Degrees of Debt

Image Gallery Ellen Weinstein / www.ellenweinstein.com

The Project on Student Debt estimates that the average college senior in 2009 graduated with $24,000 in outstanding loans. In August 2010, student loans surpassed credit cards as the nation’s single largest source of debt, edging ever closer to $1 trillion. Yet for all the moralizing about American consumer debt by both political parties, no one dares call higher education a bad investment. The nearly axiomatic good of a university degree in American society has allowed a higher education bubble to expand to the point of bursting.

Since 1978, the price of tuition at U.S. colleges has increased more than 900 percent, 650 percentage points above inflation. To put that number in perspective, housing prices, the bubble that nearly burst the U.S. economy, then the global one, increased only 50 points above the Consumer Price Index during those years. But while college applicants’ faith in the value of higher education has only increased, that of employers has declined. According to Richard Rothstein at the Economic Policy Institute, wages for college-educated workers outside of the inflated finance industry have stagnated or diminished. Unemployment has hit recent graduates especially hard, nearly doubling in the post-2007 recession. The result is that the most indebted generation in history is without the dependable jobs it needs to escape debt.

What kind of incentives motivate lenders to continue awarding six-figure sums to teenagers facing both the worst youth unemployment rate in decades and an increasingly competitive global workforce?

During the expansion of the housing bubble, lenders felt protected because they could repackage risky loans as mortgage-­backed securities, which sold briskly to a pious market that believed housing prices could only increase. By combining slices of regionally diverse loans and theoretically spreading the risk of default, lenders were able to convince independent rating agencies that the resulting financial products were safe bets. They weren’t. But since this wouldn’t be America if you couldn’t monetize your children’s futures, the education sector still has its equivalent: the Student Loan Asset-Backed Security, or, as they’re known in the industry, SLABS.

SLABS were invented by then-semi-public Sallie Mae in the early ’90s, and their trading grew as part of the larger asset-backed security wave that peaked in 2007. The value of SLABS traded on the market grew from $200,000 in 1991 to $240 billion by the fourth quarter of 2010. But while trading in securities backed by credit cards, auto loans, and home equity is down 50 percent or more across the board, SLABS have not suffered the same sort of drop. SLABS are still considered safe investments—the kind financial advisers market to pension funds and the elderly.

In addition to the knowledge that they can move SLABS off their balance sheets quickly, lenders have had another reason not to worry about the loans: federal guarantees. Under the recently ended Federal Family Education Loan Program (FFELP), the U.S. Treasury backed private loans to college students. This meant that even if the secondary market collapsed and there were an anomalous wave of defaults, a lender bailout was built into the law. If that weren’t enough, in May 2008 President Bush signed the Ensuring Continued Access to Student Loans Act, which authorized the Department of Education to purchase FFELP loans outright if secondary demand dipped. In 2010, as a cost offset attached to health reform legislation, President Obama ended the FFELP, but not before it had grown to a $60-billion-a-year operation.