There's a fascinating article on Avvo's Naked Law site, titled 8 Reasons College Tuition is the Next Bubble to Burst.
It's of particular interest to me not only because I have a son about to enter 11th grade but also because the article implicates the 2005 "reform" of bankruptcy law in the Tuition Bubble.
Here's the theory in a nutshell: Private colleges have been riding the same debt bubble that real estate and derivatives were riding - spiking profits based on consumers getting easy credit. And since student loans are nondischargable in bankruptcy, the lenders take no risks that students will default. In other words, we have a system that encourages private schools to hike tuition rates, since students can always get those giant loans, and encourages banks to lend the money, since they know they will not be left holding the BK bag.
Because colleges know that students will simply borrow more money to cover tuition increases, colleges have been relying on steady tuition hikes to solve all of their money problems. If this continues a college degree will soon cost as much as a house.
And consider this, from Bloomberg:
Publicly traded higher education companies derive three-fourths of their revenue from federal funds, up from just 48 percent in 2001 and approaching the 90 percent limit set by federal law. The fact that colleges are almost completely relying on borrowed money to finance tuition, up to the legal limit, means we've almost hit the breaking point. If not for the easy student loan money sloshing around, many colleges would go belly up tomorrow.
Some for-profit higher ed companies like University of Phoenix make a practice of marketing to the homeless, accordiing to Bloomberg, since they're guaranteed to get federal funds. They pay the homeless folks a stipend, so it's a win-win for everyone - except for the fact that these guaranteed loans are driving the cost of education up to absurd heights for everyone.
The solution: Make student loans dischargable in bankruptcy, like other kinds of unsecured debt. While Obama has taken steps to reform the student loan business by making loans directly from the government and cutting private banks out, there is as yet no progress on making student loans dischargable.
