The College Loan Bubble About to Burst

In his pitch for lowering taxes for middle-wage earners and extending benefits to the millions unable to find work, President Obama made the case that no economic recovery can take place unless these folks, the bulk of the nation’s labor force and consumer population, have at least enough money to pay for their basic necessities.

Adjusted for inflation in 2010 dollars (9.15 to 1), the cost of food and clothing in the United States has, thus far, remained relatively constant since 1950. Undergraduate tuition and fees (again in 2010 dollars) in 1950 was on average $5,500 per year, an affordable cost for a single working-class father earning $28,000 a year (wives usually stayed home in those days).

Today, 2011, undergraduate tuition plus fees costs at a private university is on average $35,000 per year, an unaffordable cost for even a working class couple together earning $40,000 a year. Their only option to get their kid into that private school is to borrow the money.

Consider next that when instructional and administrative costs are subtracted for total tuition paid in by students at a university with a typical 20,000 student enrollment, the university ends up, by conservative estimates, with roughly a $650,000,000 surplus. (Precise statistics, if there are any, are hard to come by.)

At state universities, tuition and fees tuition are on average one-third that of private universities, but since the other two-thirds is made up by the taxpayer, the surplus income over instructional cost is about the same as in private universities. And what is true of universities proportionately is the case with most four and two year colleges.

Admittedly, universities and colleges have other than instructional costs-- for pensions, IT equipment, lecture series, bonuses, security, publicity, PR, to name some. But they are also lavished with a goodly amount in money and kind with gift, grants, and endowments. So however one looks at the numbers, our institutions of higher learning are raking in far more than they spend on education per se.

So why is the cost of higher education in America skyrocketing while the cost of food, clothing and other necessities has over the years remained relatively constant? The cause is clear enough: A combination of unsecured financing on the part of the Federal government and private lending institutions, and over-blown expectations, not to say delusions, or wannabeism, on the part of the public that a college diploma, in whatever field, is a sure key to success.

Denouncing the excessively long apprenticeships in the 18th century Britain of his day--seven years by law--Adam Smith noted that most jobs back then, like fitting spokes on wagon wheels, could be easily learned in three weeks. (The Wealth of Nations, Book One, Chapter Ten, Part II) Much the same could be said for the majority of entry-level jobs in modern-day America, which typically require no greater skill than operating a machine, clerking, answering phones or pushing the right buttons on a computer. Yet both employers and workers alike have been led to believe that such jobs, and even the least intellectually demanding ones, require a college education. One-fifth of bartenders, waiters and waitresses, parking lot attendants and desk clerks in America today are college graduates.

Thus it has come to pass that the demand for a college degree and the cost to acquire one has ballooned exponentially, and because the average wage earners cannot afford to cover the cost out of pocket, they are have been enticed into taking easy-to-get, unsecured loans, which in in turn, fuels more demand and ever higher costs.

But the bubble is about to burst. An increasingly number of debt-saddled graduates is fast realizing that the secure well-paying jobs they assumingly were being educated for do not exist, and, therefore, will not be able to pay back their loans. So in addition to the toxic assets spawned by the subprime mortgage market, our economy will be further polluted by a new and equally toxic heap of bad loans--the high price paid for the folly of trying to leverage the American Dream.

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