The Student Loan Debt Crisis: Unveiling 3 Startling Realities of Government Involvement and Aggravation of the Problem

Student Loan Debt Bomb: 3 Shocking Truths about How the Government Caused a Crisis – and is Making it Worse

Craig HueyEconomics, Government, Congress, and Politics Leave a Comment

What used to be a minor inconvenience for college graduates – paying off their college student loans – has now become a full-blown crisis…

Nationwide college student loan debt has soared from $517 billion in 2006 to over $1.5 trillion this year … a 300% increase in 12 years!

Put another way, college student loan debt is more than 1/3 of the entire projected federal tax revenue for fiscal year 2019!

The cause of the massive debt increase over the past 12 years? The federal government.

Here are 3 shocking truths explaining how – and why – it happened:

1. The 2008 financial crisis – caused by government banking and home mortgage policies and regulations implemented during the Clinton administration – resulted in a surge in college enrollment …  a surge in tuition … and a surge in student loan defaults.

To make home ownership “affordable” to low-income families, banks were required to issue subprime mortgages – loans at below-market interest rates for the first 3 years.

When these adjustable-rate mortgages (ARMs) ratcheted up to market interest rates, thousands of low-income home buyers defaulted on their loans because they couldn’t afford the higher payments.

The loan defaults caused Lehman Brothers – a huge bank that was heavily invested in subprime mortgages – to declare bankruptcy in September 2008.

Many workers subsequently lost their jobs during what is now called “the great recession.”

They decided to go to college – with the idea it would lead to a higher-paying job that would enable them to pay off their student loans.

For many, the higher paying job didn’t materialize … so they became saddled with a debt they couldn’t afford to pay since their income didn’t increased as expected.

Why did tuition also surge during and after the financial crisis?

Because state budgets were squeezed, resulting in fewer dollars available for public colleges…

Most colleges had to raise their tuition due to the reduced state funding … requiring students to take out larger and larger student loans.

The skyrocketing college tuition costs and the ever-increasing student loan amounts required to obtain a college degree haven’t subsided in response to the economic boom of the past 2 years.

2. The federal Department of Education is now subsidizing colleges that have so many students defaulting on their loans that they are at risk of losing access to federal aid.

The idea is to help colleges make their bookkeeping numbers look more presentable to the Federal Student Loan Program…

But a new study claims the federal government isn’t the solution to the student loan crisis; it’s the problem.

The study, “Accounting for the Rise in College Tuition” – published by the National Bureau of Economic Research – concluded that “demand shocks” from federal loans, subsidies and aid “lead to higher college costs and more debt, and in the absence of higher labor market returns, more load default inevitably occurs.”

The data showed conclusively that the growth of the Federal Student Loan Program alone accounts for the entire rise of college tuition from 1987 to 2010!

3. The federal government always blames the private sector for the crises it creates.

Whenever government subsidizes anything, the following occurs:

  • Higher prices
  • Market disruptions
  • More government spending to “solve” the crisis
  • More rules and regulations
  • More subsidies
  • Less private sector
  • Less of a free market

As former President Ronald Reagan famously said, “The nine most terrifying words in the English language are: I’m from the government and I’m here to help.”

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