An explosion of bold loans aimed directly at consumers. Financial firms lending to customers with spotty or unknown credit records. Borrowers taking on a sizeable debt burden designed to finance an important future investment. The looming possibility of a massive debt disaster.
Sounds like a portrait of this summer’s subprime mortgage crisis. But it’s also an apt description of another risky lending sector: student loans.
An Associated Press article this week predicts the student loan industry may be the next financial sector to melt down, and an Arizona Daily Star editorial warns of an impending “”disaster similar to the mortgage crash”” if action isn’t taken to curb soaring tuition prices and libertine lending. Will student loans be the next commercial catastrophe?
Not just yet. There are differences between subprime mortgages and student loans. Parents co-sign most student loans, providing an extra safeguard against default. And the subprime crisis is unlikely to spill into student loans, since few student borrowers are also in the market for mortgages.
But frenzied lending and massive student debt aren’t promising economic indicators, and steps should be taken today to prevent exuberant lending from becoming a future flaw.
According to data from last week’s meeting of the Arizona Board of Regents, the average Arizona undergraduate leaves college saddled with $18,029 in debt, a 5 percent increase on last year. And this week, after the recently passed federal College Cost Reduction Act cut lender subsidies, companies providing government-guaranteed loans have already started reducing student discounts and raising rates, making private loans even more lucrative.
A student loan crisis might not ravage the economy, but it has the potential to devastate higher education and ruin the hopes of thousands of students. Legislators should plan now to prevent it.
Fortunately, there’s a simple way to forestall a crisis: adequately fund student aid.
Arizona students receive almost $1 billion in student aid each year, but according to ABOR, 36 percent still have unmet financial aid needs. They are therefore most likely to take out pricey private loans.
Fortunately, the regents are trying to ease the lending load and boost grant aid. A program approved last week will forgive debt for students who teach in a public school after graduation. And they are considering changes to the grant aid process.
But the regents don’t fund financial aid. Most student aid in Arizona is from federal loans and work-study programs, and much of the rest is provided directly by universities. The most meager contribution is approved by the state Legislature and contributed to the Arizona Financial Aid Trust.
Arizona gives less grant aid to college students than any state except North Dakota and Wyoming, according to the Arizona Republic, but the Legislature put up only $2.9 million for student aid last year – a pitiful 0.2 percent of the total cost.
Some think even this pittance is too much. Arizona Sen. Jake Flake recently called financial aid “”Robin Hood syndrome.”” Others have criticized the fact that the UA sets aside 15 percent of its tuition dollars for student aid. But if the Legislature did its part, the money wouldn’t need to be diverted in the first place.
Loans are important tools – like taking out a mortgage to buy a home, there’s nothing wrong with taking on some debt to finance a college education. But with half of Arizona undergraduates leaving college in debt, the best way to keep tomorrow’s lending under control is to fund financial aid today.
Opiners’ Board
Editorials are determined by the Wildcat opinions board and written by one of its members. They are Justyn Dillingham, Allison Dumka, Allison Hornick, Sarah Keeler, Connor Mendenhall and Jeremiah Simmons.
