The only segment of our economy that had experienced the same inflation as medical care is higher education. While there may be many causes for this expansion of cost the biggest is doubtless the easy availability of student loans. The federal government has recently assumed full responsibility for the vast majority of these instruments.

Until now it has been difficult to get the full picture of the nature of these debts – ie, how big is the total and what is the default rate. Data from the New York Federal Reserve indicate that the total amount of these loans is approaching one trillion dollars. It will soon equal that of the sub-prime mortgage debt just before it peaked in 2007. The default rate is now estimated to be 13.4%. This threatens not only the government which holds this debt but those  have taken these loans. Unlike a mortgage loan you cannot walk away from a student loan; it is not discharged by bankruptcy. It follows you forever. Look at the red bars on the graph below. It’s only very recently that student loans have been displayed when total debt is reported.


These loans operate like a positive feedback loop. Student loans make it easy for colleges and universities to raise tuition and other charges which in their turn make bigger loans necessary; bigger loans allow the schools to raise charges even more.  This is a cycle that can only end badly. When this debt pyramid collapses the feds won’t have to bail anyone out – other than themselves, which is to say us.

This is what the Department of Education has to say about these loans (CDR stands for cohort default rates):

The FY 2009 three-year rates announced today capture the cohort of borrowers whose loans entered repayment between Oct. 1, 2008, and Sept. 30, 2009, and who defaulted before Sept. 30, 2011. More than 3.6 million borrowers from over 5,900 schools entered repayment during this window of time, and approximately 489,000 of them defaulted.

Sector differences also exist when comparing the increase in the CDR from the two-year to the three-year rates for the FY 2009 cohort, with for-profit schools displaying the biggest jump in rates from year two to year three. The Department reported the two-year CDR for the FY 2009 cohort last year. The increases from the two-year to the three-year rates were 7.2 percent to 11 percent for public institutions, 4.6 percent to 7.5 percent for private non-profit institutions, and 15.0 to 22.7 percent at for-profit schools.

With the economy under so much stress to start with this problem is likely to stay under the radar until it reaches critical mass and goes nuclear. You can form you own conclusions about why the federal government has immersed itself in education loans and how it’s position relates to the proper role of government. So pernicious is the problem of student indebtedness that several of our most elite institutions of higher education had eliminated student loans and replaced them with grants or scholarships  But the recent financial turmoil resulting from the mortgage meltdown has caused some of them to rescind this policy. More turmoil to follow.