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Monday, Feb 4, 2013 6:00 PM UTC

Student loans: The next housing bubble

College students accrue hundreds of thousands in debt with little hope of paying it back. It's a cruel game

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Topics: student loans, Debt, law school, Higher education, Editor's Picks,

Student loans: The next housing bubble (Credit: hxdbzxy via Shutterstock/Salon)

The American system of higher education is increasingly becoming a fiscal disaster for ever-larger numbers of students who move through it.  That disaster is being caused by a combination of terrible incentives, institutional greed — and the pervasive myth that more education is the cure for economic inequality.

The extent of this myth is highlighted by a new report from the Center for College Affordability and Productivity, which indicates that nearly half of all employed college graduates have jobs that require less than a four-year college education. Despite such sobering statistics, the higher-education complex remains remarkably successful at ensuring that American taxpayers fund the acquisition of educational credentials that, in many cases, leave the people who obtain them worse off than they were before they enrolled.

Far from being “priceless,” as the promoters of ever-more spending on higher education would have Americans believe, both undergraduate and post-graduate education is turning out to be a catastrophic investment for many young and not-so-young adults.

In recent years, law school has become the most striking example of this remarkably perverse system. Consider how American legal education is funded:

  • Law schools calculate a total annual cost of attendance, based on their tuition and the cost of living in the area where the school is located. For example, American University’s law school estimates this year’s cost of attendance as $70,204.
  • Any student a law school chooses to admit can, assuming he or she is not currently in default on an educational loan, borrow 100 percent of the cost of attendance for that particular school from the federal government, in the form of educational loans that currently carry interest rates of 6.8 percent and 7.9 percent.
  • The federal government puts no limits on how much money a school can make its students eligible to borrow, nor does it make any effort to determine whether the federal loans students are taking out have any reasonable prospect of being paid back.
  • Interest begins to accrue on these loans as soon as they are disbursed. This means that a student who enrolled, for example, in American University last fall will have — assuming a 3.5 percent annual increase in the cost of attendance — approximately $260,000 in debt when the student’s first loan payment comes due, six months after graduation.  The student will owe monthly payments of more than $3,000 on the standard 10-year repayment plan, and nearly $2,000 on an extended 25-year repayment schedule.

In effect, the system allows any 22-year-old American University chooses to admit to borrow a sum equal to the average home mortgage, but without a single one of the actuarial controls that are supposed to minimize the risk that homeowners will borrow too much money.

After all, even at the height of the housing bubble, homebuyers who got so-called liar loans that misstated their actual income still had to jump through certain hoops to do so. In addition, if they defaulted on their loans, there was a house the lender could foreclose on that in most cases still had some value. Of course, that system proved to be far too unregulated, and led to a financial disaster that would have wrecked the nation’s banking system if not for hundreds of billions of dollars of federal bailout money.

Still, even that system was a model of rationality in comparison to the federal government’s funding of higher education.  As long as they are technically “nonprofit” institutions, schools can charge whatever they like, without having to provide a shred of proof that their graduates will be able to pay back the incredible debt loads they will be incurring. And, of course, when graduates default on these loans there’s no house to sell off to cover at least some of the deficiency.

Less than two out of every five American University law graduates are getting legal jobs of any kind – let alone the far rarer jobs that would allow graduates to actually service the debts they’re incurring by attending the school. And American is a fairly high-ranked law school.

But none of this should be taken as solely a criticism of American University in particular, or even law schools in general.  American’s law school — and America’s law schools — are merely the canary in the coal mine of an educational system that, sooner or later, is going to cave in on itself.

Paul Campos

Paul Campos is a professor of law at the University of Colorado at Boulder. More Paul Campos.

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