Next: Bankruptcy for a whole Generation

Another student protest, another mass arrest. Monday, thousands of students from all over California snarled traffic during their march on the Capitol in Sacramento. Hundreds of students then flooded the Rotunda of the Capitol, a somewhat raucous affair. Eventually, the California Highway Patrol cleared them out, and 60 were carted off and thrown in the hoosegow for trespassing and resisting arrest.

Their problem: tuition increases. Already, tuition in California’s state schools has tripled over the last decade, and state budget cuts will induce universities to jack up tuition again. But the state is out of money. And so it’s struggling in a weird and ineffectual way with its red ink.

The same day the students were arrested, the New York Fed released a report on the consequences of incessant tuition increases across the nation: ballooning student loan balances that are increasingly difficult to bear:

– 27% of the borrowers who had to make payments (not current students) were past due.

– $870 billion in student-loan balances at the end of the 3rd quarter 2011 (higher than credit card debt of $693 billion and auto loans of $730 billion), up 2.1% from the 2nd quarter, while other consumer debt declined or remained flat.

– Average balance: $23,300. That includes the millions of people that refinance student loans and also those that, after years of payment, have much smaller balances or are nearly paid off. Average balances owed by recent graduates are much higher.

The report lauded President Obama’s executive actions of October last year designed to ease the repayment burden of federal student loans. Laudable as they may be, they only soothe the symptoms for ex-students by shifting more of the costs to the taxpayer. But they don’t deal with the cause: the system itself. It has become dysfunctional.

Universities as businesses, in an environment that is devoid of price competition. For example, when the University of California system demands higher tuition, the whole system falls in line to support those increases, rather than resist them.

Captive customers. Students have to get their education within the higher education system. When tuition goes up, they can’t massively drop out because it would jeopardize their dream (by contrast, if air fares jump, customers react by flying less). They can choose cheaper colleges, but all colleges are jacking up tuition and fees. And the nationwide existence of “out-of-state tuition,” while plausible on a state basis, stifles cross-border competition. So students fight tuition increases the only way they can: by obtaining more funding.

Finance. The student-loan industry profits from processing student loans. Naturally, they encourage students to take on more debt. The amount is a function of the cost of the school, not of the ability to pay back the loan. While risk serves as a natural brake in making loans, in the student-loan industry, risk is transferred to the taxpayer who guarantees the loans.

The ultimate enabler. The government, in constant need of voter support, will fund and guarantee whatever it takes to allow students to get their education regardless of how reckless tuition and fee increases are. Thus, Obama’s executive actions make repayment less onerous, but they don’t do anything to contain tuition increases.

There are no price pressures on universities—except student protests (so, keep at it). Outrageous clockwork-like tuition increases are met not with resistance but with an unquestioning, endless, and ever increasing flow of government-guaranteed student loans. The beneficial forces of market discipline have been wrung out of the system, and governments have not stepped in to exercise alternate controls.

University administrator salaries, bonuses, benefits, golden parachutes, and pensions have shocked the public when they’re exposed in the media. Programs that have little to do with education swallow up more and more money. And sure, everybody loves to have well-equipped labs in fancy buildings. But the system needs to be restructured, either by opening it up to competition or by exposing it to effective checks and balances. Solutions won’t be easy, but there isn’t much room left before it will bankrupt an entire generation.

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