I Owe My Soul to the Company Store

Gone are the days when civilizations perished from vice. Today they go bankrupt from a surfeit of virtue. If the subprime mortgage crisis was rooted in the quest for affordable housing, the curtain now rises on a scene laid waste by the student debt bomb. The Washington Post's headline reads: "Student loans seen as potential ‘next debt bomb’ for U.S. economy":

Bankruptcy lawyers have a frightening message for America: They’re seeing the telltale signs of a student loan debt bubble that is placing increased financial pressure on families struggling with their children’s mounting debt. According to a recent survey by the National Association of Consumer Bankruptcy Attorneys, more than 80 percent of bankruptcy lawyers have seen a substantial increase in the number of clients seeking relief from student loans in recent years. ...

William Brewer, head of NACBA, has said, “This could very well be the next debt bomb for the U.S. economy” -- something akin to the housing mortgage loan crisis that triggered the U.S. financial crisis.

Student loan debt is now $704 billion bigger than total U.S. credit card debt. Families which believed they were investing in the future find themselves facing eviction tomorrow. Aged parents who cosigned loans are losing their homes to the children's unpaid educational debt. The educational debt crisis comes at a time when the president wants to keep kids in school longer and make a college degree the equivalent of a right. How is the public purse gong to resolve the contradiction between these two diametrically opposed goals? The answer is simple. The president,  like a mighty Titan, will lend students money when nobody else will.

The Christian Science Monitor writes:

President Obama has said he will help ease student loan debt, claiming he doesn't even need Congress to do it. It seems the Education Department has the cash to back him up.

Which is just wow. Since when has the Department of Education had $704 billion more funds than credit card debt without the authority of Congress?

But never underestimate the brilliance of Hope and Change. The president simply took the burden upon the broad shoulders of the executive branch:

Even before the official rollout of the program at a rally in Denver, House Republicans challenged how the president could move forward without congressional approval. ...

Part of the answer appears to be a move made by the Democrat-controlled Congress in March 2010. It ended taxpayer subsidies to private banks for student loans, meaning that the Education Department alone was responsible for handing out government money for such loans. That means the $60 billion set to go to private banks for student loans during the next 10 years is now tabbed for the Education Department. ...

But many House Republicans who still oppose the move they say it has made the Department of Education one of the largest banks in the nation, largely unaccountable to Congress. ...

Republican critics also note that the Education Department charges 6.8 percent for loans that cost much less, “creating a pretty big slush fund for the government,” said Rep. John Kline (R) of Minnesota, who chairs the House Education and Workforce Committee, at Tuesday’s hearing.

The new approach came buried deep in complex legislation. Inside Higher Ed informs us:

The government began originating all loans through direct lending in 2010, when a provision to eliminate bank-based student lending was included in the administration’s health care overhaul.

...

The administrators gave overall positive reports of the program. None said they would want to see bank-based lending reinstated. By the end of the hearing, representatives on both sides of the aisle commended the Education Department for a relatively smooth shift, even though several Republicans said they disagree with the overall philosophy of direct lending, which they viewed as a government takeover of the loan program.

The increasing interest rates on federal loans, though, came in for criticism. Student loans have become a profit center for the federal government, which borrows the money at a low rate and lends to students, who repay at a higher one. In the past, much of the difference went to the banks in the form of lender subsidies, a reality that drew sharp criticism from advocates for students.

The change left some students with two sets of liabilities. Some loans were owed to the pre-Obama "bank-based" loan system and some owed to the Department of Education. But each is serviced by the same tenuous cash flow:

“High unemployment will keep defaults high,” Moody’s said.

Experts have differing opinions about the strain of student loans to the broader economy. But there’s reason to be concerned. When asked about such risks by a lawmaker last week, Fed Chairman Ben Bernanke replied, “Well, student loans are becoming a very large category of loans.”

Both programs ultimately risk failure in case the proud holder of a degree can't find a job, in which case the taxpayer gets the bill. If the "bank-based" student loan system collapses, then the government will bail them out to keep the financial system working just as it did in 2008. If, on the other hand, the Bank of the Department of Education goes under, then the taxpayer is on the hook just the same.

This simplifies matters enormously. Heads, the bankers win. Tails, the taxpayers lose.

That's not how the administration puts it, however. In a press release titled We Can't Wait: Obama Administration to Lower Student Loan Payments for Millions of Borrowers, it says "these changes carry no additional cost to taxpayers." Sure. Like all the other free stuff the administration is handing out, the new affordable student loans are truly something for nothing.