- If financial history has taught us anything, it’s that high levels of debt and, more specifically, bad loans lead to financial crises. We have seen this numerous times including the Asian Debt Crisis in the late 90s, the more recent Greek Debt Crisis and, of course, the U.S. subprime mortgage debacle.
Unfortunately, we are heading for another government-induced financial crisis — this time it is the $1 trillion in student loan debt. As of 2010, about one in five households in the U.S. have student loan–related debt of over $26,000. What is saddest about this pending crisis is that it will likely impact millions of student borrowers throughout their lives, because unlike credit card debt or mortgage debt, student loans can’t be discharged by bankruptcy.
How did we get here?
Ironically, as this crisis races toward a financial cliff, there has been no action by the government to curtail student loans, as would be the case in any other debt-related financial crisis. In 2011-12, the federal government issued 93 percent of all student loans.
Student loans are unique for a number of reasons, none perhaps more glaring than the fact that virtually nothing can disqualify an applicant from a federally-backed loan, excluding a prior student loan default or a drug conviction. A student loan is quite possibly the only loan that is not tied to credit worthiness or the ability to repay. Even more frustrating is that these easy loans are correlated to the rising cost of college — colleges have every incentive to raise costs knowing that there is an endless money supply.
Stop the madness
This crisis will likely end badly for the millions of student borrowers steeped in debt and with no ability to repay. For some reason, the government believes that everyone should go to college and is willing to give students any amount of money to put them on that righteous path. Inexplicably, this is all happening with no regard to whether students will be employable upon graduation or how they will pay back these monstrous loans. This madness must stop.
Like any loan, there needs to be some element of credit worthiness as William Bennett suggested last week in his article, “The looming crisis of student loan debt.” But one might ask, how can an unemployed student be creditworthy?
A simple solution
Admittedly student loans are riskier than most since there is no tangible asset to collateralize (although there certainly is a non-tangible asset — the student’s education). However, all educations are not created equal and should be “appraised” by lenders as part of a student loan determination.
College fees and student loan debt have a perverse symbiotic relationship. Rising costs in education beget rising student loan debt. It is puzzling why an art degree costs as much as a computer science degree when the job prospects of each are so vastly unequal.
Lenders, in this case the government, should make a fact-based determination of a student’s likelihood to graduate, to get a job and their expected income. Prospective students applying for loans can be evaluated for “credit worthiness” based on a score much like a FICO score. A student loan score would be based on a formula comprising their grade point average, major, and academic institution. Each of these variables is directly related to a student’s ability to get a job upon graduation and repay their loans. For example, a STEM (science, technology, engineering and mathematics) major at MIT would yield a higher score and loan compared to a religious studies major at a lesser ranked school.
While the solution I have outlined doesn’t offer relief to those deeply in debt today, it will stop more hot air going into the student loan balloon. And although I agree that everyone should have the right to go to college and study whatever they’d like, our government and colleges shouldn’t be reckless with our youth’s financial future — or taxpayer dollars.
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