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Why the Student Loan Crisis Isn't Going Away

Jul 26, 2010 Jennifer Williamson, Distance Columnist | 0 Comments

College tuition is increasing far faster than wages or grant aid can keep up with—and even the most financially needy students are often stuck with huge debt loads when they graduate. With wages stagnating, jobs for recent grads scarce, and few checks on the prices colleges can pay, it’s not likely that the student loan crisis is going to get better on its own—without a dramatic readjustment in the market.

There are a few characteristics of economic conditions for colleges and student loans that make the market dangerous—and vulnerable to the next big crash. Here are a few factors that have some economists worried.

The job market isn’t improving

Even if federal grant aid has expanded recently, most students can’t pay the entirety of their tuition with a Pell grant—even if they qualify for the full Pell grant amount, which few do. Unfortunately, the job market isn’t hungry for recent graduates at the moment. Millions of students graduate from college every year—and the number is rising. Current graduates are competing for entry-level jobs with grads from 2009 and more experienced workers who are willing to settle for entry-level jobs, even if they’re overqualified. With unemployment at approximately 10% and with all the competition, the job market is not optimistic. This means more and more students are graduating with loans of $20,000 or more—and no immediate way to repay them.


Students are a lending risk—but that doesn’t stop lending

In the mortgage meltdown, we saw banks lending to people without checking their credit history, income or ability to repay. A similar thing happens when a student takes out a loan. At eighteen, it’s tough for a bank to tell how risky a borrower is going to be—especially since most eighteen-year-olds don’t have a credit history yet. Still, student lenders allow students to take out large student loans. As with the mortgage meltdown, money is being given to borrowers without much consideration about ability to repay.

Colleges raise prices every year

The average amount of tuition inflation is approximately 8% per year, according to One reason colleges are able to raise prices to such an extent has to do with the amount of money in the market. Under normal market conditions, a company would have to stop raising prices once its product got too expensive for its market. But because students can borrow so easily, both from the government and private lenders, colleges have more leeway to raise prices.

The government may be partially to blame here. The College Board reports that approximately 45% of total aid awarded to undergraduate students and 65% of graduate student aid comes from the government. These loans allow many students to afford college—which is a good thing—but they also give colleges an incentive to increase their tuition.

There’s no limit to how much a student can borrow

As part of its initiative to make college more accessible, the government has been increasing the amount of money a student can borrow in federal loans. Because banks aren’t limiting the amounts students can borrow, the government isn’t putting checks on it, and students are so often encouraged to choose their school irrespective of price, there are very few limits to the amounts students will spend—and that means colleges will continue to raise prices.

We lack the political will to fix the problem

Of course, cutting students’ access to loans is the type of initiative that will get a politician kicked out of office. It’s unlikely that the government will reduce student aid funding in the near future. Unless the government is willing to regulate the prices and increases colleges set on their tuition, the only thing controlling college costs will be the market.

It’s tough to tell what the best long term solution would be for the student loan problem. But there’s no question there’s a problem. Students are graduating from college without great job prospects, and often with a debt load that keeps them from taking significant steps into adulthood for many years—including buying a house, having children, starting new ventures, or even moving out on their own.  This debt stunts the lives of our graduates—and ultimately the economy as well.


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