Washington College in Chestertown, Md. (Courtesy of the college)

Sheila C. Bair, the new president of Washington College, was formally installed in her office on Saturday at the 1,500-student liberal arts school in Chestertown, Md. Bair previously chaired the Federal Deposit Insurance Corporation. Here are excerpts from a prepared speech she gave that day. In it, Bair laments rising student debt and discusses an initiative called “George’s Brigade” that aims to recruit urban students from disadvantaged backgrounds.

Sheila C. Bair, president of Washington College (Tamzin Smith/courtesy Washington College)

Last June, when the college announced my pending appointment to be its next president, a lot of my friends and colleagues asked, “Why Washington College?” They knew that I had worked at the [New York Stock Exchange] during the 1987 market crash; that I was assistant secretary of the Treasury when we endured the 9/11 terrorist attacks; and, of course, that I had a central role in responding to the 2008 financial crisis when I was chair of the Federal Deposit Insurance Corporation.  After so much excitement …. they were surprised that I would opt for the bucolic environs of a small liberal arts college in rural Maryland.

But they didn’t know what I knew about this special, 233-year-old institution. They didn’t know about its rich history as the first college to receive a government charter after the birth of our new nation; its unique status as the school George Washington himself authorized to bear his impeccable name; its excellence in so many academic disciplines, including its nationally recognized centers for the study of American history, literature and the environment; its beautiful location, nestled in the Chesapeake Bay watershed; and most importantly, they didn’t know about the supportive, intimate educational experience Washington College has provided students for over two centuries – one designed to open minds, not capture them — a school which positions its graduates to be nimble and adaptive to ever-changing economic, social and political circumstances  because they have been exposed to multiple disciplines and perspectives from people who may see the world differently from themselves.

Any of these reasons makes a compelling answer to the question, “Why Washington College?” But perhaps the biggest factor in my decision to say “yes” was the opportunity it provided me to give back in this, the likely final chapter, of my career.

I’m a Midwesterner, and like most from America’s heartland, I can be blunt. So let me say this: I’m not proud of the leadership my generation, the baby boomer generation, has demonstrated over the past few decades.  We have enjoyed the most influential positions in government and business, and to be sure, our reign of influence has been marked by many positive developments, particularly in the area of technological innovation. But we have not been good stewards of the economy or our financial system. We have a propensity for short-term thinking, for “borrowing from the future” to pay for the needs of today.  This has manifested itself in chronic deficits, unsustainable entitlement spending and an excessive reliance on cheap credit, instead of real wage growth, to fuel economic expansion. And perhaps most tragically, because of the growing complexity of the global economy, we are handing our young people a labor market which requires a college degree to navigate.  Yet too many of us have failed to exhibit sufficient far-sightedness to save enough money to pay for our kids’ education, even when we have had the financial wherewithal to do so.

So students have borrowed. Yes, they have borrowed — to the tune of $1.3 trillion and growing. Student debt is now the second largest category of debt. Only home mortgages are greater. A total of 40 million Americans carry at least one student loan, an increase of 11 million since the financial crisis. This explosion of student debt holds disturbing parallels to the subprime mortgage frenzy which led to the 2008 financial cataclysm. Both are fueled by well-intentioned, but poorly designed government policies to promote laudable social goals. Both have perversely led to an increase in the cost of attaining those goals. Both reflect a proliferation of loans to borrowers who have little chance of repaying them. And both promise to be a drag on economic growth for years to come.

I doubt that the student loan debacle will lead to a financial crisis. The dollar amounts are not nearly as large a portion of overall lending as were subprime mortgages.  And since 93 percent of student loans are backed by the federal government, the costs of defaults will mostly fall on taxpayers, not banks. But make no mistake, the trail we are on leads to tears. The average student debt load for college graduates is about $29,000, representing a monthly payment of around $300 on a 10-year amortizing loan, quite a chunk for the average college graduate whose take-home pay is around $2,500 a month. Of course many students – particularly those whose parents cannot help them – have significantly higher debt loads. A recent Pew study indicates that 77 percent of borrowers are from lower-income families.

High student debt levels impose personal financial hardship on graduates entering the working world, but they also hurt the broader economy. Numerous studies have indicated that young people put off other financial activity such as buying a house, a car, or starting a business, until they pay off their loans. Just as subprime loans hurt our economy as cash-strapped borrowers struggled to pay their mortgages at the expense of other consumer spending, so do high student debt loads promise the same negative impact on economic growth.

Some say that $29,000 of debt is not a bad investment for a college degree which will produce a 15 percent return in higher income potential, according to researchers at the New York Federal Reserve Bank. I would agree that given the alternatives of no college education or $29,000 of debt, the latter is the better choice. But wouldn’t it be better to see more kids graduating with no debt or with financial obligations which can be paid off in a few years?

A declining savings culture among parents is far from the the only driver of burgeoning student debt loads. Poorly designed Federal aid programs – which do little to impose accountability on schools – have led to scandalous abuses of these programs, particularly in the for-profit sector. Too many vulnerable, low-income kids have been recruited to for-profit institutions which are more interested in raking in their student loan benefits than providing them with a degree that has value in the job market.  While for-profit schools account for only about 13 percent of the student population, they account for about 22 percent of student borrowers and nearly half of all defaults.

Poor financial management at some schools, public and private, has also contributed to escalating college costs, though I believe the problems of the proverbial spa dorms and luxury gyms have been overstated. To be sure, easy student access to federally-backed loans has dampened financial discipline at many schools, but this is not a primary driver of rising tuition. Finally, state government cutbacks have had an impact, which is why tuition increases have accelerated more quickly at public schools than at private, nonprofits, as public colleges have been forced to make up for declining public support by increasing student fees.

The reasons behind tuition increases are many and complex. But as I have looked at the issue of affordability, I have concluded that the biggest problem lies in the uneven nature of this and preceding economic recoveries. Over the past decade, the majority of households have seen real wages decline, even as the need for their kids to go to college has increased. Thus colleges have been confronted by an increasing demand from students for college degrees even as their families suffer a declining ability to pay for them.  Schools have responded by rapidly raising their tuition “sticker price” hoping they can find enough upper-income families to pay the higher amount so that they can subsidize deeper discounts for lower-income students.  But this has been self-defeating. As tuition has gone up, so has the number of families needing help to cover the costs, creating the need for even deeper discounts. As a result, while tuition has increased significantly, revenues net of discounts have actually declined.

I am proud to say that I think Washington College has done a good job of trying to navigate this difficult environment. Our tuition increases have generally been smaller than at peer institutions, and our student default rates are among the lowest in the country. Building on this track record, I believe we are well-positioned to contribute to the growing national debate on college affordability. And we will do so with a two pronged attack — doing everything we can to hold the line on costs while dramatically increasing scholarship funding.

We are launching a new initiative – George’s Brigade –which will allow inner-city youth to apply with friends and have their applications considered on a group basis, because we know their transition to a small rural school will be smoothed and enhanced if they can share it with one or more friends. And we will aggressively fund-raise around this new initiative to make sure the full financial need of these students is met. Research shows that the success of low-income, first generation students in achieving a college degree is heavily reliant on financial support and a social support network. George’s Brigade is designed to address both needs.

We will also be launching a broader fundraising campaign called Dam the Debt to raise an additional $1 million a year in scholarship funding with the goal of reducing student borrowing by one-third. This program will be available to a broad range of families, as we recognize that even families considered to be “upper income” can struggle to cover tuition costs today. Through this new initiative, we hope to erect a dam against the rising wave of student debt, and reduce its flow from a torrent to a trickle.

Such initiatives are key to the future of small, liberal arts colleges like ours. It is essential to preserve the liberal arts college tradition.  It differentiates the American higher education system from others and is one of the reasons why that system is the envy of the world.

George Washington didn’t just give his name and wisdom to our school. He also gave us 50 guineas to help us get started. Fifty guineas constituted real money back then — roughly $20,000 – a sizable commitment for a public servant. Washington understood the importance of philanthropy to higher education, the obligation of society to help make sure that future generations have the tools and skills they need to prosper and contribute to the economy. And ever since his generous gift, patrons and alumni at Washington College have given generously in the tradition he began. They have been key to our success over the past two centuries.

I am committed to inspiring and leading that tradition of philanthropy and good citizenship. We will be prudent stewards of our donors’ generosity. Achieving efficiency without compromising quality, and focusing philanthropy on alleviating student debt will be key priorities of my tenure here. And we will aggressively promote the value of a Washington College degree in the marketplace to ensure that our graduates secure good jobs where they can maximize their contributions to our economy, while earning the income they need to retire, as quickly as possible, any debt that they accumulate while they are here. All of this, I know, will take time, but at the end of my tenure, I hope my legacy will be one of dramatically increased scholarship funding, dramatically decreased student debt, and the cultivation of new generations of alumni, invigorated and committed to their school, and eager to give back to an institution that was single-mindedly devoted to their education.

But just as I hope to inspire future generations, let me implore members of my own generation to think hard about the kind of society we are passing on to our young people, and the many challenges that lie ahead for them. I can think of no better way for us to give back than to help them graduate and enter the world debt-free, a status most of us enjoyed when we graduated from school decades ago. Let’s make the final legacy of the baby boomer generation one of generosity and caring for the future of our children and grandchildren. For as George Washington, our original benefactor once said:

If to be venerated for benevolence, if to be admired for talents, if to be esteemed for patriotism, if to be beloved for philanthropy, can gratify the human mind, you must have the pleasing consolation to know that you have not lived in vain.