Joseph Stiglitz is joining the chorus of warnings that a worsening student loan crisis may imperil one of the strongest traits that have helped build America. The so-called American dream that has attracted people from far and wide may well be crushed by an education system that is weighing down millions of students.
“A certain drama has become familiar in the United States,” wrote Stiglitz, a professor at Columbia University and a Nobel Memorial Prize winner in economics, in a New York Times opinion piece on Monday. “Bankers encourage people to borrow beyond their means, preying especially on those who are financially unsophisticated.”
The collapse of the housing market in 2007 was characterized by what amounts to either predatory lending or institutional incompetence. In either case, banks — forever driven by profit — convinced low- and middle-income homeowners to borrow against their houses, which resulted in the loss of millions of homes when the bubble burst. As Stiglitz put it: “The wizards of finance, who prided themselves on risk management, sold toxic mortgages that were designed to explode. They bundled the dubious loans into complex financial instruments and sold them to unsuspecting investors.”
Stiglitz, a former senior vice president and chief economist at the World Bank and a former member and chairman of the Council of Economic Advisers, is known for his sometimes vehement criticisms of free-market economics. The bursting of the housing bubble in 2007 and the 2008 financial crisis have proven to be fodder for his cannon, but with those events falling into history, he has turned some of his attention to the growing student-debt crisis.
Stiglitz isn’t the only person to compare the student debt crisis and the housing crisis. The Federal Advisory Council, made up of 12 bankers who meet quarterly to advise the central bank, warned that growth in student loan debt has “parallels to the housing crisis.” Recent growth has pushed debt levels to nearly $1 trillion, meaning it now exceeds outstanding credit card amounts.
The bankers told the Federal Open Market Committee that student lending exhibited characteristics similar to those seen in the housing crisis, including “significant growth of subsidized lending in pursuit of a social good” — in this case, higher education rather than expanded home ownership.
To begin with, the fraction of students with debt has increased dramatically over the past eight years. The borrowing rate among 25-year-old students in the fourth quarter of 2004 was 27 percent, and increased 16 percentage points to 43 percent by the fourth quarter of 2012.
Just as the mortgage lending boom pushed home prices upward, student loan lending has put upward pressure on tuition. The bankers said both examples showed a “lack of underwriting discipline.”
Stiglitz points out that average tuition and room and board at a four-year college is just shy of $22,000 per year. This is more than double the average price of under $9,000 in 1980-1981. “Like much else, the problem of student debt worsened during the Great Recession: tuition costs at public universities increased by 27 percent in the past five years — partly because of cutbacks — while median income shrank,” he wrote.
“Student debt has become an integral part of the story of American inequality,” wrote Stiglitz. “We now have a pay-to-play, winner-take-all game where the wealthiest are assured a spot, and the rest are compelled to take a gamble on huge debts, with no guarantee of a payoff.”