Higher Debt: Is the student loan industry headed for a meltdown?

View: The Pessimist

“If a thing can’t go on forever, it won’t.”

Glenn Reynolds did not come up with this maxim, but he repeats it with the fervor of a proud papa. The University of Tennessee law professor says that easy credit for higher education is just such a thing.

“What can’t go on forever is an increase of tuition at rates higher than household income,” Reynolds says. “The thing that can’t go on forever is students graduating more and more in debt.”

Because those things can’t go on forever, they won’t.

Reynolds, like Kantrowitz and Horton, sees expensive mid-list private schools getting the shaft first. But he doesn’t share their comparatively rosy outlooks. In June, he compared a decline in student loan borrowing to the housing market in 2007.

“Bubbles burst when people catch on, and there’s some evidence that people are beginning to catch on. Student loan demand, according to a recent report in the Washington Post, is going soft, and students are expressing a willingness to go to a cheaper school rather than run up debt. Things haven’t collapsed yet, but they’re looking shakier — kind of like the housing market looked in 2007,” Reynolds wrote in the Washington Examiner.

“A few things constant about bubbles are that nobody can predict when they’ll burst. Whatever causes a bubble to burst, it tends to be something small and hard to predict,” Reynolds told TheDC. “The other thing about bubbles is that people always tell you this one is different.”

And the Instapundit blogger wouldn’t roll back the tide even if he could.

“If [this kind of lending] were done by any other business, it would be regarded as predatory. Whether a university is organized as for profit or nonprofit, it’s a business like any other.”

While he’s not the first person to make this comparison, I asked Reynolds why more politicians aren’t critical of the student loan industry, and the government’s role in egging on a generation of indebted 18-year-olds.

“Education has really good PR in the U.S. We have the best university system in the world, but in 1965, we had the best automobile industry in the world, too. Don’t think that because it’s good, it’s unassailable. I think they need to be accurately informing students about how they’re going to afford these loans.”

Accurately? Many of them won’t be able to afford these loans, because they won’t be able to find jobs upon graduation. Or, at least not the jobs they were promised when they borrowed $50,000 for school, and which they have to begin paying back within six months of graduating college.

“The ramifications for defaulters go beyond higher ed,” Reynolds says. “People with student loan debt can’t afford to buy houses. They’ve already bought a house. They can’t afford a car, because they’ve already bought a car.”

Reynolds’ suggestion? “You want these borrowers to know what they’re getting into, and you want the institutions that loan money to get some skin in the game. They shouldn’t have to eat the entire loan in the case of a default or bankruptcy, but they should retain 10, 20, or 30 percent of the risk.”

“That oughtta make people less willing to write $200,000 checks to unemployed 18-year-olds.”

But even if his suggestion is ignored, Reynolds stands by his mantra: Things that can’t go on forever, won’t.

To an 18-year-old, student loans are like fairy dust. You’re not really sure where they came from, why you’re eligible to receive them, or how you’ll pay them back. Only that they are good and plentiful, and without them, you’d be forced to attend a school in your parents’ income bracket. Maybe a public university where you are “just a number.” Or a community college, where single moms go to brush up on their remedial math skills.

Student loans, the key to attending a school that will make you healthy, wealthy and wise, are also undermining the American economy and exposing millions of young Americans to a level of risk more befitting seasoned investors.

More than likely, more government subsidies won’t be the answer. As tuition hikes continue to outpace inflation in both private and public nonprofit schools, states will find it difficult to keep up their own financial aid contributions. That’s already the case for the public university systems in Florida, New Jersey, California, and Arizona, where skyrocketing attendance numbers means more people on an increasingly crowded dole.

And while encouraging a reality-based approach to post-secondary education might mean fewer trips to Paris for broke 19-year-olds, and maybe even fewer English majors, that’s a small price to pay for graduating solvent adults.