Warning: Bailout alert! The Obama administration has decided it's time to spread the wealth some more, just in time for the election. Who's getting it this time? Broke college grads. Obama's team wants these borrowers to be able to wipe out their private student loans through bankruptcy. Again the administration is forgetting there's no such thing as a free lunch. If lenders know their risk is higher, they'll raise rates making college even more expensive. Of course, the President wants to ignore the real crisis, which is the government's own loan program. Uncle Sam -- and thus taxpayers -- back more than 90% of student loans - nearly $900 billion dollars' worth.
Don't get too attached to that money though. The White House's own budget forecasts as many as 25% of federal loans issued next year will end up in default. That means defaults could cost as much as $20 billion dollars. That's a program in dire need of reform. The crucial point the President just doesn't seem to grasp is making student loans easier to get only ends up hurting these kids. When the money's easy to get, schools are free to jack up prices. It means students end up with massive debt they'll have to work for decades to pay off, and that's if they can get work.
I guess the President thinks bankruptcy is a cure-all? Here's some perspective: In the last 20 years, tuition costs have risen 184%, and that's adjusted for inflation, but the pay of college grads has only risen 9%. One of the education industry's favorite statistics has been that college grads will make a million dollars more in their lifetimes than folks with just a high school degree. But recent studies show that's no longer true. Today, a degree means your lifetime earnings will go up by $300K - $600K. On average that works out to be less than 4.5% return on your investment.
That's not bad, but a degree just isn't the ticket to breakaway success it once was. Despite this, more and more students sign up ever year, and many of them won't even be prepared for a job! A study finds half the graduates of four-year colleges don't have basic reading and math skills, like the ability to understand a credit-card offer or an editorial from the newspaper. For far too many grads, that diploma is just proof of debt, not employability. But there is hope for a real solution. Last year the University of the South - a private school - cut its tuition and fees by ten percent.
And it's paid off for them: They've gotten a huge boost in applications, and the quality of applicants improved too, allowing the school to become more selective. So schools are capable of holding down costs, and providing a better value. The last thing we need is more government interference, making it easier for students to run up a mountain of debt they can't afford, and piling more risk on the taxpayer's back.
But I’m afraid people just won't listen to reason. Even the guy who researched this very piece is leaving his steady job this week to go back to school and run up his very own mountain of debt.
He will be missed.