Beware the Student Loan Bubble!

The dot-com bubble is a dim memory for most Americans and no memory at all for many college students who were barely out of kindergarten when the bubble burst. But, except for some high-tech entrepreneurs who put their homes in hock to play the game and some venture capitalists who risked their client's capital, that bubble was not such a big deal.

A lot more Americans were hurt when the stock market tumbled in 2003. For a long time, the stock market had looked like a sure thing. Some politicians argued that social security taxes should be invested in the stock market to give retirees a more comfortable nest egg. Then the bull market ended. Retirement plans were canceled. Retirees living on dividends had to tighten their belts.

But stocks began to rise again and more and more people went back into the market. But just a few years later, share prices fell even harder and faster.

That settled it for most people. The only really safe investment was real estate. Nobody could go wrong by owning a home. Real estate values had been rising for decades. So why shouldn't all Americans have their share of the pie?

Banks that denied home loans to the poor and disadvantaged were guilty of discrimination. Ninja loans were created to provide the benefit of home ownership to those with neither job nor sufficient income to afford them. Mortgage payments could be made by drawing on the inevitable growth of equity in a perpetually rising housing market.

Soon home prices were rising to levels far beyond the point at which they were affordable based on conventional standards. Inevitably, the end came. In some areas, home prices fell by more than half and equity turned to debt. Many homeowners were "underwater." They owed more on their home than the home was worth. Some struggled to make their payments, while others simply walked away, leaving bankers and investors in mortgage-backed securities holding the bag.

Meanwhile the costs of waging wars in the Middle East caused government debt to soar to the multi-trillion-dollar level. Republicans and Democrats argued whether the solution was higher taxes or lower expenditures. Neither recognized that the problem had gone far beyond the point where conventional solutions could work.

So, what's next? Has the last bubble burst?

Unfortunately not, and the next bubble is close to home. For years, a college education has been painted as the ticket to the good life and the old image of the starving student who struggled to make ends meet with two part-time jobs and studied far into the night was no longer acceptable. The solution was student loans requiring no credit and no ability to pay. To make such loans acceptable to lenders, laws were passed that made a student loan the only form of indebtedness, other than debts owed to the government itself, that could not be discharged through bankruptcy.

Now we have an economy teetering on the brink of depression with unemployment levels resisting all government attempts at "stimulus." Where will tomorrow's students burdened with huge debts find jobs that provide enough income for a decent living while meeting loan payment deadlines? And if those deadlines are not met, interest rates can skyrocket. Missed payments can destroy credit and with more and more employers requiring credit checks as a condition of employment, missed payments can make an applicant unemployable.

It's easy to foresee a chain reaction that will begin with former students missing a payment and ending with an avalanche of student loan defaults. Not only will this be a personal tragedy to many of today's students, it may be the straw that breaks the back of the economy.

It will be a very heavy straw. Student loan debt now exceeds the total credit card debt in the United States.

What needs to be done? For one thing, students can no longer be treated as a cash cow that can support extravagance in the educational system. A few decades ago, there were state and city colleges in the United States that provided a first-class education, free of tuition, to students willing to work hard. We'll never see that again. But why can't we shift our priorities and focus on providing (and receiving) the best education possible at the lowest cost?