Saturday, March 2, 2013

The next bubble is here

We all know about the housing bubble.  Lenders gave out money willy-nilly, people accepted it to buy homes, this increased demand and artificially drove up prices, and then the housing market crashed.  (I’m sure an economist would quibble with much of that phraseology, but you get the point.)  And while our economy is still feeling the effects, the next bubble is already here.  Unfortunately, it could easily have been prevented.  And although much of the damage is already done, it’s still possible to rein it in.  The new bubble, if you haven’t guessed, is educational debt. 

When I started state college back in the 80s, and private law school back in the 90s, tuition was about $1,200 and $13,000 per year, respectively.  Today, however, prices for those same degrees can easily surpass $8,000 and $45,000 per year, respectively.  And there are similarities to the housing market: tuition is raised each year, and each year the federal government lends or guarantees as much money as the schools ask for, and to as many students as are willing to sign on the dotted line.  (Again, the details aren’t my concern here, so excuse the imprecision.)  There is typically no consideration given to the student’s creditworthiness, chances of success at college, chosen major, or the likelihood of earning a living and paying back the loan. 

Obviously, this was a recipe for disaster.  Today, outstanding student loan debt exceeds $1 trillion dollars, and the default rate is now higher than that for credit card debt.  The good news, though, is that the solution going forward is simple.  Yes, the lender could investigate each student’s creditworthiness, their chosen major, and the likelihood that they’ll be able to get a job and repay the loan.  But that would be a lot of work, and there is an easier solution.  Granted, this solution would have been far more effective ten years ago, but it would still work today.

Let’s suppose that private law schools charge $45,000 per year, and anyone who wants to attend such a school can get a student loan.  Now let’s assume that law schools announce a tuition increase to $50,000.  Instead of increasing available funds for tuition to $50,000, the government could say: “No dice.  We’re capping the amount of the federally guaranteed loan at $45,000, and you law schools will just have to deal with it.  Or, you can charge whatever you want, but the student will have to come up with the amount of tuition over-and-above the $45,000.”

So what would happen?  Law schools would go back to charging $45,000 faster than a chain smoker can light up a cigarette.  And they could easily do it.  It would just mean no new buildings, no $867,000 salaries for deans, no army of under-deans, dean-lets and dean-lings, no grossly insane bonuses (excuse me, “forgivable loans”) for faculty, higher teaching loads (say, five classes per year), no visiting prof program, and no money for professors to travel around the county to hear themselves talk about their articles at academic conferences (see the author's note on page 478 of this article, for an example).  In short, if the extra $5,000 per year per student is not available to the law school, then the administration won't take on all of these frivolous things to “soak up all available resources.”  And let’s face it, as a colleague of mine says, “We all know that learning the law involves a case book or statute book, a note pad, and a pen.”  In fact, little has changed since the time Lincoln studied. 

Further, and most importantly, law students wouldn’t be any worse off.  In fact, they’d be far better off for having “paid” the lower tuition.  And with lower student debt, there is a greater likelihood that they’ll be able to pay it back.  And with more students paying back their student debt, we taxpayers would be on the hook for fewer defaults.

In short, the government shouldn’t let schools (colleges or law schools) dictate how much money they are going to suck from the taxpayers each year.  You, government, hold the purse strings.  Cap—or, better yet, reduce—the amount you will loan or guarantee for tuition each year.  You are the dog.  Stop letting the tail wag you.

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