Degrees of Debt

College kids are borrowing at record levels, often for a second-rate education. And the bubble is about to burst.

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    Ellen Weinstein /
  • degrees-of-debt2

    Ellen Weinstein /

  • degrees-of-debt1
  • degrees-of-debt2

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.

Barbara Saunders
9/27/2011 2:52:12 PM

I think the dialogue about which degrees are "useless" misses the important points. First, it's a mistake to confuse "college degree" with "education" in the first place. There must be some way to provide people with job training AND education other than a full-time program during which they cannot work and which costs tens or hundreds of thousands of dollars. Second, I don't know what world people live in where liberal arts majors don't have jobs. I have worked with six-figure tech writers with English degrees and numerous people at all levels of businesses and nonprofits whose degrees had absolutely nothing to do with their role. If you graduate with an art degree and plan to get a job called "art" the way that an engineer gets a job called "engineering", you've got a bigger problem than having a "bad" major. I know programmers with liberal arts degrees who learned to code after college.

steve eatenson
9/8/2011 11:57:19 AM

Griffmaster is right. I received a bachelor degree in business administration which I found to be nearly useless. A master's in business is worth something to companies like Exxon, etc., but a bachelor's degree gets you a manager trainee job that means you work your butt off at lousy hours for low wages while those with master's degrees or a CEO relative get promoted. College is not for everyone. Many young people would be better served becoming a working apprentice in a skilled trade like plumber, electrician, welder. They have the potential to get a job quicker and make more money than most with bachelor's degrees.

9/3/2011 11:08:26 AM

The problem is kids are encouraged to take classes they're interested in, not classes that will actually teach them skills to be competitive on the job market. Liberal arts degrees are 90% useless - I loved my lib. arts classes, but for every 10 people with one of those degrees there are only 3 jobs at most - teaching jobs usually. A generic degree is not worth the investment, specialization is where it's at.

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