Just as the irrational exuberance of sub-prime lending and skyrocketing housing costs are blowing up in our faces, another credit crisis looms on the horizon. Fueled by back-room deals and misleading introductory rates, students with no credit history (or even bad credit in some cases) have been getting in under their heads, borrowing more than they can afford without understanding the consequences. According to a recent study by the College Board, almost one-out-of-five of graduates will not be able to make payments on the average undergraduate loan debt -- now a whopping $20,000.
The similarities between unregulated lending practices in housing and education are hard to ignore. People with risky credit histories (students) are being lent tens of thousands of dollars to pay for a commodity (higher education) whose price is increasing at unprecedented levels -- regularly doubling or tripling the rate of inflation each year. Third-party brokers (college administrators) are taking huge kickbacks in stock options and referral fees to lure uneducated borrowers (again, students) into signing up for loans with a low introductory teasers and adjustable rates. The government has done little to mandate this "wild west" of escalating college costs and unmitigated student borrowing. According to the Project on Student Debt, members of the class of 2006 saw their debt grow by 8 percent while their average starting salaries only increased by 4 percent. Young people are taking on debt twice as fast as they can pay it back.
It's not just that students are earning less and borrowing more, it's also who they're borrowing from. Private student lenders were responsible for about 25 percent of all student loans in the 2006-2007 school year compared with only 7 percent a decade ago. Private loans often come with higher interest rates, no relief for people who declare bankruptcy and can even be passed on to the next-of-kin should the borrower pass away. And unlike a house, you can't sell your education to try to pay down your debt.
The only good news about the looming student loan crisis is that we still have some time to do something about it. Last week, student-advocacy groups made their positions known at a two-day conference sponsored by the Department of Education. The meeting was scheduled to discuss new regulations to carry out a Congressional mandate that will reduce subsidies to private lenders and increase grant aid to students. The Department of Education -- the same organization that ignored the looming crisis for way for too long -- is now taking a good, hard look at the devious practices of many private student lenders. And, not surprisingly, they look a lot like the sub-prime mortgage guys who fooled some of the people some of the time, taking us all down with them.