Is College Tuition the Next Bubble?

March 24, 2012 -- At $1 trillion dollars, student loan debt has eclipsed credit card debt for the first time in American history. To make matters worse, come July 1 the interest rate on federally subsidized Stafford student loans will automatically double, from 3.4 percent to 6.8 percent, unless Congressional action is taken to extend the lower rate before then. Depending on which side of the aisle you choose, extending the lower rate will cost between $3 billion and $7 billion per year (estimates from the center of the aisle hover around $5.5 billion).

The problem is not simply the interest rate. Loans for college are often taken out directly by parents, or guaranteed by them, and the debt can easily run into six figures. This could ultimately threaten their credit ratings, retirement funds, and even their homes. All of this boils down to a simple truth that just about anyone who is either actively paying for college or contemplating it already knows. When it comes to financing higher education in the United States, we've got a major problem. But if you're like me, intuition isn't enough. So allow me to paint you a thoroughly disturbing picture.

According to Finaid.org, parent debt relating to their children's education has more than doubled in the last 10 years. In 2010, for the first time ever, $100 billion in student loan debt was disbursed. That's about 10% of all outstanding student loan debt handed out in one year. It is not a problem associated with any particular tax bracket. The willingness of parents to cosign for tuition loans exists across all levels of income.

President Obama was recently criticized for his stance regarding the need for an education (I believe the exact word used was "snob"), but the desire for higher education has been part of the American persona for centuries. Around 1780, John Adams observed:

"I must study Politicks and War that my sons may have liberty to study Mathematicks and Philosophy. My sons ought to study Mathematicks and Philosophy, Geography, natural History, Naval Architecture, navigation, Commerce and Agriculture, in order to give their Children a right to study Painting, Poetry, Musick, Architecture, Statuary, Tapestry and Porcelaine."

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He also observed: "There are two types of education… One should teach us how to make a living, and the other how to live."

God love him, Adams was part, and a perfect harbinger, of the problem that we face today. The first part of that problem is that somewhere along the way it became politically incorrect to suggest that college might not be right for every young American. Although the student loan problem was created by loans for all kinds of post-secondary education, tuition for college programs represents the vast majority of the debt especially in cases where the amount owed is large. It became government policy to encourage kids to go to college, just like it became government policy to assist everyone in buying their own home. It's a laudable goal, and statistics indicating the lifelong value of higher education are compelling. The problem is, somebody's got to pay for it, and with the US getting relatively poorer–straddled with huge national debt, dependence on foreign oil, and high unemployment–the burden on American families is growing geometrically with no relief in sight (other than increasing government assistance).