Wednesday, February 8, 2012

Leveraging One's Education

A student had trouble believing
That the newspaper wasn't deceiving
In ascribing a sign
Of reversing decline
To his borr'wing to learn basket weaving.

Citing the latest Federal Reserve statistics that show consumer debt up in December, the Wall Street Journal sees "a sign that the credit freeze is thawing." Indeed, household debt rose at a seasonally adjusted 9.3% annual rate, following a 9.9% rise in November. But - is this a good thing? Two considerations rate mention. First: we're trying to exit a huge financial crisis brought about by excessive borrowing, so any conclusions based on consumer debt trends should at least consider what an optimal level of borrowing would be, and whether we are still above it. Second, the largest component of December's increased consumer debt comprised student loans, which is certainly a bad thing. Student loans have been growing faster than they can be repaid, in part because federal and state programs will fund unlimited amounts with no credit underwriting; there is no assessment of the likelihood of the student and program of study generating sufficient loan repayment in the future. This must change.

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