If you haven't taken the time to watch President Obama slow jam the news on Late Night from last week, take the time. It was a political masterstroke that so infuriated conservatives (because they're incapable of approaching that level of coolness), that they actually tried to make being cool, uncool. It, of course, was not that cool.
The slow jam was all about student loans, and though it may have been a big deal for Jimmy Fallon's ratings, it didn't really do much to address the breadth of the crisis. A lifetime ago, I proposed something that might actually go some way toward fixing the school financing bubble we all face, though many will view it as even uncooler than the GOP's attack on coolness. More on that later, but first, let's take a closer look at the substance of the slow jam.
The Late Night appearance placed President Obama at the forefront of the student debt crisis. It was arranged so Obama could voice his support for legislation that would keep interest rates for federally subsidized Stafford loans at 3.4 percent. They are set to increase to 6.8 percent on July 1 unless Congress acts. Most politicians think rates should stay low, but they don't all agree on how to pay for it. Republicans want to use a fund marked for public health. Democrats want to pay for it by eliminating certain subsidies for oil companies and increasing taxes on the wealthy. Either way, it's a head fake.
Locking the interest rates at 3.4 percent will save the average student a few thousand dollars over the life of the loan, but it will do nothing to solve this nation's higher education problem where often only the very rich or those willing to take on permanent debt can go to college. So the President can slow jam this all he wants, but even the ghost of Barry White couldn't make this interest rate deal anything more than lipstick on a pig.
So permit me to slow jam just how badly higher education in America is broken.
Awww yeah. Mmmm.
College in America is insanely expensive. According to data from The College Board, since 1981, tuition at private colleges has nearly tripled and it's nearly quadrupled at public colleges (in constant, 2011 dollars). In the early '80s tuition and fees at a private college ran just $10,144. Now it's $28,500. A public college cost $2,200 and in 2011/12, the average was $8,200. And remember, these are all 2011/12 dollars and none of these figures includes room and board. That means that an education at an 'elite' private institution can run a middle class family that doesn't qualify for aid, close to a quarter of a million dollars. And if the next 30 years is anything like the previous, some of the kids in Sarah Lawrence's class of 2042 could be saddled with somewhere in the neighborhood of $720,000 in student loan debt.
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Sure, college graduates do earn more than non-college graduates, but consider the costs. There have always been and will always be ebbs and flows in the overall economy and the employment rate. What's troubling now is the fact that when kids graduate with $100,000 or more in student loan debt, and can't get a job, they won't be able to pay back these sizable debts. So, they'll either default on or defer their student loans, which will cause that debt to sky rocket. Then their credit will take a hit, which, depending on what state they live in, could make it even harder for them to get a job. And even if they do manage to get a job, the mountain of student loan debt they are paying will make it very hard for them to save up enough to buy a house, a car or their own kids' college tuition, which means that our housing market and economy in general could remain anemic for generations.
Student loans are the roach motel of debt. They are almost never discharged in bankruptcy. Banks and colleges know that repayment of these loans is the third certainty in life—after death and taxes. While there are efforts afoot to reform current bankruptcy law to make student loans dischargeable, lenders aren't terribly concerned because they have an alternative. According to one report, 90 percent of student loans have cosigners (i.e., for every kid who escapes the hook, there is a parent dangling on the line).
There will be ripples. Student loans, just like mortgages, are securitized. They are sliced and diced into little pieces and sold off to investors. So, when the great wave of student loan defaults happens (and it will happen), because these loans are securitized we could see ripples throughout the financial system, just as we did when people started defaulting on their mortgages. The difference here is that mortgages are backed by real property—houses—which banks can repossess. What backs student loans? Smart kids? Underwater parents? We could be looking at a whole lot of money simply evaporating.
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It's a big mess, and year by year we're making it worse, but there might be an alternative to this broken system. Since 1969, I have supported the concept of a National Service Corps and said so in a floor speech that I drafted for a certain U.S. Senator I used to work for. The idea was based upon President Kennedy's Peace Corps and had been proposed at the time by a number of luminaries. The premise is simple: at age 18, you serve the nation for at least two years. In return, America underwrites your education at a four-year public university or technical school. Your contribution can be in the form of military service, infrastructure improvement or community building.
This would accomplish a number of things, not the least of which is to provide American students with some real world experiences that would lead to more informed decisions about and a greater appreciation for college and career. It would also give a boost to our economy by nurturing productivity and infrastructure enhancements. And as a bonus, eliminating the all-volunteer Army might help to prevent us from engaging in elective wars.
Next week we'll take a closer look at how a program like this might be able to work.
Adam Levin is chairman and cofounder of Credit.com and Identity Theft 911. His experience as former director of the New Jersey Division of Consumer Affairs gives him unique insight into consumer privacy, legislation and financial advocacy. He is a nationally recognized expert on identity theft and credit.