The average Class of 2016 graduate has $37,172 in student loan debt, up six percent from 2015. In total in the US forty-four million borrowers owe nearly $1.3 trillion in student loan debt. About one in four loans is in default or delinquency.

Student loan debt has surpassed credit card debt. This is looking like the 2008 subprime mortgage crisis. Why is this happening?

Escalating Costs                                

When your tuition bill went up 5.6% between your freshman and sophomore year your parents were not happy, but they dug a little deeper and came up with the cash. However when your little sister matriculated twenty years later the compounding effect resulted in sticker shock. Tuition had gone up 200% in twenty years.

Colleges just don’t worry very much about their costs. Being interviewed by the New York Times while president of The Ohio State University, E. Gordon Gee said, “I readily admit it. I didn’t think a lot about costs. I do not think we have given significant thought to the impact of college costs on families.”

Gee’s total compensation at OSU was $1.6M including a mansion, a chef, and access to a private jet. Leaving OSU under a cloud Gee, who had formerly served as president of Vanderbilt and Brown–among other schools, was rehired as president of West Virginia University. If Mr. Gee were in the private sector, he would have been rebuked for being in “the old boys club.”

Easy Money

In 1987 Bill Bennett, President Reagan’s secretary of education, wrote an op-ed for the New York Times entitled “Our Greedy Colleges” in which he argued that the government’s attempts to make higher education more accessible may have also accidentally made it more expensive. “If anything,” he wrote, “increases in financial aid in recent years have enabled colleges and universities blithely to raise their tuitions, confident that Federal loan subsidies would help cushion the increase.”

Ever since then, academics and economists have argued over whether or not colleges actually take advantage of all those federal grants and loans by hiking their prices?

Earlier this summer (2016), a team from the Federal Reserve Bank of New York and Brigham Young University released the latest paper suggesting that Bennett was right. Looking at both public and private nonprofit colleges during the mid-2000s, they found that schools raised tuition by 55 cents for each $1 increase in Pell grants their undergraduates received, and by 60 to 70 cents for each extra dollar of subsidized student loans.

http://newyorkfed.org/medialibra…

Poor Planning

Parents and students sorely underestimate the difficulty of navigating the path from the high school auditorium (where you received that diploma) to that first, well-paying job:

• Poor or non-existent financial planning. Many student loans are a substitute for financial planning.
• There seems to be a “college at any cost” mentality among some parents and students. Many parents and students choose a school or a post-secondary education plan they can’t afford without excessive debt.
• Choosing an unmarketable major resulting in being under employed or unemployed.
• Not having an academic plan that incorporates experiential learning, e.g. internships, resulting in no good job.
• Not understanding the financial aid system and how it interconnects to the Federal tax system.

Abuse & Misuse

Incurring debt for spurious reasons:

• To attend an out-of-state college to be with your boyfriend.
• To take spring break in Mexico.
• To buy a car.
• To live a luxurious life style as a student.

This isn’t likely to end well. The “creative” repayment plans can result in ever increasing balances. The taxpayers are going to be left “holding the bag.”