Academics point to parallels between the housing crisis and the current U.S. higher education system

NEW ORLEANS, La. – Academics and business leaders claim that the Student Aid and Fiscal Responsibility Act (SAFRA), passed last year, has not corrected the underlying problem within the student loan system. Specifically, lax lending standards and artificially low interest rates for government subsidized loans exacerbate tuition increases, while academic achievement has remained stagnant.

SAFRA eliminated federally subsidized loans, instead using all federal student loan funding for direct loans. But continued easy money policies and growing applications provide little incentive for the government or universities to keep college tuition in check.

Dr. Richard Vedder, professor of economics at Ohio University, says that higher education is in a “bubble situation”, indicated by “its price [rising] sharply, fueled by cheap federal loan and grant money while the return on investment has fallen.”

Peter Thiel, who anticipated the Dot-com Bubble of 2000, also claims that a higher education bubble has replaced the housing bubble.

“A true bubble is when something is over-valued and intensely believed. Education may be the only thing people still believe in [in the U.S.].”
According to The Economist, the cost of a private college has soared thirteen-fold over the past 40 years, while household incomes have grown at only half that rate. Also, college tuition has risen twice the rate of inflation and four times the rate of wage growth.

Dr. Dan D’Amico, professor of economics at Loyola University, says higher education is one of the main areas that has been absorbing inflation over the past several decades. However, “It doesn’t seem like it can go much farther – but that doesn’t mean the education bubble has to pop, it might just stagnate.”

A 2008 study from the Center for College Affordability and Productivity concluded that the cause of the housing collapse was artificially low interest rates, as a result of Federal Reserve policy and lax lending standards. Consequently, between 2000 and 2006 housing prices increased by 90 percent. The same driver exists for higher education, the study reported, and “both phenomena can be attributed to government policy, specifically the guarantees provided for student loans.”

Since the federal government guarantees student loans, when a student defaults the federal government pays the loan originator the balance of the loan plus interest. The government then hires a collections agency to recoup its money and adds a 25 percent collections fee on the defaulter, which benefits both the lender and the federal government. Universities also benefit, since they receive their tuition regardless of whether a student pays his debt or finishes his degree. Naturally, tuition prices increase in line with the amount that prospective students can borrow.

Student loan debt has now outpaced credit card debt, at $829 billion versus $826 billion. From 2004 to 2005 alone, student debt increased by 30 percent. And a majority of undergraduates owe $20,000 in student loans, up 108 percent in a decade, while 45 percent of college graduates from the class of 2009 earned less than $15,000 in 2010.

Concurrently, students are defaulting at an alarming rate: 25 percent of all government loans default, 30 percent of community college loans default, 40 percent of two-year college loans default, and for-profit schools have a 43 percent default rate.

Although student loans are defaulting faster than home loans at the height of the housing crisis, a 2005 decree from the Bush Administration stated that student loan debt could not be dissolved through bankruptcy proceedings. The only other scenario where this “no-escape” clause exists is debt from criminal acts and debt from fraud.

Dr. Michael Poliakoff, policy director for the American Council of Trustees and Alumni, agrees that the current system is flawed, and states that, “A better system would provide grants and loans to students based on both need and merit, with a sliding scale of support” corresponding to GPA, SAT/ACT, AP credit, and academic hours taken while in school.

He continues, “Similarly, high loan-default rates should be factors in eligibility to continue receiving Title IV funding: this would be a disincentive for institutions that accept students who are not college ready and ensure that they ultimately feel the consequences of loan defaults.”

Dr. Poliakoff also cited a Richard Arum and Josipa Roska study showing that many students show little signs of cognitive growth during their college careers. He also mentioned a second study from the Organization for Economic Co-Operation and Development showing that, per pupil, the U.S. spends twice the average of other industrialized nations on higher education.

Robert Ross is a researcher and social media strategist with the Pelican Institute for Public Policy. He can be contacted at, and you can follow him on twitter.