Sheila Bair, who as head of the Federal Deposit Insurance Corp. in 2006 warned of a coming mortgage crisis, said she thinks the next crisis will be caused by student debt.
Bair, in an interview with Bloomberg published Monday, said she fears the current generation of college students will be so overindebted, they will be too weighed down to contribute to the economy, producing another disaster.
“In the aggregate, this is a huge problem,” said Bair, who is now president of Washington College in Chestertown, Maryland, the nation’s 10th oldest college.
Some 43 million Americans owe some $1.3 trillion in student loans, with many facing poor job prospects. The average college student owes $35,000. But more than 42 percent of federally owned student loans are in default. Less than 3 percent of families put money for college in tax-deferred accounts.
The issue has been front and center in the presidential contest with proposals for making tuition free at public colleges.
“A bank would never get away with what the Department of Education is doing,” Bair said of the federally underwritten student loan program. “There’s no underwriting, and they let these kids get way in over their head on debt they possibly can’t repay.”
Bair became aware of the student loan problem while researching her book, “Bullies of Wall Street,” in which she explains the 2008 financial crisis to young Americans in the hope they won’t make the same mistakes.
Once Bair was hired at Washington College, she decided to do something immediately about student debt. A brainstorming session with a working group came up with the idea of grants to graduating students, sort of a scholarship after the fact. But since the school’s budget couldn’t support it, she decided to use donations to fund the initiative, dubbed “Dam the Debt.” She also changed an internal policy to funnel unrestricted donations to scholarships.
Members of the class of 2016 received an average of nearly $2,640 to defray their debt.
Another part of her plan would shave $2,500 off tuition if the payment comes from a tax-advantaged college savings plan.
“I just thought, wouldn’t it be nice to make a statement as a college and provide some scholarship funding behind it to reward families who have the foresight to save ahead?” Bair told MarketWatch last month. A Government Accounting Office report found families that take advantage of such accounts make three times that of families that don’t.
She also froze tuition in December, and the school is considering guaranteeing tuition for the four years a student attends.
“The bad thing about the affordability and student debt crisis is that it really hits the vast majority of families,” Bair said. “Even what we would consider upper middle-income families, when it comes to college costs, especially when you have more than one child, it can be a challenge.”