Wednesday, September 2, 2015

The Beginning of the End: Signs Are Everywhere that the Student Loan Program Is Collapsing

In the spring of 1940, just before the Battle of France, the people of Paris were enjoying themselves. As William Shirer wrote in The Collapse of the Third Republic:
The sands at Auteuil were full for the annual spring racing, and betting was heavy. Crowds flocked to the spring art exhibition at the Grand Palais. The cinemas and theaters played to full houses. The windows of the great jewelry shops in the rue de la Paix sparkled with diamonds and other gems, and inside business was good. (p. 604)
And then the Germans invaded the Low Countries and within a month the Nazis were in Paris.

When the party's over, it's over.
American  higher education, it seems to me, is behaving much as the Parisians did on the eve of their World War II disaster. Tuition goes up every year, even though the colleges offer steeper and steeper discounts just to lure students in the door. The average freshman now pays just 50 percent of a college's sticker price.

Meanwhile, the major public institutions of the South and Midwest pay their varsity football coaches $4 million and even $5 million a year to producing winning teams; and the assistant coaches often make a million dollars a year or more.

The campus book stores sell fewer and fewer books but make a profit selling junk.  Fewer books means more space to sell college-branded  t-shirts, sunglasses, and coffee mugs at outrageous prices. Most campuses now have a Starbuck, where students can buy elaborate coffee drinks for $5 a pop.

More and more, colleges and universities are outsourcing their student services. University employees no longer cook the meals.  Let them eat at Taco Bell, conveniently located in the Student Union. As a percentage of  total college enrollment, fewer and fewer undergraduates live in college dorms. Instead they flock to expensive, privately developed coed student-housing ghettos that provide undergraduates with swimming pools, game rooms, and plenty of space to park their late-model cars.

And why not? Student loans will pay for just about everything. And if the kids need more money than they can borrow on their own account, mom and pop will be glad to co-sign student loans at private banks. Total outstanding student-loan debt is now $1.3 trillion.

But it can't go on forever.

Almost 7 million people are currently in default on their loans, which means they haven't made a student-loan payment for more than a year. Millions more have obtained economic hardship deferments and aren't making student-loan payments.

More and more people have signed up for income-based repayment payment plans that stretch out the loan repayment period to as long as 25 years--3.9 million people, according to the Department of Education. That's a 56 percent surge in just one year.

DOE describes the uptick in long-term repayment plans as a victory because students' monthly payments go down. But many people in these plans are making payments so low they will never pay off their loans. And anyway, who wants to pay a percentage of their income for a quarter of a century just for the privilege of getting a crummy college education?

Nor is it clear that most people will stick with a long-term payment plan for 25 years. Not long ago, DOE reported that more than half of the people in those plans failed to report their annual income, a prerequisite for continuing in an income-based repayment program.

This house of cards is about to come tumbling down. Already, private liberal arts colleges are folding or on the verge of folding as students realize that it makes no sense to pay $40,000 or $50,000 a year to attend a nondescript private liberal arts college in nowheresville. Sweetbriar's debacle is just the first of many more college closings to come.

And the bloom is off the rose for the for-profits, which have been insanely profitable for the private equity groups and wealthy investors who own them. Corinthian Colleges' bankruptcy is but the harbinger of a major shakeup in the for-profit college industry.  And what happens to Corinthians's 300,000 former students, most of whom used student-loan money to pay their tuition? How many Corinthian alums will pay back their student loans?

There's only one solution to this giant economic disaster--reasonable access to bankruptcy for overburdened student-loan debtors. But DOE and its loan-collection agencies fight student-loan bankruptcies tooth-and-nail. DOE even opposed bankruptcy relief for a quadriplegic debtor who was working full time but couldn't make enough money to compensate his full-time caregiver and and still pay his fundamental living expenses (Myhre v. U.S. Department of Education, 2013).

DOE knows that if bankruptcy relief becomes an option for people who are swamped by their student loans that a flood of debtors will flow into the bankruptcy courts. If that ever happens, this enormous fraud on American young people will be exposed.

So colleges and universities waddle long, academic year after academic year, jacking up their tuition and hiring more and more bureaucrats and administrators.  College presidents hob nob with wealthy donors and watch the football games in executive sky boxes.  Tenured professors teach less and less, and low-paid adjuncts teach more and more of the college curriculum.

But the metaphorical equivalent of German panzer tanks are hiding in the shrubbery of our well-groomed college campuses. And some day soon, American higher education--the envy of the world our college leaders tirelessly assure us--will collapse.


Mitchell, Josh. School-Loan Reckoning. 7 Million Are In Default. Wall Street Journal, August 21, 2015.

Myhre v. U.S. Department of Education, 503 B.R. 698 (Bankr. W.D. Wis. 2013).

Shirer, William. The Collapse of the Third Republic. New York: Simon and Schuster, 1969.

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