Post Event Summary

Do student loans represent a new credit bubble? On Thursday at AEI, panelists gathered to discuss solutions to the mounting U.S. student loan debt crisis. In his keynote address, Bill Bennett of the Claremont Institute alleged that student attitudes toward higher education may be shifting. Bennett claimed this shift may be a consequence of the lower return on investment provided by a college degree, the twenty-first century primacy of intellectual capital over the prestige of a degree, the lowering of academic standards among colleges and the technological developments that will provide individuals with nearly unprecedented access to higher education.

Richard George of the Great Lakes Higher Education Corporation contended that the debate over interest rates distracts from the real problem of rising college costs. Whereas college costs are increasing much faster than inflation, incomes are growing at less than half the rate of college costs. The only solution is to control capital flows supporting college costs by revamping student loan programs to reflect the bifurcation in the U.S. higher education system.

Art Hauptman, a higher education consultant, advocated limiting the amount students can borrow and changing institutional behavior to restrict borrowing by charging colleges a fee for defaulting students.  Alex Pollock of AEI then described the history of tuition dollars, demonstrating that since the passage of the Higher Education Act in 1965, college tuition as a percentage of average earnings has risen from 8 percent to 26 percent. Finally, AEI's Ed Pinto drew parallels between the tuition debt crisis and the mortgage debt crisis of last six years. According to Pinto, as long as government sets interest rates based on politics and both colleges and private sector capital have no skin in the game, the tuition debt bubble may grow to $2 trillion, $400 billion of which will be at the expense of U.S. taxpayers.

Event Description
Outstanding U.S. student loan debt is now estimated at over $1 trillion. The problems of student loans are generating sharp debate, including claims that they represent a new credit bubble. Colleges (and all purveyors of post-secondary education) arguably receive the greatest benefits from student loans, since they pump up colleges’ revenues with no credit risk and allow colleges to keep increasing their prices and expenses. Meanwhile, many students graduate — or even worse: drop out — with mountains of debt and unattractive or no job prospects to boot. Even more dismal is the fact that defaults on student loans are high.

American colleges in effect practice the “originate and sell” model of lending, while the price of their product keeps going up.  This practice is reminiscent of the mortgage bubble that has brokered loans and escalating housing prices. One possible improvement would be for colleges to retain “skin in the game” for student loan credit risk, which is the same treatment Congress has prescribed for mortgage lenders. This event will address the problems and improvements needed for student loans, beginning with a keynote presentation by former secretary of education Bill Bennett.

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