Student Loans, R.I.P.

Some say the world will end in fire,
Some say in ice.

-Robert Frost

I wonder if Robert Frost had student loans. I don't know about the world, but my bet is that student loans will end in ice. Fire would be the government killing off their own loans. Ice would be the market doing the job.

Either way, student loans are toast. They have outlasted their use. They originally helped students pay for college. But with 37 million students holding over a trillion dollars of loans in amounts of $30,000 each, loans have become an insufferable burden. They were also designed to provide financial support to colleges. But they have bloated college budgets, making them dangerously dependent on government largesse.

Not surprisingly, colleges are looking over their shoulders at the government wondering what it's going to do. The government is complaining a lot. Tuitions are too high. Students have to borrow more and more. Yet many of them do not graduate. Defaults on government debt are growing. Last month the President summoned college presidents to the White House to warn that things must change. To make sure they do, the government is going to issue College Scorecards on each college's performance.

It seems that the government is gathering kindling for a big bonfire. Colleges are warning the government that it could set fire to all of higher education if they continue stoking the flames of public ire at colleges.

Could this be it? Will the government burn up college loans and colleges in the process? Doubtful. The Department of Education appreciates what is at stake. Any conflagration that reduces student loan availability will also reduce college tuition revenues to dangerous levels, forcing the government to rescue them.

The government is boxed in. Even small measures cause great pain. Historically black colleges and universities are blaming the 2011 tightening of the credit requirements for PLUS loans for causing $150 million loss in revenue. In a game of Russian roulette, college presidents are probably correct in betting the government will not light a match.

But there is much the government does not control. In fact, the market has a big say in the future of student loans. Decisions of whether parents will allow their children to borrow, how much, and at what cost reflect the market. So too do decisions by student borrowers as to whether they will repay their loans on time--or ever.

Parent fatigue with student debt is bubbling. Across the country 40% of colleges cannot achieve their enrollment goals. Yet parents are amply able to borrow for their students to go to these colleges. The experts point to demographic declines for the declines in enrollments. Yet if these colleges halved their tuitions and thus halved the need to borrow, does anyone doubt they would reach their enrollments? Price matters, always has.

More students are not making their student loan payments on time then are up to date. Hundreds of millions are going unpaid. This trend can be seen in how our new Consumer Financial Protection Agency is taking aim at the increasingly harsh actions of loan collection businesses (hired by the government) against student defaulters. At one and the same time the government is hiring outside groups to collect the debt and worrying about a debt backlash caused by mean spirited debt collectors.

These market trends are like a glacier covering the whole college debt program in thick ice from which it will not emerge. The government can do what it will, but if parents won't borrow and students won't repay, the program will come to a stand still.

The government should build a museum to display failed policies. One wing would be dedicated to those that ended in fire such as slavery, the other would be those frozen in ice. In that wing there will be a room for student loans.

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