Will Student Loans Be The Next Mortgage Crisis?

One trillion dollars in student debt is creating a crushing burden on millions of young Americans. But colleges are equally at-risk; deprived of the loans on which they’ve become dependent, they would face a severe financial crisis.

Colleges have dramatically increased their reliance on student loans, with government loans approaching the equivalent of 90 percent of total tuition and fees, according to The National Center for Education Statistics. Private student loans create additional dependency.

College administrators are adamant that student loans are not their problem, that they are merely bystanders to student loan default. After all, they have already received and spent the money; repayment, they say, is the problem of the government and private lenders.

If only a small number of students defaulted, these administrators would be right. But if millions start missing payments — and it’s already close to one million today, according to the NCES — the losses could compromise the government’s ability to lend. Then, colleges would have a serious problem. Already, student defaults have reached close to 9 percent, the same rate at which the recent mortgage meltdown began. If all student “problem” debts, including those forgiven and in forbearance, were considered, the real distressed rate on student loans would be an alarming 20-plus percent.

Contrary to economic theory, student debt grows in good times and bad. Mortgage, credit card, and car loan debt levels all fell during the 2008 financial crisis. Why didn’t student loan debt? Because colleges needed the money. Financial aid officers added more and more borrowing into their student awards to fill the gap between rising college costs and declining family income. The government aided in this process by offering loans, in efforts to increase college attendance.

A student loan reckoning is approaching, just when the financial positions of the government and many colleges are deteriorating. Post-election deficit plans will probably include sharp cuts in student aid, which has grown to almost half of the US Department of Education’s entire budget. Fewer Pell Grants will increase the need for loans, just when many states, most notably California, reduce spending on higher education.

Colleges are also suffering. Moody’s Investors Service has warned that college and university revenue growth will slow significantly in coming years, posting a negative outlook for a majority of these institutions, excepting those with large endowments.

The landscape after millions of students default on loans would be bleak. Public schools would be forced to seek more funding from states, while traditional private schools would fall back on their endowments. The richest colleges would gain market share of the brightest students. And for-profit schools, the most dependent on federal student loans, would suffer most.

California offers a sobering example. State budget cuts have ravished its prestigious higher education system, requiring students to wait years to enroll in foundational classes.. Business and other schools with independently strong endowments are attempting to break away from their harder-hit university systems. The governor is threatening to do away with entire campuses, if Californians fail to raise taxes.

Massachusetts may fare worse than California. Higher education is a mainstay of our economy, accounting for almost half a million jobs; some communities rely on a nearby college as the biggest local employer. What the petroleum price is to Houston, the price of tuition is to our state. If tuition rates suffered a sharp decline, our workforce would, as well.

To avoid a student loan crisis, colleges must find ways to close their financial gaps without relying so heavily on student loans. The government should determine whether colleges are capable of using other resources, such as endowments, to withstand lending cutbacks.

College is a critical investment, but we have made it an extremely risky one. The student loan bubble will burst once it reaches $1 trillion to $2 trillion, bringing down students and colleges with it. Let’s act now to stop another financial disaster.

THE BOSTON GLOBE

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