College on a Credit Card

Earlier this week, the New York Times reported on the newest and fastest growing way of shackling my generation's feet to the floor of the American Dream --- financing college at credit card interest rates [h/t Mish Shedlock]

As college tuition has soared past the stagnant limits on federal aid, private loans have become the fastest-growing sector of the student finance market, more than tripling over five years to $17.3 billion in the 2005-06 school year, according to the College Board.

Unlike federal loans, whose interest rates are capped by law — now at 6.8 percent — these loans carry variable rates that can reach 20 percent, like credit cards. Mr. Cuomo and Congress are now investigating how lenders set those rates.

And while federal loans come with safeguards against students’ overextending themselves, private loans have no such limits. Students are piling up debts as high as $100,000.

Banks and lenders face negligible risk from allowing students to take out large sums. In the federal overhaul of the bankruptcy law in 2005, lenders won a provision that makes it virtually impossible to discharge private student loans in bankruptcy. Previously such provisions had only applied to federal loans,

This is risk free, politically protected profit being extracted from the backs of the generation that is being crammed down upon to finance the past thirty years of Baby Boomer binge drinking.

Something is wrong here as a public matter. Even though wage growth for college educated adults has been stagnant, the achievement of a degree still produces a very significant lifetime earnings premium over just the completion of high school. Easy, understandable and transparant financing of college education is a good social policy as it expands our national economic option space while also producing a significant anti-poverty impact.

Expanding the size of junior and senior year Stafford loans to the full expected price of attendance at public and private universities is one cheap and effective way of financing college more affordabily and transparently. Increasing the availability of direct student loans instead of the intermediated bank directed loans saves students and the federal government money. Increasing the size of Pell Grants and encouraging more 2+2 community college to four year campus pathways are another means of decreasing the cost of education.

There are cheap, effective and non-risky solutions to a very serious problem out there. To implement these solutions require political will and a minimal amount of increased government outlays. The cash is the easier thing to come up with as there is a large constituency of young, educated professionals who want their next degree to be more affordable than their last degree and they vote reliably Democratic. However fixing this complicated schema that is designed to enrich the connected while screwing the diffused masses of twenty somethings requires pissing off the connected by taking away their quasi-monopolistic profits.

Like that will happen with the Blue Dogs running the marginal vote in the House