COMPARING THE EDUCATION BUBBLE TO THE HOUSING BUBBLE: WILL UNIVERSITIES BE TOO BIG TO FAIL? April A. Wimberg* I. INTRODUCTION History shows us that markets are largely cyclical and, over time, many traditional investments become obsolete or lose some of their luster, at least temporarily.1 This phenomenon is not limited to equities traded on Wall Street, but exists even in the most traditional assets.2 A perfect example of this trend was the recent dramatic collapse of the U.S. housing market.3 As a result, Congress has implemented far-reaching legislation to protect investors and taxpayers from another investment bubble.4 Even in the face of this expanded protectionism, Washington has turned a blind eye to the bubble that has developed in the higher education market,5 which eerily shadows the characteristics of the housing industry. Historically, both higher education and home ownership have been associated with higher economic status; consequently, the government has encouraged both of these classic American dreams for several decades.6

∗ J.D. Candidate, May 2013, Louis D. Brandeis School of Law, University of Louisville. Before law school, the author worked for eight years in investment banking in New York and also served in the Peace Corps, working with microfinance institutions in Cameroon. She would like to thank her husband, Michael Wimberg, for his endless support. 1 See, e.g., CHARLES P. KINDLEBERGER, MANIAS, PANICS, AND CRASHES: A HISTORY OF FINANCIAL CRISES 38–41 (Basic Books, Inc., rev. ed. 1989). 2 See Ron Derby, Bust May Follow as Gold Hits $1500, BUS. DAY (Apr. 21, 2011), http://www.businessday.co.za/articles/Content.aspx?id=140905 (explaining the fall of gold prices in 1980). 3 See Mark Landler, U.S. Housing Collapse Spreads Oversees, N.Y. TIMES, Apr. 15, 2008, at A1, available at http://www.nytimes.com/2008/04/13/business/worldbusiness/13iht-housing.1.11931770. html?_r=1&pagewanted=all. 4 The Dodd-Frank Wall Street Reform and Consumer Protection Act’s stated purpose is “[t]o promote the financial stability of the United States[,] . . . to protect the American taxpayer by ending bailouts, [and] to protect consumers from abusive financial services practices.” H.R. 4173, 111th Cong. (2010). 5 Congress passed several acts with only the merest pretense of making higher education more affordable, yet no real changes were made to the system. See, e.g., Health Care and Education Reconciliation Act of 2010, 20 U.S.C. § 1071 (2006) (addressing only loan forgiveness opportunities for a small group of students). 6 See Community Reinvestment Act, 12 U.S.C. § 2901 (2006) (encouraging investments in housing); Higher Education Act of 1965, 20 U.S.C. § 1001 (2006) (encouraging investments in higher

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However, the benefits that used to come with home ownership and college education have changed. These investments are still attractive to many Americans, but they no longer guarantee a path to economic security.7 In fact, financing an education and a home with debt can be very risky investments, particularly considering the high costs and shifting demand for both. The cost of college education increased 270% between 1976 and 2005,8 and rising costs are forecasted to continue.9 During the same thirty-year period of skyrocketing tuition, the number of universities in the United States increased.10 The increased price and quantity of universities has not produced higher quality institutions.11 Nor has the opportunity for a young college graduate risen.12 Given these statistics, the decision to pursue a college degree is not a rational decision for many students who need to finance their education with extensive debt. Nonetheless, the U.S. government continues to promote loans that allow individuals to invest in a college education, an American dream, even if these individuals may not have the capacity to finish college or repay their debts.13 This Note explores how the housing and higher education markets have changed in similar patterns. Discussed are several regulations that have not only encouraged investments in housing and higher education, but also encouraged Americans to assume high levels of personal debt to pursue these socially laudable goals. The excessive capital financing through government enterprises has inflated prices in both housing and education.14 The major difference in the markets is that the bubble in the education market has yet to burst. education). 7 See Greg Ip, The Declining Value of Your College Degree, WALL ST. J., July 17, 2008, at D1, available at http://online.wsj.com/article/SB121623686919059307.html. 8 See Aaron N. Taylor, “Your Results May Vary”: Protecting Students and Taxpayers Through Tighter Regulation of Proprietary School Representations, 62 ADMIN. L. REV. 729, 749 (2010). 9 See Higher Education Costs Continue to Soar, CBS NEWS (Oct. 26, 2011, 8:04 AM), http://www.cbsnews.com/8301-201_162-20125731/higher-education-costs-continue-to-soar/. 10 U.S. CENSUS BUREAU, Table 278. Higher Education–Institutions and Enrollment 1980 to 2009, in STATISTICAL ABSTRACT OF THE UNITED STATES: 2012 178 (2011), available at http://www.census. gov/compendia/statab/2012/tables/12s0278.pdf (noting that the total number of higher institutions was 3,231 in 1980 and 4,495 in 2009). 11 See Rebecca Leung, For-Profit College: Costly Lesson, CBS NEWS (Feb. 11, 2009, 7:37 PM), http://www.cbsnews.com/stories/2005/01/31/60minutes/main670479.shtml. 12 See Ip, supra note 7. 13 See David M. Herszenhorn & Tamar Lewin, Student Loan Overhaul Approved by Congress, N.Y. TIMES, Mar. 26, 2010, at A16, available at http://www.nytimes.com/2010/03/26/us/politics/ 26loans.html. 14 William D. Henderson & Rachel M. Zahorsky, The Law School Bubble: How Long Will It Last If Law Grads Can’t Pay Bills?, 98 A.B.A. J. 30, 33 (2012), available at http://www.abajournal.com/ magazine/article/the_law_school_bubble_how_long_will_it_last_if_law_grads_cant_pay_bills/.

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Lending to students who will never be able to repay their loans cannot continue. Student loans financed by the federal government need to be tied to specific performance criteria for (1) the student, and (2) the higher education institutions that ultimately receive the federal funding. However, reducing or limiting higher education funding does not create positive fanfare for politicians.15 Significant changes are unlikely to occur until there is an impending implosion in the student loan market. Therefore, universities should prepare for what would happen if government funding substantially decreased. II. AMERICAN DREAMS: THE GOAL OF HOME OWNERSHIP AND HIGHER EDUCATION FOR EVERYONE Americans have a habit of spending money they do not have with little forethought into how they will pay off their debt.16 Of course, this is not just applicable to housing, cars, dinners, and clothing, but very much pertains to higher education as well.17 Despite the fact that most middleand low-income Americans no longer have the austerity to prepare for their short-term financial needs,18 the federal government has implemented programs that encourage individuals to take out long-term debt to pursue the American dream of going to college or owning a home.19 But, in 2012, these investments do not have the same return that they have had in the past and may no longer be a wise venture for many.20

15 See e.g., Jake Greenberg, Despite Gov. Jerry Brown’s Campaign for Education Funding, Further Cuts to UC Are Unavoidable, DAILY BRUIN, Jan. 13, 2011, available at http://www.dailybruin.com/ index.php/article/2011/01/despite_gov_jerry_browns_campaign_for_education_funding_further_cuts_to _uc_are_unavoidable (criticizing Governor Brown after he proposed higher education funding cuts in response to California’s budget crisis). 16 See Jim Donovan, 3 On Your Side: College Students & Credit Cards, CBS PHILLY (Aug. 21, 2012, 6:10 PM), http://philadelphia.cbslocal.com/2012/08/21/3-on-your-side-college-students-creditcards/. 17 See Roger Roots, The Student Loan Debt Crisis: A Lesson in Unintended Consequences, 29 SW. U. L. REV. 501, 510–11 (2000). 18 See Daryl G. Jones, Personal Savings Rate: Worse than We Thought, CNN MONEY (June 30, 2010, 3:39 PM), http://money.cnn.com/2010/06/30/news/economy/personal_savings_decline.fortune/index.htm. 19 See generally 12 U.S.C. § 2901 (2006); 20 U.S.C. § 1001 (2006); 26 U.S.C. § 36 (2006). 20 See Francesca Di Meglio, College: Big Investment, Paltry Return, BLOOMBERG BUSINESSWEEK, June 28, 2010, http://www.businessweek.com/stories/2010-06-28/college-big-investment-paltry-return businessweek-business-news-stock-market-and-financial-advice (explaining that graduates of only 17 elite schools can expect to get a $1 million return over the course of their career, and it is questionable whether there is any return on investment for graduates of the lowest 20% of schools); cf. Brett Arends, Is Your Home a Good Investment?, WALL ST. J., May 27, 2009, http://online.wsj.com/article/SB12433 6746233955539.html (noting that currently home investment only produces a 1.2% return on investment

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A. The Housing Market Historically, home ownership was a significant step in establishing economic security,21 and the average home represented 44% of an American’s wealth.22 Believing this investment would lead to an economic windfall for low-income individuals, for decades the government created programs that encouraged lenders to make loans to this segment of the population.23 Legislators campaigned on promises that they would make home ownership a realistic dream to every American.24 These initiatives created a message: borrowing money to invest in a home did not involve risk. As the housing market changed due to shifting consumer demand, the programs that the government enacted had a perverse impact on the demand for housing.25 1. Federal Regulation and Enterprises Encouraging Home Ownership The Community Reinvestment Act (“CRA”) was one of the most significant government programs created to stimulate the housing market. The CRA increased pressure on banks to extend credit to minority and lowincome would-be homeowners.26 Congress enacted the legislation in 1977, though it was not given much attention until the Clinton Administration substantially revised it in May 1995.27 Seen as a success, the legislation was revamped again in August 2005 by the Bush Administration.28 The CRA was touted as a way to “channel billions of dollars a year in new credit into America’s distressed communities.” 29 over inflation in 15 years). 21 U.S. CENSUS BUREAU, HOUSEHOLD ECONOMIC STUDIES: DID YOU KNOW? HOMES ACCOUNT FOR 44 PERCENT OF ALL WEALTH (2001), available at http://www.census.gov/prod/2001pubs/p70-75.pdf. 22 Id. 23 See, e.g., THOMAS E. WOODS, JR., MELTDOWN: A FREE-MARKET LOOK AT WHY THE STOCK MARKET COLLAPSED, THE ECONOMY TANKED AND GOVERNMENT BAILOUTS WILL MAKE THINGS WORSE 17–21 (2009); 12 U.S.C. §§ 2903–2905 (2006). 24 See Housing Choices for Iowans, OFFICE OF SENATOR TOM HARKIN, http://harkin.senate.gov/resource/housing.cfm (last visited Aug. 31, 2012) (declaring that Congress has approved a housing program that will allow “millions of American families . . . to achieve the dream of home ownership at no cost to taxpayers.”); First-Time Home Buyer Bill Signed into Law, OFFICE OF N.Y. STATE SENATOR KENNETH P. LAVALLE (June 9, 2011), http://www.nysenate.gov/pressrelease/first-time-home-buyer-bill-signed-law. 25 WOODS, supra note 23, at 2–3. 26 See 12 U.S.C. §§ 2903–2905; WOODS, supra note 23, at 17–21. 27 See Community Reinvestment Act, BD. OF GOVERNORS OF THE FED. RESERVE SYS., http://www.federalreserve.gov/communitydev/cra_about.htm (last updated May 4, 2011). 28 Id. 29 Robert A. Rosenblatt & Chris Kraul, U.S. to Push Banks on Credit in Poor Areas, L.A. TIMES, Dec. 9, 1993, available at http://articles.latimes.com/1993-12-09/news/mn-65506_1_community-banks.

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The federal government’s intervention in the supply side of housing loans did not end with mandating banks lend to risky borrowers, but also extended to increasing the liquidity of these loans. Specifically, the government sponsored securitization machines, Freddie Mac (“Freddie”) and Fannie Mae (“Fannie”), which were designed to create liquidity for housing loans.30 Both enterprises have enjoyed special tax and regulatory privileges and both were originally created under the umbrella of government programs designed to give disadvantaged populations access to housing.31 The modus operandi for Freddie and Fannie was to purchase residential mortgages from banks, creating a secondary market that helped increase lending to homeowners (by freeing up more money for banks to lend).32 The regulations promulgated by the U.S. Department of Housing and Urban Development (“HUD”) required Fannie and Freddie to purchase a specified percentage of low- and moderate-income loans.33 In plain English, banks were required to give out risky loans, which they could then sell to buyers who were required to purchase them. Not only were Freddie and Fannie government-created programs, they were also quasi-private companies publicly traded on the New York Stock Exchange.34 Though surprising given today’s knowledge of subprime lenders, both Freddie and Fannie were profitable for many years based on this loan repurchasing scheme.35 The success of these institutions attracted additional private companies providing similar services,36 further stimulating the supply of companies willing to lend to home buyers.

30

See Company Profile, FREDDIE MAC, http://www.freddiemac.com/corporate/company_profile/ (last visited Dec. 28, 2011); Marketplace Liquidity, FANNIE MAE, http://www.fanniemae.com/portal/ funding-the-market/marketplace-liquidity.html (last visited Dec. 28, 2011). 31 See generally FANNIE MAE, 2006 ANNUAL REPORT (2007), available at http://www.fanniemae.com/resources/file/ir/pdf/proxy-statements/2006_annual_report.pdf; FREDDIE MAC, 2006 ANNUAL REPORT (2007), available at http://www.freddiemac.com/investors/ar/pdf/2006annualrpt.pdf. 32 WOODS, supra note 23, at 15. 33 See 24 C.F.R. § 81.12 (2012). 34 See FANNIE MAE, supra note 31, at 11; FREDDIE MAC, supra note 31, at 1. 35 See generally FANNIE MAE, supra note 31 (discussing the financial status of Fannie Mae in 2006); FREDDIE MAC, supra note 31 (discussing the financial status of Freddie Mac in 2006). 36 See Michael Simkovic, Competition and Crisis in Mortgage Securitization 7 (Oct. 8, 2011) (unpublished manuscript), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1924831.

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2. Government Programs Should Have Adjusted to Changes in the Housing Market In order to facilitate these new loans to the target population, actions were taken to stimulate demand from borrowers. Consequently, lending standards were relaxed and requirements for a loan, specifically a HUD loan, were made much easier.37 Instead of requiring the traditional 20% down payment for a house,38 down payments were no longer a prerequisite for obtaining a loan.39 The market essentially was open to everyone. To be clear, borrowers did not need any assets or savings to be able to purchase a home.40 New home buyers with no record of savings found themselves with a thirty-year investment, an obligation that requires insurance, maintenance, and the payment of taxes—all of which are not required in most rental agreements.41 Changing demand changes the market. There is no evidence that these programs were ever reevaluated to take into account any factors that were changing in the housing market. And indeed, the U.S. housing market went through a major transformation after these initiatives were implemented. These changes included demands for larger homes, new homes, second homes, an increasingly transient population, and investing in spec homes.42 All of these factors contributed to rapid growth in the housing market.43 The number of new builders and housing starts increased dramatically.44 In 2005, over 5% of Americans had a job tied to the housing market, representing two million more jobs than just ten years prior.45

37

See 24 C.F.R. § 81.12 (2012) (regulations promulgated by HUD). See, e.g., The Down Payment Hurdle, YAHOO! FINANCE, http://loan.yahoo.com/m/finance8.html (last visited Dec. 26, 2011). 39 See id.; FHA HOME LOANS, http://www.fha-home-loans.com/ (last visited Jan. 22, 2012) (explaining FHA loan programs that will help individuals buy a home with no money down). 40 See FHA HOME LOANS, supra note 39. 41 Cf. Kevin Quealy & Archie Tse, Is It Better to Buy or Rent?, N.Y. TIMES, http://www.nytimes.com/interactive/business/buy-rent-calculator.html (last visited Sept. 15, 2012) (detailing the extra costs to consider when deciding whether to purchase a home or to rent). 42 Carissa Wyant, Growing Movement: Americans Buying More Tiny Houses (Under 500 Sq. Ft.) to Avoid Foreclosure, MINT PRESS NEWS (May 9, 2012), http://www.mintpress.net/tiny-house-movement-drawingbigger-following-in-u-s/. 43 Between 2000 and 2005, the total number of annual housing starts grew from 1,568,700 to 2,068,300. Annual Housing Starts, NAT’L ASS’N OF HOME BUILDERS, http://www.nahb.org/generic. aspx?sectionid=819&genericcontentid=554&channelid=311 (last visited Sept. 15, 2012). 44 See Kathryn J. Byun, The U.S. Housing Bubble and Bust: Impacts on Employment, MONTHLY LAB. REV., Dec. 2010, at 3, available at www.bls.gov/opub/mlr/2010/12/art1exc.htm; Annual Housing Starts, supra note 43. 45 See Byun, supra note 44, at 3–4. 38

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The housing market was propped up for two decades46 when one of the most substantial changes came into play: cheap money. The United States experienced negative growth following the burst of the dot-com bubble in 2000 and the September 11th attacks in 2001.47 In response, the Federal Reserve (“Fed”) decided to stave off any additional down cycles of a recession by cutting interest rates and increasing the supply of money to encourage borrowing.48 The new borrowed money found its home, literally. The Fed’s policy of creating cheap money did prevent some of the 2001 recession from taking its course; for example, the 2001 recession was the only recession in which housing starts did not decline.49 As a result, an illusion of a recession-proof investment was created, and almost everyone wanted to invest. In 2006, the national home ownership rate hit an all-time high of nearly 70%.50 Based on the significant demand and recent history of positive returns, housing prices on average rose 124% between 1997 and 2006.51 In 2007, the U.S. housing market softened and homeowners, particularly subprime borrowers, started to default on their loans.52 As the economy weakened, more homeowners failed to pay on their mortgages, and the snowball effect of the defaults led to a depreciation in the value of almost all housing.53 Homeowners who lost their jobs and wanted to sell their homes were faced with negative equity, owing more on their mortgages than what they could obtain in selling their home. Therefore, selling would require a large outlay of non-existent cash. Because in many cases borrowers never had the ability to accumulate savings to purchase their homes, homeowners truly could not afford to sell, and instead stopped

46

WOODS, supra note 23, at 26. See WASH. STATE OFFICE OF FIN. MGMT., ECONOMIC CONDITIONS DURING THE 2001 RECESSION 1–2 (2002), available at http://www.ofm.wa.gov/researchbriefs/2002/brief015.pdf. 48 WOODS, supra note 23, at 25–28. 49 Id. at 81. 50 See Jann Swanson, Homeownership Rate Hits 10 Year Low. Youngest Demographic is Biggest Drag, MORTGAGE NEWS DAILY (Apr. 26, 2010), http://www.mortgagenewsdaily.com/04262010_ census_homeownership.asp. 51 See CSI: Credit Crunch, ECONOMIST, Oct. 18, 2007, available at http://www.economist.com/ node/9972489. 52 Foreclosures Set to Hit 1 Million Mark in 2010, CBS NEWS (July 15, 2010, 10:05 AM), http://www.cbsnews.com/stories/2010/07/15/business/main6679943.shtml. 53 Since these loans were bundled into many structured finance products, home defaults did not just impact risky investors, but these products had been sold to everyone from corporations to teacher retirement funds. Of course, these catastrophes do not happen in a bubble, but spread to massive layoffs and one of the highest unemployment rates in decades. See Simkovic, supra note 36, at 3–4. Given the purpose of this Note, the securitization and spread of these debts is not addressed in more detail. 47

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paying on their mortgages. An estimated one in seventy-eight households went into foreclosure,54 and the spillover effects have been tremendous. The total impact of the housing market crash may take several more years to unfold, but there is no question that an investment in housing no longer yields the same return it once did. B. The Higher Education Market Historically, higher education has been a golden ticket to a prosperous future and has been estimated to be worth a million dollars.55 For decades, government programs have fostered this conviction and have supplied billions of dollars in loans to low- and middle-income individuals to finance their educations.56 Today, higher education is sold as a must-have in order to enter the middle-class.57 This idea has created soaring demand for a college education,58 and private and public organizations have reacted by creating an increased supply of places for one to attain an education, at increased prices.59 Now, due to these changes and the changes in the global economy, a college degree no longer assures the same rewards.60 1. Government Programs Encouraging Higher Education Federal programs encouraging the attainment of higher education have been around for decades. The first major law that encouraged more Americans to attain a college degree still exists—the Higher Education Act of 1965.61 More commonly known for its creation of the Stafford Loan program,62 the Act was part of the War on Poverty and was intended to help

54

See, e.g., Foreclosures Set to Hit 1 Million Mark in 2010, supra note 52. But see Mark Schneider, How Much Is That Bachelor’s Degree Really Worth?, AM. ENTERPRISE INST. (May 4, 2009), http://www.aei.org/article/education/higher-education/how-much-is-that-bachelorsdegree-really-worth/. 56 See History of Student Financial Aid, FINAID, http://www.finaid.org/educators/history.phtml (last visited Sept. 16, 2012). 57 See Jennifer Gonzalez, Bachelor’s Degree Is Still Best Path to Middle-Class Jobs and Earnings, Report Says, CHRON. HIGHER EDUC., Nov. 14, 2011, http://chronicle.com/article/Bachelors-Degree-IsStill/129784/. 58 See U.S. CENSUS BUREAU, supra note 10 (showing that from 1980 to 2009, the number of college students increased almost 40%, while the number of individuals enrolled in private universities increased 113%). 59 See id.; Fast Facts: Tuition Costs of Colleges and Universities, NAT’L CTR. FOR EDUC. STATISTICS, http://nces.ed.gov/fastfacts/display.asp?id=76 (last visited Sept. 16, 2012). 60 See Schneider, supra note 55. 61 See 20 U.S.C. § 1001 (2006). 62 Roots, supra note 17, at 504 (explaining that the name of the program was changed in 1988 from 55

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reach the nation’s poor.63 Yet, like most government programs enacted during this time, the program intended to be the aid of last resort has become the primary tool that most Americans use to attend college.64 Stafford Loans increased the supply of money available for students to borrow in order to attend college.65 The loans gave students needed access to capital, but the money also tied up a significant amount of the government’s financial resources.66 With such high demand for student loans coupled with finite resources, there inevitably was an issue with liquidity. In order to address the issue, the government needed to either distribute fewer loan dollars or find new sources of capital. In order to achieve the latter option, the government created the Federal Family Education Loan Program (“FFELP”) through the Higher Education Act, which insured student loans made by private banks.67 Additionally, the program encouraged the creation of secondary-loan buyers because the government feared that banks alone would not be able to come up with enough money to help students.68 In 1993, another loan program, Federal Direct Loans (“FDL”), was developed to provide loans to students directly through the government.69 By lending directly, the bank, or middle man, was eliminated.70 For years, FDL was touted to be a more efficient way for the government to lend, as the government, not the banks, would collect interest on the student loans.71 Banks were eventually cut out of the student loan equation, and under a piece of 2009 legislation, the Student Aid and Fiscal Responsibility Act (“SAFRA”), the FFELP was discontinued and the FDL program became the

the Federal Guaranteed Student Loan Program to the Stafford Loan Program). 63 See id. at 505. 64 See id. 65 Id. 66 See Sandra Block, Students Suffocate Under Tens of Thousands in Loans, USA TODAY, Feb. 23, 2006, at 01B, available at http://www.usatoday.com/money/perfi/general/2006-02-22-student-loansusat_x.htm (noting that student loans can be extended up to 30 years). 67 See Direct Loans vs. the FFEL Program, FINAID, http://www.finaid.org/loans/dl-vs-ffel.phtml (last visited Sept. 21, 2012). 68 Eric C. Hallstrom, Here We Go Again–The Conversion of Qualified Scholarship Funding Corporations From Nonprofit to For-Profit Status: What We Can Learn From the Health Care Conversion Bonanza, 25 J. CORP. L. 659, 664 (2000). 69 20 U.S.C. § 1087a (2006). 70 See Peter Baker & David M. Herszenhorn, Obama Signs Overhaul of Student Loan Program, N.Y. TIMES, Mar. 30, 2010, at A14, available at http://www.nytimes.com/2010/03/31/us/politics/ 31obama.html. 71 See THOMAS HILLIARD & AMY ELLEN DUKE-BENFIELD, CTR. FOR POSTSECONDARY AND ECON. SUCCESS, RECONCILIATION: IMPORTANT GAINS IN POSTSECONDARY EDUCATION, BUT ALSO MISSED OPPORTUNITIES 1 (2010), available at http://highered.colorado.gov/Publications/General/Strategic Planning/Meetings/Resources/Access/Access_100413_HCERA_Analysis_March30_Final.pdf.

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sole lender of government-backed student loans.72 Under the new plan, there is no recognition of the time value of money73 or cognizance of finite government resources. Legislators have ignored the real likelihood of future liquidity issues. The 2009 legislation also goes further to whet the appetite for higher education loans by promising loan forgiveness and capping maximum monthly repayments based on income.74 2. Changes in the Education Market Should Draw the Attention of Washington While the government provides other programs, such as grants and tax benefits, to help students fund their education, loan programs are the main method by which the federal government helps support access to higher education.75 For the 2011–12 school year, nearly $116 billion in new loans were made (up from $84 billion in 2009–10, a 38% increase in just two years).76 Essentially, everyone who can get accepted to a university has the opportunity to attend college. Currently, the government provides up to $57,500 per year in guaranteed loans per student.77 At the same time, a college degree has declined in value, and the saying that a degree is worth a million dollars is now an old wives’ tale.78 With access to borrowed money, college attendance has increased substantially in the past three decades.79 However, not every student with the desire (and loans) has the qualifications or ability to attend a traditional university.80 In view of this opportunity, entrepreneurs have given rise to a

72

Health Care and Education Reconciliation Act of 2010, 20 U.S.C. § 1071 (2006). See generally Understanding the Time Value of Money, INVESTOPEDIA, http://www.investopedia. com/articles/03/082703.asp#axzz1hra7nlg8 (last visited Dec. 20, 2011) (explaining that the value of money one has in the present will not be the same in the future). 74 The HCERA legislation implements President Obama’s proposal to improve the income-based repayment plan. Baker & Herszenhorn, supra note 70. It cuts the monthly payment by one-third, from 15% of discretionary income to 10% of discretionary income. Id. It also accelerates the forgiveness of the remaining loan balance from 25 years to 20 years. Id. These changes are effective for new loans made on or after July 1, 2014. Id. 75 Federal Higher Education Programs - Overview, FED. EDUC. BUDGET PROJECT (June 21, 2012, 3:05 PM), http://febp.newamerica.net/background-analysis/federal-higher-education-programs-overview. 76 See id.; Brian O’Connell, Why Banks Are Bailing on Student Loans, BANKING MY WAY, http://www.bankingmyway.com/credit-center/student-loan/why-banks-are-bailing-student-loans (last visited Sept. 17, 2012). 77 Student Loans, FINAID, http://www.finaid.org/loans/studentloan.phtml (last visited Sept. 17, 2012). 78 Schneider, supra note 55. 79 U.S. CENSUS BUREAU, supra note 10. 80 See Taylor, supra note 8, at 739 (discussing the lower admissions standards used by for-profit 73

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growing number of private universities.81 Private, for-profit schools serve students that are underserved by traditional universities.82 These schools tend to enroll the students who were not in the top 25% of their high school classes and would be unlikely to enroll or be successful at other types of institutions.83 Less than 25% of their students graduate within six years, compared to graduation rates of 55% and 64% at public and private nonprofit institutions, respectively.84 These ineffective institutions are funded by every taxpayer.85 For-profit schools educate only 10% of the students enrolled in institutions of higher education, but receive over 23% of federal loans and grants under the federal government’s financial aid programs.86 The University of Phoenix, the largest for-profit university, received 88% of its income from federal aid to students, yet only 34% of its students graduate in six years.87 Ninety-five percent of students attending for-profit universities receive some type of federal student aid, and these students graduate with more debt than students who attend public universities.88 Almost 100% of students at forprofit schools graduate with debt, which averages around $40,000 per student.89 Additionally, these students are more likely to default on their loans, representing 44% of the federal student loan default rate.90 The majority of defaults on student loans show that the debtors were young, low-income, largely minorities, and that those debtors did not have a strong educational background to take on higher education.91 Ironically, the group defaulting on their loans is the same group that the government has sought to empower.

universities). 81 See U.S. CENSUS BUREAU, supra note 10. 82 Taylor, supra note 8, at 753. 83 Id. at 753–54. 84 Id. at 755. 85 See generally Daniel L. Bennett, New College Loan Rules Put Taxpayers at Risk, FORBES.COM (May 10, 2010, 6:00 PM), http://www.forbes.com/2010/05/10/student-loans-safra-leadership-educationbennett.html (stating that taxpayers must pay for student debts when they default on their loans). 86 Cheryl L. Auster, Comment, Promising a Better Future but Delivering Debt: Understanding the Financial and Social Impact of For-Profit Colleges and the Effect of the New Program Integrity Rules, 13 SCHOLAR 631, 634–35 (2011). 87 Goldie Blumenstyk, Senator Takes Aim at For-Profit Colleges’ Reliance on Federal Money and Aggressive Recruiting of Veterans, CHRON. HIGHER EDUC., Jan. 22, 2012, http://chronicle.com/article/ Senator-Takes-Aim-at/130426/; Goldie Blumenstyk, U. of Phoenix Reports on Students’ Academic Progress, CHRON. HIGHER EDUC.: MEASURING STICK (Dec. 9, 2010, 7:02 PM), http://chronicle.com/blogs/measuring/u-of-phoenix-reports-on-students-academic-progress/27584. 88 Auster, supra note 86, at 635. 89 Id. at 667. 90 Id. 91 Roots, supra note 17, at 520–21.

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In addition to the paltry graduation rate, many of the private universities do not provide students with the appropriate credentials to obtain jobs in the fields in which they studied. Federal and state laws allow unaccredited institutions to enroll students and issue almost meaningless degrees.92 Many students with degrees from private universities find themselves with a degree that leaves them unqualified for the career that they wish to pursue.93 One only need quickly search news articles, class action suits against for-profit universities, and complaints to the Department of Education to see numerous examples of students who completed programs at for-profit universities only to find that their universities were unaccredited and that their degrees provided them no credentials.94 Despite the fact that many graduates did not receive a degree worth the paper it was printed on, they still owe thousands of dollars in student debt.95 Community colleges, which were traditionally a pathway to associate or technical degrees, have also slipped in the quality of education provided.96 Only 30% of students who start programs at community colleges actually complete the program.97 What is more a change from the historical notion of higher education is that attaining a degree from a four-year traditional college does not always produce a good return on the investment the students make.98 The opportunities for job seekers with a college degree have not increased.99 Nor have the wages of college degree holders increased in line with the cost of living.100 Employers now want skills from employees that are more specialized and less likely to be obtained in a college classroom.101 Globalization and technology are also having an impact on the changing demands and employment opportunities for those with a college degree.102

92

See Important Questions About Accreditation, Degree Mills, and Accreditation Mills, COUNCIL modified Apr. 1, 2011). 93 See Leung, supra note 11. 94 See Auster, supra note 86, at 633, 646, 652. 95 Id. 96 See Daniel de Vise, Eight Ways to Get Higher Education into Shape, WASH. POST, Feb. 20, 2011, at W12, available at http://www.washingtonpost.com/wp-dyn/content/article/2011/02/11/AR 2011021104924.html. 97 Id. 98 See Ip, supra note 7. 99 Id. 100 Id. 101 Id. 102 Id.

ON HIGHER EDUC. ACCREDITATION, http://www.chea.org/degreemills/ (last

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Despite the tapering opportunities for a college graduate, the cost of a four-year college degree has skyrocketed.103 Within ten years following implementation of the Higher Education Act, college costs had increased by 77%.104 In just the past two decades, the cost of attending a university has gone up 900%.105 However, instead of pricing people out of the higher education market, students have been more willing (and able, due to the availability of government loans) to take on debt in order to afford their degrees.106 College graduates are paying on their education over thirty years.107 This type of debt burden is a significant change from the amount of debt that previous generations took on to finance their degrees. Twentyfive years ago, students were advised to keep their student debt below 8% of their anticipated income.108 Now, students are advised to keep that number below 20%.109 On top of this debt, many American students find themselves holding some type of consumer debt, which is not reflected in the average school debt reported.110 Many students taking on debt are relying on different loan forgiveness programs, but these programs may end up being just empty promises.111 The Obama Administration’s new federal education loan forgiveness program, like most federal programs, is largely unfunded and after several years would require congressional authorization of funding.112 Therefore, the programs are subject to termination after students have relied on them in taking out loans to finance their educations. A similar situation occurred when many teachers in Connecticut and Kentucky found themselves stuck with student debt up to $100,000 after the student loan forgiveness

103 Digest of Education Statistics, NAT’L CTR. FOR EDUC. STATISTICS, http://nces.ed.gov/programs/ digest/d10/tables/dt10_345.asp (last visited July 1, 2012). 104 Roots, supra note 17, at 505. 105 Malcolm Harris, Bad Education, N+1 MAGAZINE, Apr. 25, 2011, available at http://nplusone mag.com/bad-education. 106 See Roots, supra note 17, at 510–12. 107 See Jen Haley, Student Loan Debt – How to Get Relief, CNN (Mar. 5, 2008), http://articles.cnn.com/2008-03-05/living/student.loans_1_private-loans-student-loan-justice-direct-loanprogram?_s=pm:living. 108 Roots, supra note 17, at 502 n.5. 109 Id. 110 See id. at 510. 111 Cf. Jonathan D. Glater et al., Students Relying on Loans Wonder Whether Forgiveness Will Last, N.Y. TIMES, May 30, 2009, at B1, available at http://www.nytimes.com/2009/05/30/your-money/ student-loans/30money.html?pagewanted=all. 112 See Loan Forgiveness for Social Workers, NAT’L ASS’N OF SOC. WORKERS, http://www.social workers.org/loanforgiveness/default.asp (last visited July 1, 2012).

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programs were repealed in these states.113 Critics called these teachers irresponsible for taking on so much debt when they knew they were only going to be making an insignificant teacher’s income.114 But when the government marketed these programs to wide-eyed high school graduates, it did not mention the chance of defaulting on its promise.115 A similar fate could be in store for graduates who depend on the new forgiveness programs that are being promised. III. ANALYSIS: THE EDUCATION MARKET SEEMS TO BE MIRRORING THE SAME PATH HOUSING TOOK The foregoing history has pointed to some similarities between the housing and education markets, and the parallel trends of both are unsettling. The characteristics of the government programs created to encourage growth in these two markets are very similar, and the intended beneficiaries of these programs are also comparable.116 Unfortunately, the impact on the American economy may also be similar. In fact, if there are not changes in our higher education system, the crisis that ensues could be much worse for middle class Americans.117 The housing and education programs built over the years have been gracious efforts to give economically disadvantaged groups access to a better and more prosperous life. Yet, however well-intended, market intervention on a mass scale should be done thoughtfully and should be continuously reviewed because the impact of previous attempts has proved to be disastrous.118 Economist Gottfried von Haberler warned in the Great Depression of the 1920s against inflating consumer purchasing power because “[i]t was precisely this disproportional increase of demand for consumers’ goods which precipitated the [Depression].”119 In both the housing and education markets, government programs have given

113

Cf. Glater et al., supra note 111. Id. 115 Cf. id. 116 See, e.g., 12 U.S.C. §§ 2901–2905 (2006); 20 U.S.C. § 1070a (2006). 117 Discharging federal student loans in bankruptcy is very difficult. If students find that their degrees cost more than their future potential earnings, loan repayment is still required. See Taylor, supra note 8, at 762; cf. David Hogberg, Congress Inflates the Higher Education Bubble, INVESTORS.COM CAPITAL HILL BLOG (Apr. 27, 2012, 3:19 PM), http://blogs.investors.com/capitalhill/index.php/home/35politicsinvesting/7131-congress-inflates-the-higher-education-bubble. 118 See, e.g., WOODS, supra note 23, at 100–07 (discussing the impact of government intervention during the Great Depression). 119 Gottfried Haberler, Money and the Business Cycle, LUDWIG VON MISES INST., http://mises.org/tradcycl/ monbuscy.asp (last visited July 1, 2012). 114

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consumers greater ability to purchase these products. The CRA funneled billions of dollars into the housing market by encouraging banks to lend to low- and middle-income home buyers.120 In effect, these government programs were the fuel to subprime lending that led to an unsustainable increase in home purchases.121 Similarly, the Higher Education Act and other federal laws have stimulated the demand for education.122 By allowing any student with an acceptance to a “higher learning” facility to obtain loans, there is an almost infinite source of funds to universities.123 As a result, these institutions can continue to increase tuition despite the readily apparent fact that most students rely on loans that they will not be able to repay. Bubbles do not emerge in silos. As we saw in the housing crisis, a market develops around the distortion. The Fed’s policy of cheap credit misled businesses into thinking that the time was ideal to invest, which then encouraged others to invest.124 The boom in the housing market created ancillary demand in other industries like construction equipment and building materials.125 The increased demand created a new baseline for investors, who assumed that the current trends were representative of normal growth.126 Everyone bought into the thinking. Finally, the smoke and mirrors fell away as defaults on loans began. There is no persuasive reasoning as to why education would be different. The number of private universities has grown rapidly,127 as has the cost of higher education.128 The latter goes against what basic economics would indicate: a growth in supply would be followed by a drop in price. Instead, the price for a college degree has increased exponentially.129 As a result, an extremely profitable and fiscally irresponsible market for education has developed.130 The smoke and mirrors in this bubble is the level of debt that the government will provide

120 Peter J. Wallison, The True Origins of the Financial Crisis, AM. SPECTATOR, Feb. 2009, available at http://spectator.org/archives/2009/02/06/the-true-origins-of-this-finan. 121 Id. 122 Roots, supra note 17, at 505. 123 See id. 124 WOODS, supra note 23, at 68. 125 See Michael Wolfe, Housing Market Interest Rates, S.F. GATE HOME GUIDES, http://homeguides.sfgate.com/housing-market-interest-rates-8915.html (last visited Jan. 20, 2012). 126 See id. 127 U.S. CENSUS BUREAU, supra note 10. 128 Cost of Higher Education, 1985–2007, INFOPLEASE.COM, http://www.infoplease.com/ipa/a07818 78.html (last visited July 4, 2012). 129 See Taylor, supra note 8, at 749. 130 Id. at 752–55.

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(and students will take) to fund a degree that may be worth significantly less than the cost.131 A. The Market Manipulator—Interest Rates Historically low interest rates have played a part in the affordability of both housing and education.132 Government programs for both markets were already encouraging loans, but when the Fed made interest rates extremely low, debt became more palatable.133 Bubbles are created by making cheap credit available for the asking, which “encourages excessive leverage, speculation, and indebtedness.”134 This phenomenon is not exclusively related to the stock or housing markets, but is related to any market that is artificially altered to a level that would never be created by a rational free market system.135 If the CRA was the fuel to the housing crisis, the Fed was the match that lit the crisis into full blaze. Some economists argue that the Fed’s policy of intervening in the economy to push interest rates lower than the market would have set them is the single greatest contributor to the housing crisis.136 While interest rates may not encourage student loans,137 they may be a significant contributor to the market crash. Reminiscent of the perfect storm that imploded the housing market, several factors may contribute to the eventual tipping point of the higher education bubble, but interest rates will play a significant role. This Note takes the stand that high interest rates coupled with high loan defaults will dry up student loans, which will bring havoc for many institutions of higher education. Interest rates are lower than they have been in fifty years.138

131

See Schneider, supra note 55. WOODS, supra note 23, at 30–31 (explaining that low interest rates cause artificial inflation to occur: “[I]f the housing market had not been the distorted market, something else would have artificially ballooned.”). 133 Id. at 8. 134 Id. 135 Id. at 30–31. 136 Economists’ Views on Interest Rates, Housing Bubble, WALL ST. J. REAL TIME ECON. BLOG (Jan. 10, 2010, 8:01 PM), http://blogs.wsj.com/economics/2010/01/12/economists-views-on-interestrates-housing-bubble/. 137 Matthew M. Chingos, Stafford Interest Rate Cut Does Not Help Right Away, U.S. NEWS & WORLD REPORT (Apr. 27, 2012), http://www.usnews.com/debate-club/should-the-lower-interest-rateon-stafford-loans-be-extended/stafford-interest-rate-cut-does-not-help-right-away. 138 See Selected Interest Rates: Historical Data, BD. OF GOVERNORS OF THE FED. RESERVE SYS., http://www.federalreserve.gov/releases/H15/data.htm (last visited Sept. 16, 2012) (comparing 2011 rates to historical rates dating back to 1962). 132

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The purpose has been to enable businesses and consumers to borrow cheaply in order to stimulate the economy.139 Of course, all loans have enjoyed low interest rates, including student loans, which today average 6.8%, compared to 12.0% twenty years ago.140 Despite the historically low borrowing rate, some graduates are still looking at loan repayment plans of thirty years.141 A window of opportunity to address this looming crisis still exists since interest rates may remain depressed for several more years. The Fed has indicated that rates will be kept low until 2014 and potentially several years beyond.142 However, when the United States does experience a bout of inflation, a normal cyclical event after years of depressed rates and government fostered economic stimulus,143 student loan rates will increase in line. 1. The Devil Is in the Details, but How Many High School Graduates Are Reading Details? When deciding to attend a college, most students look at the face value of the education and not the impact interest rates will have on the total cost of their degree. High interest student loans will have harrowing effects on the education market. The financial walk is as follows: if interest rates adjust to 12.0%, the average student debt of $23,000 for an undergraduate would take thirty years to pay off by making $236 in monthly payments.144 Unfortunately, for graduates that have been finding jobs making less than $30,000 a year, the math adds up to a significant loss.145 For professional

139 See generally How Does Monetary Policy Influence Inflation and Employment?, BD. OF GOVERNORS OF THE FED. RESERVE SYS., http://www.federalreserve.gov/faqs/money_12856.htm (last updated Sept. 14, 2012) [hereinafter Monetary Policy, Inflation and Employment] (explaining the effects of Federal Reserve monetary policy). 140 Historical Interest Rates, FINAID, http://www.finaid.org/loans/historicalrates.phtml (last visited Dec. 21, 2011) (documenting the major changes in Stafford Loan interest rates). 141 Repayment Plans, FINAID, http://www.finaid.org/loans/repayment.phtml (last visited Dec. 21, 2011). 142 See Luca Di Leo & Jon Hilsenrath, Fed May Signal Low Rates into 2014, WALL ST. J., Dec. 23, 2011, at A4, available at http://online.wsj.com/article/SB10001424052970203686204577114821255600 622.html. 143 Monetary Policy, Inflation and Employment, supra note 139. 144 See Loan Calculator and Amortization, BANKRATE.COM, http://www.bankrate.com/ calculators/college-planning/loan-calculator.aspx (last visited July 4, 2012) (to recreate the monthly calculation, enter $23,000 as the loan amount, select a 30-year repayment plan, and set the interest rate at 12%). 145 See Sara Murray, The Curse of the Class of 2009: For College Grads Lucky Enough to Get Work This Year, Low Wages Are Likely to Haunt Them for a Decade or More, WALL ST. J., May 9, 2009, at

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degrees, student loans average almost $100,000, which paints a far more disturbing picture for graduates who do not make above-average salaries.146 2. The Trickle Down Effect on Universities There is a possibility that some may choose not to attend college when considering the total cost of a degree. However, the more likely scenario, comparable to the recent housing market collapse, is that people will still finance college, but then stop paying on their loans when they believe they are paying on a losing investment. Legislators will be pressured to push forward loan forgiveness or adjust bankruptcy provisions.147 All scenarios have the effect of creating less money in the coffers, and since the government is now the only source of lending for the majority of student loans,148 liquidity is again a major issue. At some point, the number of government guaranteed loans will be reduced or the amount of loans to students will be capped. As follows, the higher education institutions that have relied on an endless supply of tuition dollars will be faced with a significant budget gap. Indeed, the United States may need to ask whether universities are too big to fail. This sounds like a doomsday scenario, but these are the basic economics of boom and bust markets.149 3. Societal Costs of Supporting High Debt Levels Even if the above is viewed as an extreme result, there are also social reasons why having education financed by high levels of debt is bad for our economy. First, many of the programs are a significant waste of resources (taxpayer dollars). As noted above, there is a dismal graduation rate from private institutions that receive a significant amount of government-funded loans.150 The investment made in this educational system demands a considerable amount of taxpayer money that does not seem to be producing any type of societal benefit.151

A1, available at http://online.wsj.com/article/SB124181970915002009.html. 146 Henderson & Zahorsky, supra note 14, at 32. 147 Gregory Kristoff, Hansen Clarke’s Student Loan Forgiveness Act Finds Big Support Online, HUFFINGTON POST (June 19, 2012, 8:38 AM), http://www.huffingtonpost.com/2012/06/15/student-loanforgiveness-act_n_1601271.html. 148 See Health Care and Education Reconciliation Act of 2010, 20 U.S.C. § 1071 (2006). 149 See generally KINDLEBERGER, supra note 1. 150 Taylor, supra note 8, at 755. 151 Bennett, supra note 85.

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Second, since the new federal loan scheme funnels all loans through the FDL program,152 the government ties up a significant amount of resources until the loans are repaid. Keep in mind that a chunk of those loans will not be repaid. The government forecasts that approximately 15% of the student loans made in 2007 will default.153 Further, the government is invested in a risky hedge by holding the loans for such an extended period of time.154 If inflation exceeds the current interest rates on the loans, the government is repaid dollars worth significantly less than what was loaned. Another negative public consequence is that indebtedness discourages entrepreneurialism because graduates cannot take risks, but must take jobs that will allow them to pay on their student loans. Entrepreneurialism is the blood of small business, which makes up 50% of the private American workforce.155 The high increases in the cost of education funded by debt cannot be sustained if not accompanied by a correlating increase in wages for a college graduate. The phrase “irrational exuberance” was used by Alan Greenspan to describe the escalated values of assets that are subject to prolonged contractions.156 In 2005, Robert Shiller used the phrase as the title of his book predicting the housing market crash.157 The phrase fits perfectly in this scenario as well. Prices are going through the roof, yet investors (students) are not blinking an eye—they just keep racking up student debt.158 While the price of education seems to be inelastic,159 unless there is a corresponding increase in opportunities for, or wages of, college degree holders, the bubble has to eventually burst.160

152

See 20 U.S.C. § 1071. Bennett, supra note 85. 154 Id. 155 Advocacy Small Business Statistics and Research, U.S. SMALL BUS. ADMIN., http://web.sba.gov/ faqs/faqIndexAll.cfm?areaid=24 (last visited July 4, 2012). 156 Alan Greenspan, Chairman, Fed. Reserve, Remarks at the Annual Dinner and Francis Boyer Lecture of the American Enterprise Institute for Public Policy Research: The Challenge of Central Banking in a Democratic Society (Dec. 5, 1996), available at http://www.federalreserve.gov/ boarddocs/speeches/1996/19961205.htm (describing Japan’s housing bust). 157 See ROBERT SHILLER, IRRATIONAL EXUBERANCE (Princeton Univ. Press, 2d ed. 2005). 158 See generally Auster, supra note 86, at 651–68 (citing statistics of debt levels and detailing individual accounts of students accumulating debts in attaining unaccredited degrees). 159 See Daniel L. Bennett, Subsidy-Absorbing Institutions of Higher Education, FORBES (Apr. 11, 2011, 5:00 AM), http://www.forbes.com/sites/ccap/2011/04/11/subsidy-absorbing-institutions-ofhigher-education/. 160 See Marco Rabinowitz, Higher Ed Bubble Bursting: US Bank, JPMorgan Cutting Back on Student Loan Market, BENZINGA (Apr. 11, 2012, 9:43 AM), http://www.benzinga.com/general/ psychology/12/04/2488006/higher-ed-bubble-bursting-us-bank-jpmorgan-cutting-back-on-student-. 153

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IV. RESOLUTION: CHANGES ARE NEEDED NOW TO PREVENT THE FINANCIAL FAILURE OF HIGHER EDUCATION INSTITUTIONS Although there have been no bona fide steps by Washington to address the growing cost of higher education, the situation has garnered much attention from media and academics offering various solutions. One interesting proposal is that the government should implement a derivativesbased solution that makes a loan contract between the students and either the lender or educator subject to a return on investment.161 While this proposal makes economic sense, the result would likely be that lenders and educators would not contract with low-income groups. Another proposal suggests that universities offer three-year programs as an alternative to the four-year degree, similar to a program American University recently enacted.162 However, this proposition ignores the fact that the vast majority of students do not complete their education in four years;163 therefore, these programs would offer little help to the overwhelming majority of students. While these proposals have some weak points, at least they are starting the conversation on what steps can be taken to avoid a crisis in higher education. There are multiple steps that can be taken to curb the burst of the education bubble. First, more funding should be redistributed to primary education, making sure students have the qualifications to enter college and the guidance to understand the real benefits of college and other career choices. At least then, students may be able to make educated decisions and be able to become positive contributors to society. Second, higher education institutions should have to meet certain criteria to be able to receive government guaranteed loans. If a school fails to graduate or provide jobs to its students, then these schools are not deserving of taxpayer dollars. Additionally, students that do not perform well in school should not be able to receive government guaranteed loans. Low-income groups would still have access to education, arguably better education, and there would be a benefit to society. There is no doubt that society benefits from a more educated class of citizens. However, a college degree does not necessarily create an educated class of citizens. In fact, the rise of higher education attendance has

161

Michael C. Macchiarola & Arun Abraham, Options for Student Borrowers: A Derivatives-Based Proposal to Protect Students and Control Debt-Fueled Inflation in the Higher Education Market, 20 CORNELL J.L. & PUB. POL’Y 67, 68 (2010). 162 de Vise, supra note 96. 163 Taylor, supra note 8, at 755.

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coincided with an increase of high schools failing to prepare students for college.164 The federal government spends half as much on high school education as it does on college education.165 These trends do not make logical sense, but they do provide an additional explanation of why the quality of higher education is in decline. We cannot expect to teach students calculus when they never learned algebra. Common sense should provide that our middle schools and high schools should be the focus of providing educational funding. Yet, Obama’s 2009 education overhaul forewent plans to invest in early education and instead put the resources towards increasing the number of community college graduates, and towards colleges that serve minorities.166 While the end goal is inspiring, the means have a history of negative results.167 The counterargument against redistributing funds away from higher education loans is that the redistribution would eliminate the main resource students use to fund college. Since most students lack credit history, employment history, or collateral, and would not qualify for loans in the private market—at least not on such favorable terms—the argument made in favor of these loan programs is that college would be unattainable by many Americans if these loans were unavailable.168 However, this ignores the fact that the market normally adjusts for supply and demand factors.169 Just as college costs increased with increased funding by the government, universities may be more cognizant of their costs in order to lower tuition, or be forced to show how the cost of their education produces returns. Further, banks would likely create innovative products that would cater to college students. Banks would be more likely to demand results. They would presumably examine the odds that debtors will complete their

164 See Are High Schools Failing Their Students?, CTR. FOR COMPREHENSIVE SCH. REFORM & IMPROVEMENT, http://www.centerforcsri.org/index.php?option=com_content&task=view&id=386&Itemid=5 (last visited Dec. 21, 2011). 165 See Derrick Z. Jackson, Op-Ed., The Death of Public Education, BOS. GLOBE, Apr. 6, 2010, at 15, available at http://www.boston.com/bostonglobe/editorial_opinion/oped/articles/2010/04/06/the_ death_of_public_education/?rss_id=most+popular. 166 Compare Baker & Herszenhorn, supra note 70, with David Stout, Obama Outlines Plan for Education Overhaul, N.Y. TIMES, Mar. 10, 2009, at A14, available at http://www.nytimes.com/ 2009/03/11/us/politics/11web-educ.html. 167 See generally Stephen Joel Trachtenberg, Spend Smarter, Not Less, N.Y. TIMES ROOM FOR DEBATE (Sept. 2, 2011, 10:48 AM), http://www.nytimes.com/roomfordebate/2011/08/23/spending-toomuch-time-and-money-on-education/investing-more-wisely-in-education (suggesting an allocation of education funding focusing more on K–12 education, among other things, in order to correct current deficiencies). 168 Federal Higher Education Programs - Overview, supra note 75. 169 See How Supply and Demand Determine Commodities Market Prices, TRADINGCHARTS.COM, http://futures.tradingcharts.com/learning/supply_and_demand.html (last visited July 7, 2012).

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degrees and be able to pay back their loans. Moreover, before the Higher Education Act, most could obtain a degree while working part-time and could begin a career debt-free.170 More than likely the market, without access to infinite funds, would revert back to this dynamic. While low-income students may face greater challenges to obtain a college degree, these challenges could not be more burdensome than the current situation, which encourages low-income students to take on debt to enter a program that provides them no greater opportunities in life.171 Over the longer term, efforts to improve participation by students from disadvantaged backgrounds will require investments in primary education and strengthening career guidance counseling to help students recognize educational and career opportunities that may not necessitate a college degree.172 Despite the many downfalls and wasted taxpayer dollars, legislative support for education loans is almost untouchable. Voters have been sold the idea that such loans are a way to improve lifestyles and support an educated community. Nonetheless, Americans are not against making institutions and students accountable for the funds they receive.173 So if the United States is going to continue to focus on funding higher education, there has to be a tie to performance—of institutions and students—in order to obtain loans. An institution with a 20% graduation rate is stealing from its students and society. Loans should not be given to students for attendance at universities that do not have graduation and employment rates that allow the majority of the student body to pay back their loans. Additionally, student borrowers should also have to meet certain criteria, such as grade requirements or debt caps set using statistics that help indicate whether a student will be successful in attaining her degree and paying back her loans. Institutions that are the ultimate recipient of government loans should have to show a minimum graduation rate and a minimum employment rate in the graduate’s field of study.

170

Roots, supra note 17, at 521. See Auster, supra note 86, at 633–34. 172 See generally ORG. FOR ECON. COOPERATION & DEV., REVIEW OF NATIONAL POLICIES FOR EDUCATION: HIGHER EDUCATION IN IRELAND (2006), available at http://www.oecd.org/dataoecd/ 30/46/37844047.pdf (reviewing Ireland’s successful education overhaul). 173 See Holding the For-Profit Education Sector Accountable, STUDENT LOAN BORROWER ASSISTANCE (June 16, 2011), http://www.studentloanborrowerassistance.org/2011/06/16/holding-the-forprofit-education-sector-accountable/. 171

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As in the housing crisis, a reaction by the federal government is likely to be delayed.174 Cuts to funding for higher education are not likely to occur until there is actually a crisis. Therefore, universities should be proactive over the coming years in evaluating how they can adjust to decreased funding, tuition, or attendance. Universities that cannot adjust are likely to need capital infusion from states, or face painful cuts, in which case some universities may not survive. V. CONCLUSION The market manipulation of the American housing market began in an effort to provide low- and middle-income Americans access to loans.175 The newfound money distorted the demand of the market and prices skyrocketed.176 People began taking on debts they could never afford to pay.177 When subprime lenders began to default, the effect was felt by almost all homeowners.178 Likewise, the government’s overly liberal extension of federal loans to students has distorted the demand for higher education to such an extent that education is overpriced and oversold.179 In the attempt to open the doors of higher education to lower- and middle-class Americans, the government has encouraged students to take out significant amounts of government guaranteed debt.180 Education costs have risen concurrently,181 though the opportunity to pay off growing student loans has not increased.182 If interest rates rise on student loans, more students will likely find themselves in a position of being unable to afford to pay their student loans. The bulk of the housing bust was felt by individual homeowners who were convinced they were making a sound long-term investment in the American dream.183 But corporate titans that built themselves around the

174 See WOODS, supra note 23, at 30 (noting that despite the dramatic changes in the housing market, the Fed consistently stated there was no housing bubble). 175 Id. at 17–21. 176 Id. at 25–28. 177 Jada F. Smith, The Weekend Word: More Jobs, More Risks, N.Y. TIMES CAUCUS BLOG (Feb. 4, 2012, 6:00 AM), http://thecaucus.blogs.nytimes.com/2012/02/04/the-weekend-word-more-jobs-morerisks/. 178 Id. 179 Schneider, supra note 55. 180 Roots, supra note 17, at 504–06. 181 Taylor, supra note 8, at 749. 182 See Ip, supra note 7. 183 See Foreclosures Set to Hit 1 Million Mark in 2010, supra note 52.

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bubble also went bankrupt or were bailed out.184 If many American students are situated with a losing investment, similar to housing borrowers, they may not be willing to continue to pay on their debts. The United States may eventually need to ask whether universities are too big to fail.

184 Mortgage Lender Running Out of Cash, Options, ASSOCIATED PRESS, July 31, 2007, available at http://www.msnbc.msn.com/id/20056343/ns/business-us_business/t/mortgage-lender-running-out-cashoptions/.