My Two Cents

College trouble ahead

Chris Farrell Dec 3, 2008

The U.S. has long been an unequal society, but we always had strong upward mobility. Yet now the latest reserach suggests that we have less upward mobility–and greater inequality–than Europe. Most worrisome, the odds of staying poor if you are born poor in the U.S. are higher than in Europe.

We have become less hospitable to immigrants, the steriods of economic growth over the past several decades.

And now this depressing news on the college front: “Other countries are outpacing the United States in providing access to college, eroding an educational advantage the nation has enjoyed for decades, according to a study released today by the National Center for Public Policy and Higher Education. it’s getting harder and harder to pay for college,” writes the Washington Post

What’s going on when it comes to college? We’re borrowing to much to pay for college. To be sure, parents and students have long complained about the high and rising cost of a college education. But they paid the tab. The reason: A college sheepskin was worth the cost in salary earned in the job market.

But this time around may be different.

The past three decades loans have become more important for paying for college. Students and their parents funded a college tuition bubble with borrowed money. And I think the term “bubble” is right.

Two-thirds of college students finish school with debt, up from less than half in 1993. Now, with the securitized student loan market largely dead, the student loan business is in trouble. Compounding the financial stress on lenders is a new law limiting federal subsidies to them. The borrowing boom is going bust.

Default rates are high: Recent research explodes the widespread myth that student loan default rates are low. To be sure, the federal Dept. of Education has announced for years that the default rate was a modest 4% to 5%. Problem is, the federal agency only looks at the first two years of debt repayments. Longer term studies find far more dire results. For instance, reaching back into the 1990s and following students over the subsequent decade, students with loans totaling $15,000 or more had nearly triple the default rate of those with $5,000 or less in loans–19% versus 7%–according to the Education Sector, an independent Washington D.C. think tank. The white student default rates is about 7% and the African-American rate some 39%. A study by the National Center for Education Statistics came up with similar results.

Here’s the rub: The real earnings gap in constant dollars between a worker with a college sheepskin and her peer with a high school diploma increased by a mere real $1,033 for women from 1995 to 2005, and only $3,500 for men from 1995 to 2005–about $100 a year and $350 a year respectively. That’s hardly a reassuring return on education for a generation that has taken on unprecedented debt burdens. Over the past decade the average student loan debt burden has jumped 50%, after adjusting for inflation. Put somewhat differently, the wages adjusted for inflation of colleges graduates is down over the past five years where, after adjusting for inflation, the real cost of debt has gone up.

Parent’s aren’t seeing wage increases. Borrowing against home equity to pay for college is out. Student loan burdens are too great. Students aren’t doing well when they graduate. The economy is in recession. Student defaults are up.

The bubble has burst. The relinace on loans has gone too far.

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