Oct 09, 2013 02:12 PM

America's Higher Education Bubble


In the United States, tuition has soared. Americans now owe more on their student loans (over US$ 1 trillion) than on their credit cards or auto loans. But new graduates face poor job prospects that would enable them to repay these debts. The barista with a B.A struggling to make her rent payments. The heavily indebted law school graduate waiting tables. For many young Americans, this is the grim new reality of the early 21st century.

In large part, America faces a credit-fueled tuition bubble.

Government student loan programs allow students access to credit lines for tuition. Since 2006, these programs have been virtually unlimited for graduate degrees. They impose few conditions on the rates schools charge. This has allowed American schools to steadily increase tuition at rates well above that of inflation.

But the existing student loan system has traditionally provided weak incentives to students and schools to discriminate between programs that generate paying jobs commensurate with the cost (nursing) and those where they do not (many law programs). Increasingly large subprime educational loans are being made to many student borrowers who have no reasonable chance of ever paying them back. This resembles the early 21st century bubble in the American housing market.

This is beginning to burst. Nationwide, student loan default rates have reached 13.4 percent – a two-decade high. American students are now beginning to shy away from expensive programs that produce heavy debt, but limited career prospects. The collapse in numbers of U.S. law school applicants (roughly 43 percent fewer in 2013 than in 2004) is simply the most striking example of this trend.

With budgets deep in the red as a result of falling domestic tuition revenue, American schools are scrambling to stay afloat. More than a few law schools are dramatically lowering admissions standards in an effort to ensure a sufficient number of students. And many universities are frantically recruiting international students in a desperate effort to fill the holes in their budgets.

But in some cases, these efforts are leading schools to devolve into diploma mills, marked by poor educational quality and limited employment prospects. At over 260 American universities and colleges, students are more likely to default on their loans than actually graduate. Pressure to rapidly raise tuition revenue from international students is also giving rise to a range of unsavory practices. One such example: the 2012 scandal involving Dickinson State University in North Dakota, characterized by rampant use of loosely overseen foreign recruiters, admission of unqualified applicants and the award of degrees to hundreds of students for which they had not actually completed the requirements.

What does this mean for Chinese students seeking to study abroad? First, be careful. Although many American schools offer good, quality programs for foreign students, not all do. Some are more interested in separating students from their money than in providing real educational value. So carefully examine the schools that you are considering, particularly those that have dramatically expanded their recruitment of international students in a very short span of time.

Second, bargain. Don't simply assume that real tuition is US$ 40,000 or US$ 50,000 a year simply because the school says that it is. Many lower-tier American schools (but not the more competitive ones) are willing to negotiate the actual tuition price with individual students, and offer thousands of dollars in discounts, rather than have unfilled seats in their class. So apply to multiple American schools, obtain competing offers and use these to aggressively bargain down the price of your education.

What does this mean for America? Serious reform requires deep change. Simply put, blindly supporting the production of more and more advanced degrees for their own sake (and at almost any cost) just doesn't make sense. Instead, America needs systematic reforms to student loan programs, addressing the cost of higher education.

Liberals can support government eligibility rules tying student aid dollars to actual outcomes and jobs. The Obama administration's 2011 "gainful employment" rule was a first tentative step in the right direction. President Barack Obama's August 22 announcement that he will pursue reforms linking federal financial aid to school tuition, debt and graduation rates may result in further pressure for change.

Conservatives can support the introduction of market-based reforms. One start: limiting funds able to be borrowed under the Grad Plus loan program, forcing American law schools with poor employment prospects to directly respond to market pressures in setting tuition rates.

Late 20th century American educational policies were intended to increase popular access to quality, affordable higher education. But these programs have become unmoored from their foundations. They are cutting a damaging swath through the lives of our youth. Failure to reform spells years of crushing debt, failed expectations and severe underemployment for generations to come.

The author is an associate professor of law at Fordham Law School

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