went on another speaking tour this week. On Tuesday, he spoke at the University of North Carolina Chapel Hill to promote his economic policies and education agenda. He even made an appearance on the “Late Night with Jimmy Fallon” program when it filmed on the campus that night to help “slow jam the news.”
During his speech, President Obama emphasized his views on higher education and expressed concern with the increasing burden of college debt carried by graduating seniors. Everyone is going to have to engage in some form of higher education, he argued. “...not everybody is going to go to a four-year college or university. You may go to a community college. You may go to a technical school and get into the workforce. And then, it may turn out that after you’ve had kids and you’re 35, you go back to school because you’re retraining for something new. But no matter what it is, no matter what field you’re in, you’re going to have to engage in lifelong learning.”
The president is right in a certain sense. Many careers in our ever-changing economy now require some form of higher education. And the increasing rates of tuition do heavily impact the financial well being of students around the country — myself included. However, the President makes the same assumption with college lending that he has made with the majority of his other political initiatives — that more government involvement in the system can stabilize the college loan market and thereby control costs. His policy decisions — his absorption of almost 85% percent of student loans under the Federal Direct Lending program and his changes to repayment requirements — reflect this thinking.
He may be very wrong in this assumption.
The housing crisis was the last financial bubble to burst and it took a great deal of time for the fragility in that system to finally catch up with reality. Multiple parties are to blame for the delayed crash: private financial institutions created the bundled mortgage securities that were used to spread the bad loans so far throughout the market and should definitely be held accountable for their actions.
However, the federal government contributed just as much to the crisis. Financial institutions were required under the Community Reinvestment Act to offer more home loans to less-than-creditworthy recipients (under the guise of offering equal credit access to minority borrowers). Fannie Mae and Freddie Mac, by acting as a clearinghouse and buying up bad loan packages, used its government-backed status to shield those bad loan bundles from market forces. By artificially extending and inflating the problem, the resulting crash was made that much worse.
College lending is starting to head down that same road. Justin Pope from the Huffington Post wrote this past November that college loans share many of the key warning signs of a market bubble. Everyone wants a loan because everyone wants to go to college. The amount of money being lent keeps increasing as college becomes more expensive. Loans are paid out with little or no concern for the future financial viability of the borrower, and defaults on college loans have jumped over the last fiscal year from 7 percent to 8.8 percent.
However, Pope notes that one major difference between the housing market and the student loan market is that unlike housing loans, student loans cannot be discharged during a bankruptcy — if you go broke, you still have to find a way to pay up. This difference between home loans and college loans is important because it means those loans will have a more limited affect on the economy as a whole. However, as job numbers continue to suffer, individual student borrowers will be left on the hook for money they cannot afford to repay.
The current administration’s moves to absorb all college lending under the federal government umbrella, and to ease the requirements for repayment, is eerily similar to the moves taken to absorb bad home loans under Fannie and Freddie. Federal officials, acting out of political self-interest, will no doubt continue to massage the college loan market and artificially sustain it until the ever-growing bubble bursts — with disastrous effects for current and future college loan holders.
And by isolating students from the real costs of a college loan, these policies also shield both public and private universities and colleges from the rapidly-growing need to combat rising tuition rates.
The college loan bubble will not be deflated through government intervention alone. It is time for the private consumer — the student — to take responsibility for the costs of their own education and demand reforms. Better to pop the bubble now while it is still small, before it gets bigger and it becomes too late to respond.
David Giffin is a first year Masters in Theological Studies student at Candler School of Theology from Charleston, Ill.