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A few weeks ago I wrote about the higher education bubble that I saw at the individual level. This is the idea that, for a given student trying to decide whether or not to take on more loans to go to school, it’s essentially a no-brainer; it’s a cultural given that a college education pays off, statistically speaking, even if in a specific case it doesn’t.

As always, however, the situation at the individual level (a student going into debt) is informed by the overall system. Today I want to write a bit more about how this system got so out of whack.

I’ll actually write about a series of theories of mine, so please tell me if you think I’ve got the facts wrong. I don’t want to claim these are new ideas, but rather a storytelling version of a common understanding of how this all went down. In this case, it’s a story about money and perceived risk, no too dissimilar from the housing crisis.

Before I get into the details of the theory, let me throw in that the Ivy Leagues like Harvard and Princeton have always been super expensive, but that’s part and parcel of their brand. It’s actually intentional, they wouldn’t have it any other way, because part of being elite is being out of control expensive (although it needs to be said that their financial aid to poor kids is exemplary). In other words, I don’t think my theory is going to work on super elite colleges, but that’s fine because most people don’t attend those colleges.

And college always cost some money, although some state schools were really quite reasonable back in the day. It’s just a question of how long after college someone would have to wait or work before their student debts would be gone so they could move on with their lives and think about buying a house (more on that connection below).

Okay, with those disclaimers, let me get started. Namely, it’s all about bankruptcy laws. I know that sounds unbelievable, but it’s really true. From Justin Pope:

Until 1976, all education loans were dischargeable in bankruptcy. That year Congress began requiring borrowers to wait at least five years before they could discharge federal student loans. Since 1998, borrowers have been unable ever to discharge federal student loans, and in 2005 the then-Republican-controlled Congress made private loans almost impossible to discharge.

Why does this matter?

Because it meant that people lending to students wouldn’t need to worry about getting their money back. That sets up a perverse system where young people who are not creditworthy can take on piles of debt.

On the one hand, it’s good for students to be able to finance their education- you wouldn’t want young poor kids to not attend colleges at all for want of enough funding.

On the other hand, it meant that the tuition and fees could essentially rise without pause, since there was nothing to force them back- no supply vs. demand situation.

This is especially true because students aren’t told and do not generally “shop around” for a good deal in college, and moreover colleges are incredibly underhanded about making their tuition and fees clear (I am giving the CFPB about 3 more months to force them to present packages in a standard form before I really start complaining).

Another example: Pell Grants. These are grants given to poor kids to go to college, and they aren’t loans – the government pays them straight to the college. But the colleges have not really made it easier for kids to go to college because of this free money, but rather have raised their tuitions by the amount of the expected Pell Grant. Some colleges are better at getting Pell Grant money than others, and in particular for-profit colleges get 7 out of 10 such grants.

[Speaking of for-profit colleges, how are they allowed to exist? They are the worst of the worst and in particular have outrageous practices in terms of disclosing fees and tuitions, giving commissions to financial aid officers who then urge students to lie on their financial aid forms. Not to mention providing questionable educations.]

I hope it’s not too hard now to understand why student debt has just surpassed $1,000,000,000,000 in this country, ahead of credit cards. On the banker side of the room, these student debts are being bundled up and securitized and sold to investors just like old mortgage-backed securities (which, as you recall, couldn’t fail because the housing market always goes up) who are being told there’s very little risk since students can’t discharge student debt through bankruptcy. There’s a strong analogy with the previous housing bubble and the current education bubble: even ignoring the individual’s goal of becoming an educated citizen and qualified worker, there’s the demand side from the banking system itself which feeds on the fees of securitized products that seem riskless.

But the cost to those individual borrowers is heavy; we have a system whereby young people are being saddled with enormous and unreasonable debt in order to even qualify as a worker, and they are carrying it around like a noose. It is, for example, one thing preventing the housing market from recovering, because the generation of young people who should be buying a house right now is instead still trying to pay off student loans.

What should we do about this?

First of all, let’s focus on the culture of education and how we think about it. Is it a certification process that people should pay for? Or is it a part of what we offer our citizens as their right?

If the latter, it’s time we rethink why state schools should exist, and fund them accordingly, rather than removing more and more funding while expecting them to uphold their state-school mandates. I went to UC Berkeley in the early 1990’s and it was completely awesome, but it’s getting more and more squeezed by the state of California, which is forcing it to choose between becoming a bad school and becoming a private institution. And yes, that means taxpayer money going towards the investment of broad education rather than to banker bailouts.

Second of all, let’s rethink the bankruptcy laws. At the very least for private student debt. For public student debt it also needs to be negotiable in certain circumstances. We need to get the colleges themselves to lower their fees enough that the debt loads are tolerable.

Finally, let’s rethink how much to expect someone to pay down their debt depending on their salary. From Bloomberg:

The second crucial step is to mitigate the burdens of already distressed borrowers. The Obama administration has made progress, for instance by proposing an initiative that would let some students limit their loan repayments to 10 percent of their discretionary incomes next year and would forgive balances after two decades. Private lenders should be given incentives to offer more modifications and flexible payment options.

Yes, this means that some of those securitized student debt loans will default, just like mortgages. And that will mean that already undercapitalized banks will be even more so, because they’ve been taking risky bets yet again, and Sallie Mae will be up Shit’s Creek. But the alternative, of a continuing debt trap for young people, is an even worse alternative.