Washington is now debating how to keep student-loan rates low even as parents put the finishing touches on their kids’ college financial-aid forms. Everyone agrees that there is a “student-loan crisis” — yet few seem to notice the student-loan market and pre-crisis housing lending are looking more and more alike. The result is likely to be no less so.
Washington policy-makers were quick to condemn private-sector lenders for the housing crisis, for pushing unsuspecting borrowers into houses they couldn’t afford.
The crisis featured no-documentation loans, low teaser interest rates and a disregard of the collateral supporting the loan. When housing prices stalled and then fell, the whole structure collapsed.
So how is the student-loan crisis like the housing crisis? The harder question is: How are they different?
First, consider the student-loan “borrower.” Next to someone with a record of default, someone with no credit history is your next worst risk. Yet, that describes the student borrower.
These untested borrowers aren’t lent small sums, either. Government student loans can easily exceed $100,000 after graduate school. The chorus has risen loud when credit cards are marketed to students, yet the same individuals can rack up vastly more debt through a student loan.
Second, consider the interest rates. The Washington debate now isn’t over whether to lower student-loan rates, but how to pay for it. Lower rates through government subsidization call to mind housing’s teaser rates.
Student loans are subsidized in many ways. The Congressional Budget Office estimated in 2010 that the government’s subsidy for a direct student loan amounts to “12 percent on a fair-value basis.” Such subsidization encourages borrowers to take on more debt than they would if they had to bear the true economic costs.
That’s exactly what has happened. Again according to the CBO: “In the past five years alone, new originations increased by nearly three-quarters: from $56 billion in 2005 to $97 billion in 2009 . . . As a consequence, the total amount of federal student loans outstanding rose from $381 billion to $631 billion over that period.”
Third, consider the collateral — in this case, the education being purchased with the loan. While students and institutions are examined, the course of study largely isn’t. The first two certainly affect the ultimate product, but so, too, does what is studied. Ignoring the last is the equivalent of making a housing loan without examining the house itself.
Implicit in such a lending practice is the idea that all education is equal and good. While education may be good for the individual, it isn’t necessarily good economically. A gender-studies major may well have little prospect of finding a job, but can still accumulate huge debts.
Different in particulars, the two sectors’ dubious lending practices are identical in their essence. Little wonder student-loan debt is rapidly rising — just as housing debt did under essentially the same conditions.
The housing crisis, as the story is now told, was perpetrated by greedy bankers with conflicts of interest. The rising student-loan crisis is being facilitated by the government in collaboration with colleges. The CBO states colleges figure prominently “in administering the loan-application process and counseling students about the financing options available to them.” Sound familiar?
Student loans exist to fulfill public-sector good intentions. But in the end, it won’t make any difference to the borrowers who can’t pay.
J.T Young served in the Treasury Dept. and the Office of Management and Budget from 2001-’04 and as a congressional staffer from 1987-2000.