But that's not how it is. For one thing, the check on crappy schools and sleazy "diploma mill" institutions is essentially broken thanks to a corrupt dynamic similar to the way credit-rating agencies have failed in the finance world. Schools must be accredited institutions to receive tuition via federal student loans, but the accrediting agencies are nongovernmental captives of the education industry. "The government has outsourced its responsibilities for ensuring quality to weak, nonprofit organizations that are essentially owned and run by existing colleges," says Carey.
Fly-by-night, for-profit schools can be some of the most aggressive in lobbying for the raising of federal-loan limits. The reason is simple -- some of them subsist almost entirely on federal loans. There's actually a law prohibiting these schools from having more than 90 percent of their tuition income come from federally backed loans. It would seem to amaze that any school would come even close to depending that much on taxpayers, but Carey notes with disdain that some schools use loopholes to go beyond the limit (for instance, loans to servicemen are technically issued through the Department of Defense, so they don't count toward the 90 percent figure).
Bottomless credit equals inflated prices equals more money for colleges and universities, more hidden taxes for the government to collect and, perhaps most important, a bigger and more dangerous debt bomb on the backs of the adult working population.
The stats on the latter are now undeniable. Having passed credit cards to became the largest pile of owed money in America outside of the real-estate market, outstanding student debt topped $1 trillion by the end of 2011. Last November, the New York Fed reported an amazing statistic: During just the third quarter of 2012, non-real-estate household debt rose nationally by 2.3 percent, or a staggering $62 billion. And an equally staggering $42 billion of that was student-loan debt.
The exploding-debt scenario is such a conspicuous problem that the Federal Advisory Council -- a group of bankers who advise the Federal Reserve Board of Governors -- has compared it to the mortgage crash, warning that "recent growth in student-loan debt...has parallels to the housing crisis." Agreeing with activists like Collinge, it cited a "significant growth of subsidized lending" as a major factor in the student-debt mess.
One final, eerie similarity to the mortgage crisis is that while analysts on both the left and the right agree that the ballooning student-debt mess can be blamed on too much easy credit, there is sharp disagreement about the reason for the existence of that easy credit. Many finance-sector analysts see the problem as being founded in ill-considered social engineering, an unrealistic desire to put as many kids into college as possible that mirrors the state's home-ownership goals that many conservatives still believe fueled the mortgage crisis. "These problems are the result of government officials pushing a social good -- i.e., broader college attendance" is how libertarian writer Steven Greenhut put it.
Others, however, view the easy money as the massive subsidy for an education industry, which spent between $88 million and $110 million lobbying government in each of the past six years, and historically has spent recklessly no matter who happened to be footing the bill -- parents, states, the federal government, young people, whomever.
Carey talks about how colleges spend a lot of energy on what he calls "gilding" -- pouring money into superficial symbols of prestige, everything from new buildings to celebrity professors, as part of a "never-ending race for positional status."
"What you see is that spending on education hasn't really gone up all that much," he says. "It's spending on things like buildings and administration...Lots and lots of people getting paid $200,000, $300,000 a year to do...something."
Once upon a time, when the economy was healthier, it was parents who paid for these excesses. "But eventually those people ran out of money," Carey says, "so they had to start borrowing."
If federal loan programs aren't being swallowed up by greedy schools for expensive and useless gilding, they're being manipulated by the federal government itself. The massive earnings the government gets on student-loan programs amount to a crude backdoor tax increase disguised by cynical legislators (who hesitate to ask constituents with more powerful lobbies to help cut the deficit) as an investment in America's youth.
"It's basically a $185 billion tax hike on middle-income and low-income citizens and their families," says Warren Gunnels, senior policy adviser for Vermont's Sen. Bernie Sanders, one of the few legislators critical of the recent congressional student-loan compromise.
Gunnels notes with irony that a few years ago, when Obama moved to eliminate private-lender middlemen from the servicing of federally backed loans, much hay was made out of the enormous profits private industry had long earned on the backs of students. The Congressional Budget Office issued a report estimating that Obama's program would save $86.8 billion over a 10-year period by eliminating private profits from the system. Obama said taxpayers were "paying banks a premium to act as middlemen," adding that it was a "premium we cannot afford."
The outrage over profits, however, was short-lived.
"It was wrong when banks were making an $86 billion profit on students, but somehow it's OK when the government makes a $185 billion profit on them," says Gunnels.
One of the reasons the money has kept flying out the government's door over the years is that data about student-loan-default rates has been carefully concealed from the public and from Congress. For years, when it reported statistics about student defaults, the DOE relied upon a preposterous arbitrary calculation called the "cohort default rate," which essentially measured the rate of default only within the first two years of graduation. In 2008, Congress passed a law forcing the DOE to switch to a theoretically more accurate three-year measurement, which it sent to Congress for the first time last year. Overnight, the picture looked a good bit grimmer. The 2009 number, based on the old two-year 2009 "cohort" rate, was 8.8 percent. When the new three-year number came out, the rate had jumped to 13.4 percent.
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