Sheila Bair: $1.5 Trillion Of Student Debt Is The New Subprime

via Sheila Bair, op-ed via CNBC.com,

It is commonly said that a college degree will generate more than $1 million in additional income during a graduate’s lifetime. Indeed, that seductive statistic can even be found on the Department of Education’s website. Unfortunately, I fear many students and their families have borrowed heavily, lured by this seven-figure “college premium.”

Yet this premium is an average and varies widely by the choice of major. Capturing the premium depends on students graduating, and less than 60 percent do so, leaving many with the worst of both worlds: debt and no degree. In addition, it represents enhanced income, not wealth, and the wealth premium college graduates used to enjoy has seriously eroded, presumably due in part to student debt obligations interfering with their ability to save and invest.

Consistent with that thesis, in the recent CNBC Invest in You and Acorns Savings Survey, when asked what kept survey participants from saving more money, the most common answer among college graduates was “paying off debt.”

The question of whether college is worth it cannot be answered with an easy soundbite. It requires good information about the costs of financing college and the outcomes students can reasonably expect to achieve. Unfortunately, that information is simply not available to most students.

The vast majority of student loans are made by the government but arranged by colleges, which are well-intentioned but better equipped to educate than originate loans. College “award” letters do not always spell out clearly the level of borrowing that will be required of a student to finance his or her education. Financing terms are not disclosed in a consistent, standardized format, to facilitate comparisons with other schools’ offers.

Most colleges do not provide a good faith estimate of the projected total cost of degree completion, leaving students vulnerable to unforeseen tuition hikes. Finally, most colleges do not report earnings outcomes by major even though this is probably the biggest determinant of post-graduate income and the capacity to repay debt.

A decade after unaffordable mortgage borrowing brought our economy to its knees, we face a new kind of crisis, as student debt now exceeds $1.5 trillion, with nearly 40 percent of borrowers expected to default by 2023. We are putting a terrible financial burden on our young people and hurting the economy more broadly as loan payments curb student borrowers’ ability to engage in other economic activity such as buying a home or starting a business.

Instead of enticing our youth with the promise of million-dollar riches, policy makers should ensure that they have the skills and information needed to make cost-effective educational choices.

Former FDIC chair Sheila Bair discusses her plan to fund higher education with ‘equity’ model

Most college degrees will produce a solid income premium. On the other hand, the average cost of a four-year degree at a private college is about $160,000. Investing that money at 5 percent over a 40-year career would also yield well over $1 million.

College is an enriching experience and should be broadly accessible. Factors beyond monetary considerations may drive students’ decisions to attend. But they should be able to decide with their eyes wide open about the financial burden they are undertaking and its likely rewards.

 

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