It turns out that the Housing Bubble and the Higher Education Bubble have the same root cause: failure to scrutinize income.

In The American, the online magazine of the American Enterprise Institute, Jackson Toby analyzes how this failure will impact the next generation.

From The American

The portfolio of federally guaranteed student loans passed the $1 trillion mark in early 2012, and it continues to grow. The portfolio consists not only of loans for students from low-income families currently in college but also of hundreds of millions of dollars worth of loans taken out by students who graduated from college decades ago or quit before graduating without fully repaying their loans.

Until quite recently, about a third of college graduates didn’t have any loan indebtedness when they graduated. Some were lucky enough to have had parents or other relatives who financed their higher educations; others went to low-cost community colleges for their first two years before transferring to senior colleges, worked at low-paying jobs, and saved for college expenses. But the proportion of graduating seniors with student-loan debt has been increasing as the cost of college keeps rising. The average four-year college graduate who took out a loan owed $26,600 in 2011, and this does not count college dropouts who incur burdensome debts before giving up. The average unpaid student loan was $23,650 for 2008 graduates and $18,650 for 2004 graduates.

One effect of sizeable student loans on graduates is to make it necessary to find a good job quickly. If graduates fail to find good jobs, they are trapped in a prolonged adolescent limbo, burdening their parents economically and delaying the responsibilities of marriage and children. Former students will eventually default on a considerable portion of these loans — a reasonable estimate is 40 percent — or die before paying them off. This means that student debt is likely to be a permanent drain on taxpayers, as defaults add to the ballooning federal debt.

Defaulters suffer too, as their credit standings will be ruined for years. Even some graduates of professional schools discover that they cannot find jobs in the professions they borrowed large amounts of money to train for — and cannot repay their loans. Nine graduates of New York Law School accused their alma mater of misleading them about their postgraduate employment prospects and sued.

Causes of the Student Loan Crisis

Student loans are risky because of two aspects of a trillion-dollar misunderstanding:

1.    The failure of many students to understand the difference between grants, such as Pell grants, which are taxpayer gifts awarded to college students who can demonstrate financial need, and loans, which must eventually be repaid — with interest. …

2.    The assumption of most parents and politicians is that higher education is an investment in future careers. …