A new post over at Talking Points Memo site in the Warren Reports section entitled Canary in a Coal Mine? discusses the rise in student loan defaults from 4.6% to 5.1% in the last year. As the post notes, 5.1% is historically low. However, the report also notes that it is expected that 12% of the loans made this year will eventually default.
One of the main arguments for requiring students to borrow money is that it should be seen as an investment. Of course, we have heard the same argument for housing, too -- and look where the housing market is headed now with overleveraged investors in a excessively crowded market.
One of the problems is that many students are not able to graduate from college and find a job that, given a complete financial cost-benefit analysis of their earning potential, would justify "investing" in college by borrowing money. Section 523(a)(8) of the bankruptcy code virtually makes student loans non-dischargeable in bankruptcy. Therefore, such an investment carries with it a tremendous risk. More risk than, say, starting a new business.
We used to value a college education so much that we provided grants to qualified students so that their schooling was paid for. Because of our public policy, grants and scholarships are rarely granted anymore. In fact, colleges and universities are even getting "incentives" (read: kickbacks) to push students to borrow money from private lenders rather than the cheaper government-subsidized loans.
What makes this worse is that students from lower-income groups, who have a hard enough time moving up the economic ladder, become saddled with debt that may compound their difficulty with upward mobility. Somehow, the American people need to come to the realization that we all have a stake in educational opportunities. The world is changing. We cannot sit on our laurels. People in China and India want our jobs. We will have to work harder and continually learn new things if we expect to keep our place of preeminence in the world. Now is not the time to saddle people with debt that creates another barrier to entry to success.