Surveys show that what Americans want most is a good job, no surprise there. Over the last few decades, the best jobs have been in the public sector and those requiring a college degree. But the productivity of a growing public sector already suffers from rising costs and diminishing returns that impede economic growth, as in Greece where public sector employment doubled in the last decade or in Spain, where youth unemployment is 50%.
Even many college degrees have already passed the point of diminishing returns, as presidential candidate Rick Santorum recently inarticulately expressed. About 30% of high school grads attained a college degree during the past decade and enrollments continue to rise. But according to the Labor Department BLS forecast fewer than a quarter of all new jobs created this decade will require one. The flip side of the surplus of college educated job-seekers is the shortage of skilled workers requiring only a high school diploma, as one third of the students in public high schools don't graduate.
The Obama Administration's student loan policy to promote a college education shares many attributes with the 1995 Clinton-initiated Bush-promoted policy to promote homeownership that subsequently led to the subprime lending debacle. First, declare that the opportunity to own a home — go to college — is a basic right. Then set a public goal for homeownership — college attendance — well above private individual demand. When budgets become tight, have government lenders replace private lenders, mitigating the need to save in advance or demonstrate the ability to repay.
The government stayed out of the student loan business through the 1960s, so people saved for an education — mostly in banks — and those that needed to borrow often borrowed against homeowner equity. Student loans were uncollateralized personal loans, marketed by some banks — and beginning in 1964 federal savings and loans — specifically for education. Then in 1972, shortly after the "privatization" of Fannie Mae and the establishment of Freddie Mac, the federal government established another similar government sponsored enterprise — the Student Loan Marketing Association, or Sallie Mae – ostensibly to provide "liquidity" to the private student loan market. Just like Fannie and Freddie they didn't make a "market" in student loans but actually financed them with securities implicitly backed by federal taxpayers. As this was inevitably highly profitable, management "privatized" in 1997. Sallie Mae gave up all government backing by 2004, but the government continued to guarantee the loans and the off-budget implicit subsidies subsequently crowded out virtually all unsubsidized private lenders. And many people borrowed who couldn't repay.
As with subprime mortgage lending, the volume of student loans ballooned during the last decade to over a trillion dollars, and even with favorable deferral and forbearance provisions 27% of student loans are already past due according to a recent NY Fed study. The average student debt upon graduation won't quite reach the level of the average subprime mortgage, but the "investment" in education will likely be farther underwater than the average subprime house. The payment burden will lead many more to default. Recognizing the societal stress of living at home longer and delaying marriage, legislation was recently introduced to allow student borrowers to discharge student loans in bankruptcy, encouraging default while leaving taxpayers with the loss.
The effects of the student loan credit bubble are similar to the subprime home-ownership bubble. Just as the homeowner subsidy is mostly captured in the cost of houses, the education subsidy is mostly captured in the cost of education by educators, many of whom are members of public employee unions. Whereas private tuition costs have gone up about 25% in constant dollars over the last decade, public tuition has gone up at twice that rate.