David Paterson Can Help Ground Skyrocketing College Tuitions

A not-so-funny thing happened on the way to the housing bubble. We created a college tuition bubble as well. As with housing, a toxic combination of easy credit and unsophisticated and unrealistically optimistic consumers has driven college prices sky-high.

Those prices aren't coming down anytime soon - and as the credit crisis continues, that means there's a risk that students who max out on federal loans and need extra private aid won't be able to borrow enough to afford expensive colleges.

Last week, Gov. Paterson announced his plans to help these students with a new, taxpayer-supported alternative student loan program. Other governors and the next federal education secretary, Arne Duncan, may well follow suit.

They and Paterson must make sure their intended cure doesn't worsen the disease. Only a smartly designed, responsible state lending program can maintain access to quality colleges - while lowering borrower costs and piercing the tuition bubble. A poorly crafted program might appear to preserve access, but it will only push costs ever higher.

According to a new study, college sticker prices rose 439% over the last 25 years. Those costs haven't hurt demand; students have been willing to borrow whatever it takes to go to their dream school.

The banks made it all possible by lending, sometimes obscene amounts, at interest rates as high as 20% a year. They didn't hesitate to foist high-interest private loans on the many borrowers who have untapped and cheaper federal loan options.

As a result, student loan debt has doubled over the last decade. Defaults are climbing. And the costs of higher education are becoming increasingly disconnected from economic returns.

At this rate, the last thing we need is more students drowning in more debt.

Since we already have a secure federal student loan system that makes a minimum of $57,500 available to every family, ideally a new loan program like the one Paterson proposes wouldn't be necessary. At colleges like Columbia and NYU where federal loans are not enough, it would be better to pressure schools to increase their own financial aid. And it would be better to encourage all students to consider lower cost, quality options like SUNY Binghamton.

But given the crisis mentality and political forces calling for additional student loans, the new program seems inevitable. Paterson should at least act like a responsible lender.

He should require borrowers to exhaust federal student loans - which have interest rates as low as 5% - before making his higher-cost alternative student loans available.

He shouldn't invest a dime in risky schools and those with abysmal graduation rates. In fact, Paterson should create a "Lemon List" of schools he won't invest in and will encourage students not to attend. Start the Lemon List with the more than 80 colleges that have graduation rates under 10%, and add those with very high student loan default rates and low graduate earnings relative to the cost of attendance. And don't forget the many shoddy for-profit "colleges" that recruit unsophisticated low-income students through heavy-handed advertising, only to rip them (and the taxpayers) off.

Most important, Paterson should require colleges to put skin in the game. Colleges on the hook for a substantial portion of student loan default costs will be invested in and accountable for supplying an educational program worthy of the price charged. And schools will be less likely to drive tuition sky-high without regard to their graduates' ability to repay debt.

If New York acts like a responsible lender, it can lower the cost of student loans to borrowers, pierce the tuition bubble and support broad college access. If it makes alternative loans without regard to students and schools, the bubble will keep inflating - putting college further out of reach even for families who can get assistance.