The parallels to the mortgage lending boom pre-2007 are eerie. People are qualifying for large loans with no regard to their ability to pay. For borrowers, there's no income check, no need to verify employment, and no disclosure of how much other debt they've taken on.
Welcome to the booming field of college loans 2012. As reported earlier this month in a joint investigation by the nonprofit news organization ProPublica and The Chronicle of Higher Education, the federal government gave out $10.6 billion last year in Parent Plus loans, which average about $11,000 per student per year. Adjusted for inflation, that's $6.3 billion more than in 2000. Just under a million families signed on for Parent Plus loans last year -- almost twice as many as in 2000.
The U.S. Department of Education, which runs this particular program, should not be in the business of knocking down families into poor credit and poverty. Yet, Parent Plus loans -- like the no-money-down mortgages of a few years back -- appear to run the risk of that very outcome.
The journalists' report tells the story of a woman making $25,000 a year in 2000 who took out $17,000 in loans for her daughter to attend NYU. Today, with fees and interest, the mother owes $33,000. Her credit has been so badly damaged that she can't qualify for a loan to send a second daughter to college. Student loan debt for Americans, as a whole, now exceeds credit card debt.
This tale of easy credit for people with little means is all the worse when you consider that one in five Parent Plus loans went to students who also received Pell Grants -- need-based financial aid for households with incomes under $50,000 that don't have to be repaid.
Is there a role for the Department of Education to tighten this lending? Should the department perform better credit checks on families? The answer to that question depends in part on your faith in the future. Lending to the parents of bright young students could give them the opportunity they need to step up the social ladder.
But there's also a gloomier prospect -- and another parallel to the mortgage disaster. The housing bubble inflated because people counted on housing prices to continue climbing skyward. With similar sunny optimism, families have been depending on graduates to emerge into careers with steadily growing paychecks.
Yes, college graduates earn 75 percent more, on average, than their peers with high school degrees. But that's if they can find a job. Some estimates say that 54 percent of recent college graduates are unemployed or underemployed -- meaning, they would prefer to work more hours or could take on more responsibility.
Another problem with Parent Plus is it allows colleges to keep raising tuition and fees. The bill for bigger student centers, fancier dorms, and higher faculty and administration salaries is being shifted onto middle- and working-class families. Colleges often steer families toward Parent Plus loans -- some include the loans in financial aid award letters -- when the colleges could be giving students a break on tuition.
Surely, colleges believe that families will safeguard their finances and forgo a loan that puts them at risk of defaulting. But is that asking too much of parents, who may be excited about an acceptance from a child's dream school? Pride and easy credit are a dangerous combination. I wouldn't want to deny a child the chance at an education that might mean everything to his or her future. Upward mobility is hard enough in this country -- and getting tougher all the time.
Yet the Department of Education and colleges need to close this lending spigot. Strict lending rules aren't punitive. They're just good sense.
This essay was first published in Newsday.