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The Student-Loan Bubble

By Kellyn Brown

Last month, a legislative subcommittee approved a $28 million increase in spending on higher education, which will effectively freeze tuition for in-state students through 2015 if Montana’s universities and colleges meet certain performance standards. That’s a decent tradeoff, especially as student loan debt begins to resemble a bubble.

The amount of money students borrow to attend school has increased rapidly in recent years and, in some ways, has begun to look a lot like the housing crisis on a smaller scale. It even involves some of the same players.

As the Wall Street Journal reported last week, student-loan securities are hot among investors despite the fact that more borrowers are falling behind on their payments. The Federal Reserve Bank of New York reported recently that Americans owe almost $1 trillion in student loans, about triple of what they owed just eight years ago. Student debt is the only debt that continued to rise during the Great Recession and now is the second-largest balance owed by American households after mortgages.

The attraction from investors is familiar. They are looking for bigger returns as interest rates remain near record lows. And they are willing to take the risk to get them.

If you don’t own a substantial amount of student-loan debt, you may not care. But you should. The federal government makes the vast majority of these loans, more than 90 percent. If the bubble bursts, and students collectively begin defaulting, then taxpayers will end up paying for them.

Again, this would not nearly be on the same level as the mortgage meltdown. As Jordan Weissman wrote in the Atlantic, “ Even if it were to go bust, the slice of the student loan market open to investors is still too small to do serious damage to the country’s financial health.”

But student loans could saddle hundreds of thousands of more Americans with insurmountable debt and, in turn, bad credit, which can delay everything from buying a house to starting a family. In the fourth quarter of 2012, according to the Federal Reserve Bank of New York, 31 percent of borrowers were more than 90 days behind in their student-loan payments, up from 24 percent in the fourth quarter of 2008. The sluggish economy deserves part of the blame, but so too do institutes of higher learning.

Part of the performance standards tied to potential budget increases for Montana’s university system could be college completion rates. But another short-term goal should include measuring how many Montana graduates are finding jobs in their fields of study.

The difficulty of graduates finding jobs and repaying their debts is only compounded by the fact that too many of them hold expensive degrees for jobs that are hard to come by. The New York Times reported that in 2012, just 45 percent of graduating veterinarians had accepted a job, down from 84 percent in 1999. Attorney Chris Fletcher recently wrote in the Wall Street Journal that America’s law schools are producing more than 44,000 graduates per year while the Bureau of Labor Statistics estimated that only 21,880 new lawyers are needed annually.

Last year, the Hechinger Report found the percentage of Montanans earning college degrees had risen by more than 6 percent in the previous three years, the highest rate in the country. Our state’s schools have done well producing more graduates and institutions such as Flathead Valley Community College have worked with local businesses when determining what classes to offer their students. Some skills – in health care, agriculture and even education – have lower unemployment rates and all of Montana’s colleges and universities should take that under consideration.

As student debt continues to far outpace inflation, it will begin to matter just as much what degree a graduate earns as whether they earn one at all.