Subprime college loans

Millions of Americans took out home mortgages in the expectation that house prices would always go up, only to find that the market value of their homes is less than what they owe on them.

There are others in the same situation with regard to college loans.  They went into debt expecting that the investment in improved educational credentials would pay off in the job market, only to find that the value of their marketable skills is less than what they owe.  [Update 8/3/10: More than one in five student loans in repayment since 1995 are in default.]

I have a good friend in that position.  He went back to school in mid-life to get an advanced degree in his professional field, partly because he loves what he is doing but also in the expectation of a payoff. He graduated in the middle of the current recession, and has been living hand-to-mouth, eking out a living through a patchwork of temporary and part-time jobs. Even if he gets a full-time job, it is unlikely to be in the field he studied for.  He finds that what employers want are not highly-qualified experts with specialized knowledge, but jacks-of-all-trades who are willing to work cheap.

He has had to temporarily suspend payments on his loan, and gets dunning telephone calls from bill collectors based in India.

His situation is not unique, or even unusual.  People with home mortgages and underwater home prices can discharge their obligation by forfeiting their homes.  People with student loans and underwater careers cannot use the bankruptcy process.  Some of them will be in a form of indentured servitude for the rest of their careers.

I am not the first person to compare unpayable student loans to subprime mortgage loans.

Click on this for a recent college graduate’s lament.
Click on this for a report on the plight of law school graduates.
Click on this for a report on how disadvantaged students are being exploited by for-profit schools.

I think our system of ever-rising tuition financed by college loans is one reason why the United States as a nation pays more that other advanced countries for medical services and legal services. Someone who comes out of medical school or law school with a huge debt burden needs a high income to pay it off. Human nature being what it is, they don’t willingly relinquish the high income once the debt is paid.

I think the for-profit business model harms higher education.  If the goal of a college is to maximize revenue, then (1) it will maximize enrollment regardless of whether students get any benefit from it and (2) it will give preference to students who are stupid and rich over those who are smart and poor.

The ideal would be free or cheap higher education for everybody who is capable of doing college work, and a job market in which people are judged based on what they can do rather than what credential they have.

But I don’t have a good answer as to how you would achieve that ideal. Nor do I have a good idea of what to do about my friend’s plight.  All I can do is engage in old-guy nostalgia about the golden age of state universities and the GI Bill, when any middle-class family could easily save up for college tuition and any poor person, with some effort, could work his or her way through. Of course in those days a college education was an option, not a requirement for a middle-class standard of living.

[Update 8/9/10]   Actually there is no real-world reason why we can’t have affordable higher education open to all who qualify, or decent jobs for anyone with a good work ethic.  I must have been overly discouraged about our dysfunctional politics and economy when I wrote the original post.

[Update 9/5/10]  Click on this for a report on the government’s role in exploiting student loan debtors.

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