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.
[Related: Read more columns by Adam Levin]
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.