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The next bubble = college tuition?

Scott Jagow Sep 4, 2009

This is an extraordinary fact: last academic year, the amount of money borrowed by students increased 25% from the year before. That may be the biggest annual increase ever, at a time when lending is tight everywhere else in the economy. Guess where the money’s coming from?

The federal government has raised borrowing limits on loan programs like Stafford, and that’s had a positive outcomes for students — it’s steered them away from more expensive, higher interest private loans. It’s allowed them access to money in a tough economy. But the negative result has been a dramatic increase in the volume of borrowing.

And that is almost certainly driving up the cost of tuition even further. From the Wall Street Journal:

Loans can give colleges an artificial sense of a family’s ability to pay tuition. To some extent, that false sense of security gets built into the assumptions schools make when setting prices, say experts. The idea is that as prices rise, families borrow more and more, spurring prices to rise further, which in turn requires more borrowing.

One study says the average amount borrowed for college has increased $10,000 in the last 12 years to more than $23,000. Tuition has climbed to more than double the general inflation rate.

The Journal story points out the hard lesson many graduates are learning:

Lillian Russell graduated from law school at the University of Pittsburgh last year with $181,000 in debt from her seven years in school. She has spent much of the past year looking for work. In recent weeks, she found a job clerking at a small law office. While she settles into her job, she has deferred payments on most of her federal loans, though interest continues to accrue.

“I wish I had considered the long-term impacts of what I was getting into,” Ms. Russell says. When she entered school, “the idea was I’d take out the loans, get a job, and pay it back,” she says.

It seemed straightforward. But as the economy has soured, “I feel like it’s shifted a lot of my life goals,” says Ms. Russell, from buying a house to starting a family. “I’m really concerned about handling this obligation while taking on new ones.”

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