Sub-Prime Student Loans

After the sub-prime mortgage crisis, it was necessary to find a villain. For the left, it was greedy bankers foisting inappropriate loans on unsophisticated and inexperienced borrowers. For the right, it was government policies -- notably the Fair Housing Act, the Equal Credit Opportunity Act and the Community Reinvestment Act - and the policies of the FHA, Fannie Mae and Freddie Mac, along with the search for yield caused by overly loose monetary policy, that goaded the banks into imprudent lending. The good news is that, when the post mortems are written about the coming student loan crisis, there will be no doubt about the guilty party. The government's fingerprints are all over this one and not even a Paul Krugman will be able to blame the private sector for this mess.

The Manhattan Institute for Policy Research, a conservative think tank set up by hedge fund billionaire Paul Singer, does some excellent work, especially on education. They have recently published on an article on student loans that gives some of the very scary statistics on this $1 trillion disaster-in-waiting. I won't cover the stats, for which I recommend a quick read of the linked article or my earlier blog on the subject, but I just want to make one point.

The Economist has recently run a piece entitled "It depends what you study, not where". The article describes research done by PayScale, a firm that calculates the returns from college education. The firm compares the earnings of college graduates with the cost of the degree, net of financial aid. The results are summarized in the title of the article: study engineering or computer science, almost anywhere, and over a 20-year period you generated a hefty 12% return per annum; study business, and you clocked in at a very respectable 8.7% per annum; study arts or the humanities, and you are lucky if you avoided losing money, unlike the hapless graduates of the Maryland Institute College of Art whose college degree was a $92,000 loser. In other words, many of the college degrees manufactured in America - and, as my earlier blog points out, only roughly 1/3 of students study engineering, computer science and math, and many of these students march right back to Asia when they are done with their studies - are nothing but expensive consumption items. They are assuredly not the investments necessary to pay back the interest and principal on the amounts borrowed.

Can you imagine the howls of protest from the left if private sector lenders were foisting massive amounts of debt ($27,000 on average for the 70% of students who take loans, with the overall levels of debt up 325% since 2004) on young, unsophisticated and inexperienced borrowers under the false pretense, in many cases, that the borrower is financing an investment in his future? Particularly to finance tuition fees that have increased by 1,180% since records started being kept in 1978, 3.25 times faster than the consumer price index, in large part because of the availability of government loans? And in an environment when 44% of recent college graduates are underemployed, according to the New York Federal Reserve, including over 115,000 janitors and a quarter of retail salespeople?

Come on, Krugman, et alia, where's the outrage?