Steven Greenhut: Promiscuous lending to promote a social good


SACRAMENTO – Americans are still focused on the bubble in housing prices, which, after inflating and bursting in the 2000s, is inflating again. But the wreckage that collapse caused in real estate and financial markets could be eclipsed by the economic harm inflicted when today's bubble in student loan debt bursts.

The Federal Reserve's Board of Governors recently warned that soaring student loan debt has "parallels to the housing crisis," according to a report in Bloomberg News. As with housing, free-flowing cash will lead to widespread defaults. Of course, it's easier to repossess a tract house than to take back a potentially worthless college degree.

Federal Reserve Chairman Ben Bernanke dismissed these concerns, saying that most of the money in the student loan sector is federal money, which simply means taxpayers – rather than lending institutions – will take the initial hit. But the Fed governors make a salient point as student loan balances soar to $1 trillion, exceeding Americans' collective credit card debt.

"The bankers said student lending shares features of the housing crisis including 'significant growth of subsidized lending in pursuit of a social good,' in this case, higher education instead of expanded homeownership," according to that Bloomberg report. "The lending has put upward pressure on tuition, just as the mortgage lending boom led to rising home prices, they said, calling both examples of a 'lack of underwriting discipline.'"

For my entire life, I've heard policy makers insist that there is insufficient funding for education and that getting a college degree is the pathway to a better life. But, as the bankers noted, the sea of student loan money artificially boosts tuition, which creates a new cycle of indebtedness by students. Higher tuition makes "pay-as-you-go" a less-likely option.

Lax lending standards make it easier for colleges to spend money poorly. If the federal government provides a loan to virtually every applicant, then university administrations can spend foolishly. There's so much money, why not hike faculty salaries and pensions? Why not offer programs and majors of questionable intellectual or economic merit?

I know people with six-figure loan debt, multiple degrees and few job prospects. There were few lending constraints – hey, it's only government money – so they racked up loan after loan. Others use loans to gain useful degrees with lucrative job potential, but these graduates come out of school with a crushing load of debt that will take decades to repay.

In 2012, Congress debated a controversy surrounding for-profit colleges, which receive about a quarter of total federal Title IV student aid. The impetus was the latest iteration of the GI Bill for active military and veterans, who often choose for-profit education programs.

"These colleges use high-pressure sales tactics to ensnare veterans, promising them a high-quality education and a 'guaranteed job,' and urging them to sign up on the spot," Jerome Kohlberg wrote in an opinion piece for the Pittsburgh Post-Gazette. "They lock themselves into long-term commitments, turn over their GI education benefits and sign up for student loans to cover the difference."

The alleged abuses at some for-profit colleges have reminded some critics of abuses by the subprime mortgage industry. But these problems are almost solely the result of easy access to government dollars. Indeed, public universities do the same thing – lure students into long-term debt commitments based on freely flowing federal dollars, even if they don't use the high-pressure tactics used by some recruiters in the private educational business. For-profit and non-profit universities rely heavily on government tuition subsidies.

Many government employees, by the way, receive automatic pay boosts for additional educational attainment, so this government-funded system ratchets up government spending throughout the entire taxpayer-funded universe.

When I attended college, only the rarest student stayed on campus beyond four years. Many received degrees in less than four years. Now, it's typical for students to take six years to get through a California State University degree program. The education establishment claims the problem is the result of too little money, but the real cause is just the opposite. With so much money available, there are too many students on campus and not enough classes for them.

Look at the large portion of students taking remedial courses, which reminds us that more college doesn't always equal a better education.

Given that students who get themselves in financial trouble can't unload their debt through bankruptcy, easy college tuition money can mean a lifetime of financial struggles. These problems are the result of government officials pushing a social good – i.e., broader college attendance, or, in the case of real estate, broader homeownership.

The housing bubble was inflated in part by government-dictated lending policies designed to expand homeownership by requiring banks to make loans to people who couldn't meet traditional down-payment, income and credit standards. And government policies designed to expand educational opportunities have inflated the cost of tuition, cheapened the value of education and burdened new generations with crushing debt loads.

Yet those of us who call for less government meddling and more private-sector discipline are the ones considered heartless.



User Agreement

Comments are encouraged, but you must follow our User Agreement


Programs & Promotions
Business Directory
Ads by Google