Growing loan bubble presents serious problem

The student loan bubble is growing bigger and bigger, and there will come a point when it bursts just like the housing bubble did in 2008. The result will be economic chaos and turmoil for millions of Americans. To stop this economic bubble from bursting and to give every American access to affordable higher education, Congress and our Wisconsin state legislature need to take action.

Some economists argue that there is no bubble, insisting that rising tuition for students is the result of lower higher education appropriations from state legislatures and Congress. There is definitely merit in this claim.

According to a Demos report titled “The Great Cost Shift,” aggregate state appropriations for higher education were $65.1 billion in 1990-1991 and only $75.6 billion by 2010-2011. Simply to provide the same relative amount of higher education funding per full-time public student, states would have had to appropriate almost $102 billion to higher education. This amount is 35.3 percent more than the $75.6 billion states appropriated in 2010-2011.

I wholeheartedly agree the cost of education has been shifted from state legislatures and Congress to the individual student, and that this is hurting students. The negative impact on students is illustrated by the fact that, according to The Atlantic, student loan debt grew by 511 percent between 1999 and 2011. In addition, USA Today reported in 2010 that 19 percent of households had either “outstanding student debt” or “loans in deferment” and “among households headed by someone younger than 35, a record 40 percent [owed] student debt.”

Yes, cost shifting has played a major role in the higher education debt crisis — but this doesn’t mean that the higher education bubble doesn’t exist. Economic bubbles occur when the market prices of goods do not reflect their true value. This occurred in the housing mortgage market before the Great Recession.

Housing mortgages were sold to consumers. Then, the mortgages were securitized into collateralized debt obligations and sold to Wall Street investors. The demand for CDOs on Wall Street artificially inflated the price of houses. When largely unregulated and complex CDOs collapsed in 2008, housing market values plummeted.

There were signs of a housing bubble before it burst. Today, there are signs of a higher education bubble that is also bound to burst. In a 2007 speech Chairman of the Federal Reserve Ben Bernanke said, “The rate of serious delinquencies has risen notably for subprime mortgages with adjustable rates, reaching nearly 16 percent in August; roughly triple the recent low in mid-2005.” This 2007 increase in delinquencies is analogous to the increase in the number of students in outstanding debt or deferment that we see today.

Our political leaders must not allow another economic bubble to burst — they must take decisive action. But what actions are they to take?

Gov. Scott Walker exempted the University of Wisconsin System from a $66 million cut in August, but kept the $250 million in funding cuts in the current budget. This is simply not the way to create more jobs in Wisconsin nor is it the way to help students obtain an affordable higher education.

State funding for UW-Madison “declined 8 percent between 2002 and 2010,” according to a report from the National Science Board. This trend is occurring nationwide. Unless it wants nearly 20 percent of students to end up with outstanding student loan debt or to be in default, our state legislature must make adequately funding higher education in Wisconsin an essential priority.

I realize that Wisconsin, like many states, has many funding priorities and that funding education with limited revenues can be difficult. That is why the federal government needs to intervene as well and fix the student loan debt crisis.

The Student Loan Forgiveness Act would help students by capping payments on federal student loans to 10 percent of discretionary income each month. After consistent payments for 10 years, up to $45,000 in student debt would be forgiven. The Act would also offer federal student loan forgiveness for students who participate in the Public Service Loan Forgiveness Program after five years instead of 10. Unfortunately the act has not been passed in Congress.

Where should our political leaders find the money for funding higher education, you ask? There are many ways to find tax revenue at the federal level, such as closing tax loopholes that benefit corporations, eliminating federal subsidies and taxing financial derivatives on Wall Street. One thing is clear — our politicians must fund higher education. It is ultimately up to students to pressure their leaders for this funding.

Aaron Loudenslager ([email protected]) is a first year law student.