Student Loan Crisis: How We Got Into This Mess

Education reporter Suzi Parker explores the seemingly good idea that led to a trillion-dollar consequence.

Higher education has a hefty price tag in America. Is the cost worth the reward? (Photo: Getty Images)
Suzi Parker is a journalist whose work also appears in The Christian Science Monitor and Reuters.

Remember when America was in a highly competitive intellectual race with the Soviet Union? Turns out, this race is partially to blame for our country's exploding student loan debt.

After Sputnik launched in 1957, the country's fears over falling behind in science and engineering became a reality. In turn, the federal government, already waging a war on poverty, decided the following year to provide financial aid to students for a college education.

In the decades following, Congress passed a series of bills making the process more complicated and more expensive. Private lenders, too, entered the college loan business in 1980s. From there, greedy bankers and eager students desiring an education created a lethal crisis that's led to nearly $1 trillion in student loan debt without the reprieve of discharging the debt in bankruptcy.

More: No Income? No Problem! How the Gov't Is Saddling Parents with College Loans They Can't Afford

“Student loans are an unintended consequence,” Harlan Platt, author of Unintended Consequences: How To Improve Our Government, Our Businesses and Our Lives. “Government had an idea to fund people to go to college, but when someone else is in charge of your checkbook, someone is going to write a lot of checks. That’s what happened.”

Platt says that once student loans were more manageable, but that changed because universities were focused on their national image. He theorizes that when magazines started ranking schools, universities felt the pressure to spend, and make more money in order to move up the lists.

“A university or college that wants to prosper needs to take actions to improve its national rankings just like a football team would,” he says. Colleges have begun a bidding war for faculty and a building war for dorms, student unions, and athletic centers with two or three pools. All of these institutions are chasing an elusive goal that is rankings and that means more dollars have to be raised.”

In turn, tuition skyrockets.

Two-thirds of American college students graduate with large debt, an average of  $24,000. According to the U.S. Department of Education, student loan defaults have doubled in the last five years.

Dr. Timothy G. Nash, vice president of corporate and strategic alliances and the Fry Endowed Chair of Free Market Economics at Northwood University in Midland, Mich., says 80 percent of student loans are guaranteed by the government, so an increasing default rate could trigger a financial crisis, much in the way that increasing mortgage defaults set off the “Great Recession” in 2008.

The higher burden of student loan defaults, Nash notes, and the inability of debtors in delinquency or default to maintain high credit ratings, mortgage and auto loan eligibility, or a base level of revolving credit could spell the next round of financial disaster for the U.S. economy.

Student loans are almost impossible to refinance, and the borrower carries the burden. Many economic experts agree that bankruptcy protections must return to student loans. Otherwise, defaults will continue, interest fees will compound and eventually creditors will eat up an entire generation’s Social Security payments and retirements in order to receive repayment.

Other economists believe that President Barack Obama should create a new “national service corps” similar to the GI Bill in the 1950s. People could serve before, during and after college in order to receive tuition, room, board and fees at any public university. Private universities should be willing to offer a tuition break if students serve in the corps. So far, the idea, and many others like it, are  just that—ideas.

But for students now entering college, Platt suggests parents and children seriously consider their “return on investment” before signing up for a loan. He says they should ask: Will the education I get be a sufficient return on the investment?

“I suspect in some cases the answer is no,” Platt says. “In those cases, social pressure is pushing kids to go to college who shouldn’t even go to college. College isn’t a simple calculation. There is a lot of uncertainty and unknown.”

According to the ACT report The Condition of College & Career Readiness 2012, 60 percent of high school graduates are at risk of not succeeding in college and careers. Platt says that some students may simply need to learn a trade or pick a career that will still be around in 20 years. That’s because there are thousands, if not millions, of college graduates with mountains of debt who aren’t working in their chosen field. They either decided they didn’t like the work connected to their degree or it vanished because of changing technology.

“Many students really should take a year off to figure out what to do with their lives,” he says.

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