May 23, 2011
Government-backed "no-doc" loans given to people with little regard to their ability to repay. Soaring default rates. Taxpayers on the hook for tens of billions of dollars.
Sound familiar? It's a synopsis of Too Big to Fail, Monday night's HBO movie about the financial crisis spawned when all those subprime mortgages started going sour three years ago. It also describes what's going on today with the federal student loan program.
The student loans don't pose the same risk to the global economy as the toxic housing loans that were packaged and sold to investors around the world. The amount of money is smaller. But the foolishness is the same, inviting another rude shock to a federal budget already in distress.
As millions of college students graduate this month, and millions more college-bound students fill out federal aid forms, many lack realistic plans for paying back their loans. This is likely to produce great costs both to indebted families and American taxpayers.
The trends are disturbing: Almost half of the money loaned to students attending for-profit schools in the past decade is expected to default at some point, according to U.S. Department of Education data. A third of community-college borrowing will likely default over the life of those students' loans, and almost a quarter of borrowing by university freshmen and sophomores is expected to do so.
Almost all student borrowing -- some $665 billion worth -- is owed to the Education Department, not banks. The department downplays the situation by saying only 7% of students have defaulted so far. But that figure reflects students who have stopped paying already, not defaults over the life of the loans. Probe deeper, and the default figure is more likely to be closer to 16%.
Despite the dangers, student lending continues to rise at a rapid clip. It grew 17% last year, with most loans requiring no documentation of a student's ability to repay or commitment to finish school. As tuitions increase, so do debt loads. College seniors who graduated in 2009 carried an average of $24,000 in student loan debt, according to the Project on Student Debt, a research and policy group.
What separates the payers from the defaulters is often the question of whether the student will drop out, because many dropouts can't afford to pay back loans they took based on a promise of higher earnings from higher education.
Some schools are going the extra mile to warn students about the risks. Virginia's Tidewater College is making students submit budget plans before giving them their loans. More should do so. There's no shame in taking out less loan money, studying part time, and being realistic in one's academic expectations.
In past years, much of the expansion in student lending was rightly blamed on for-profit schools that, in cahoots with unscrupulous bankers, were more interested in harvesting government-guaranteed loan money than in providing quality educations. Now that reforms have been instituted, and nine out of 10 loans start and end with the federal government, there's little excuse for the market's continued wild expansion.
Just as students -- and parents -- need to be warned that government loans aren't free money, the Education Department needs to be far more protective of taxpayers. Unless it wants to be blamed for the next big bailout, the department ought to continue to toughen collection procedures and tighten penalties against colleges with high rates of loan default.
Like homeownership, a college education is part of the American dream. But it's important that costly dreams be well grounded for the borrower and the lender. Willy-nilly credit practices hurt both.