Deflating the Higher Education Bubble

The federal government feels comfortable handing out enormous, non-collateralized loans because they can't be discharged in bankruptcy. Unless you fall into an exceptional hardship case, that loan will be repaid, no matter what pain it causes. It is unconscionable to saddle a 22-year-old with $78,000 worth of debt, regardless of the culpability of her 18-year-old self for asking for those loans in the first place. We don't allow an 18-year-old woman to drink a glass of beer -- why can she sign for a $78,000 loan?

Let's instead front-load the pain. We need to give 18-year-olds a dose of reality -- there is a limit to how much debt makes sense, even for the great prize of a bachelor's degree in Slavic Studies.

The Stafford loan is actually a good starting point. It has a 10-year repayment window, so you've often finished repaying it before mortgages and kids really hit the wallet. But its maximum limits are too high -- especially for "independent" students. While it's sad that many kids find themselves without parental support, it's even worse to then saddle them with $50,000 in debt on top of that with no support system and no way out.

Let's go with something reasonable. A ten-year repayment window, so you know there's a light at the end of the tunnel. Pay down 10% per year, so you see real progress. And it shouldn't take more than 10% of the average salary. I call it the 10/10/10 Plan.

We'll use the average salary of all bachelor degree holders (around $45,000), which after state and federal income taxes and FICA leaves us with $2,779 per month. A 10/10/10 Plan would let you borrow $24,000 -- debt service comes to $276 per month. Leaving you with $2,500 per month to live a life.

You are not going to be able to attend Northwestern University for $24,000. Some things will have to change -- you may need to do your first two years at a local community college. You might have to get a job for a year or two before you can go to school, or join the armed services for scholarship money. You will have to be resourceful. But better to start thinking about how to scrounge up money when you're not in debt yet.

You'll also see some big changes at the colleges and universities. With the stream of “free” money gone and thousands of cost-conscious students looking at other options, price competition will begin in earnest. Maybe every dorm room doesn't need a flat-screen TV, maybe we don't need more administrators than teachers, and maybe inflation that outmatches the CPI four-fold isn't a sustainable business model.

As the federal government underwrites the vast bulk of student loans, the 10/10/10 Plan would have big effects right away. To make it even more effective, it should cover private loans as well -- for every dollar of private money you borrow, one dollar of federal money is taken away.

This 10/10/10 Plan is easy to understand -- I think I could even explain it to an 18 year-old.