Student Loan Bubble?
Here’s an interesting piece in the Huffington Post about whether student loans are really a bubble about to burst akin to the mortgage crisis. I found this part particularly interesting:
First, one thing that’s important about the possible student loan bubble is that it poses much less of a threat than housing debt did to drag down the entire economy. Yes, many individual borrowers may find themselves in trouble. But total student loans probably amount to less than 10 percent of outstanding mortgages. Every single student loan could default and it still probably wouldn’t match total mortgage defaults during the recent downturn. More importantly, unlike mortgages, Wall Street isn’t knee-deep in securities comprised of bundled student loans, as it was with mortgages. (It also helps that it’s also harder to speculate in student loans; an investor can flip a house, but not a brain.)
If huge numbers of defaults on student loans would not significantly harm the economy, then, presumably, generous loan forgiveness would not either.
However, one thing that bothered me in the article was this sort of throwaway line comparing student loans to mortgage loans:
Just like housing, many student loans were made with little or no research into whether borrowers were fit. Federal Stafford loans are basically automatic for college students, and government backing for other types of loans gave other student lenders little reason to be picky.
The concept of granting student loans based on the “fitness” of the borrower is extremely problematic. First, those least “fit” to borrow are probably those who need the loans the most. Second, how does one determine who is “fit” to borrow for college? If the criteria is the potential to pay them back, the student loan lenders would have carte blanche to determine which majors/fields of study are most “valuable.” Anyone without the means to pay who wished to major in the liberal arts or fine arts could essentially kiss college good-bye. While I know from reading comments on various student loan articles that there is a significant portion of the population out there who would say “good riddance,” the fact remains that controlling a student’s major is akin to controlling thought, which could raise, I think rightly, possible constitutional issues.
Finally, I think there is a fundamental difference between the ability to guage “fitness” for student loan borrowing and “fitness” for virtually any other type of borrowing. Imagine a person, I’ll call him Joe, who is 18 years old and currently has a part-time job at Taco Bell. If Joe tries to borrow money to buy a house and he is turned down due to his low income, he knows that if, by the time he hits, say, 30, he earns substantially more money, he will be able to get his loan. Joe could do lots of things in the meantime to increase his income and, consequently, his ability to pay back a mortgage loan. In fact, one of the main things Joe could do to increase his income is to attend college. This would seem to be a wise choice as, from the same article:
Wages for the median bachelor’s degree recipient are roughly $55,292, compared to $34,813 for those with only high school, according to the latest data from Georgetown University’s Center on Education and the Workforce.
However, if 18-year old Joe is turned down for a student loan, rather than a mortgage loan, this option for increasing his later “fitness” is essentially eliminated. Because the very action he needs to take in order to increase his fitness to borrow is the action that he can’t take unless he borrows.
In other words, denying someone a mortgage loan based on their ability to pay seems reasonable given that such a denial has no obvious bearing on whether one will be able to pay tomorrow. But denying someone a student loan based on their ability to pay absolutely has a bearing on that person’s ability to pay tomorrow since it is the student loan itself that would increase the borrower’s ability to pay it back later.
Thus, I think it is important, when thinking about student loan reform, to stay away from any talk of the borrower’s fitness. In fact, I’d argue that one of the main purposes of student loans is to ensure that those who aren’t fit under ordinary economic standards can still get an education.