Free Markets, Free People

Is there a student loan bubble?

You might have read one of the increasingly frequent stories (like this solid essay in n+1) about a student loan bubble.  The basics:

  • College is widely believed to be the ticket to success.  Degree-holders are more likely to be employed and they make more income than non-holders.
  • Many people tried to take refuge from a lousy job market by going to college, and the recession also pinched state budgets, forcing schools to raise tuition.
  • Consequently, the amount of student loan debt has exploded toward $1 trillion, eclipsing even consumer credit.  Since student loan debt is impossible to discharge even in bankruptcy, it was widely considered safe for lenders, and was securitized much in the same fashion as mortgages.
  • As punishing as the rules for paying student loans are, those saddled with the debt have been unable to pay—many fresh graduates aren’t competitive candidates for still-scarce jobs.  Only 40% of student loans are being actively repaid.  So lenders are starting to pull out.

Over the longer term, the growth in college costs has far outpaced inflation for decades (“Since 1978, the price of tuition at US colleges has increased over 900 percent, 650 points above inflation”), while the added-income value of those degrees has not grown at nearly the same pace.  The oft-quoted statistic that college graduates make $1 million more over a lifetime is misleading (it doesn’t take into account years of foregone income, for one thing), and there’s reason to suspect that much of the real discrepancy is due to correlation: students who have what it takes to pass through the filter of college admissions and stick it out are likely the kind of people who would make more money over their lifetimes anyway.

But is that enough to call it a bubble?

First, no one can really walk away from student loan debt like they can walk away from a mortgage, so many currently nonperforming loans can be expected to perform again when employment picks up.

Second, even if many people lose faith that a college degree is worth the price, tens of millions of kids have been groomed for college from a young age, and it’s true that employers still use college degrees as a significant signal of value.

That faith is unlikely to collapse overnight, and even if it did, it would take time for businesses to adjust.  Employers would have to start signaling a greater interest in other factors that prospective employees could substitute for accredited colleges.

Even entry-level jobs have college-educated competition, so how is a young adult to invest his time and credit, other than jumping on the subsidized college bandwagon?

  • Take a risk on going unemployed for a stretch?
  • Work for free?  (He’d still have to compete with college students.)  Aside from internships, working for less than the minimum wage to establish one’s value as an employee is generally prohibited.
  • Try to convince employers that alternative forms of study are as valuable as college experience?

These are luxuries many can’t afford.  There are federal guarantees for college money, but the closest thing a young adult can get to a subsidy for entrepreneurship or job hunting is the welfare state safety net if he fails.  The college path is blazed, even if it is the scenic route.

So for now, the lack of alternatives will help ensure there’s no big “pop” but a few marginal shifts:

  • Young adults will try to attend cheaper schools, work through college, and take on less debt.
  • Creditors will be less generous with student loans while repayment rates remain low.
  • And colleges will get by on less money than they planned to have.

As much as we need greater competition in postsecondary education, and better alternatives for young adults to build and signal their value, no student loan “bubble” will do the job.  It isn’t a bubble if the air has nowhere to escape.

18 Responses to Is there a student loan bubble?

  • I contend that the public schools now train students to be indoctrinated, and then they are ready to be finished off in college. So I would argue, to parents, that they should get their kids out of public schools and then have some serious justification for encouraging them, or paying for them, to go to college — like a need for rigorous work in the hard sciences. I would say that the most important thing to do for a kid is to cultivate the entrepreneurial spirit. Even someone of average intelligence, if inspired to run his own business, can succeed if he learns to learn what that takes. Learn how to read, write, do math, play baseball, shoot, plumbing and electricity, marketing and advertising, and strong ethics.

  • This was discussed earlier by Bruce.  I tried the link the thread, but my post was rejected.  Perhaps too short.
     
    Anyway to repeat what I said there, I think the demand by employers for college graduates is because high school is meaningless to them.  A college degree, although by no means a guarantee, increases the likelihood that someone is at least functional in written and spoken English.

    • Indeed, Bruce did cover it.  I missed that, but I do have a slightly different take on it than he does, because I’m still skeptical that this is a “bubble” like the others we’ve seen.  I don’t see how this “pops.”

      As to your point: a high school diploma still means something; after all, “dropout” means something.  Every level of schooling completed shows that a person has a certain minimum of skill and diligence.  And some college degrees, of course, are worth more than others.

      • Same goes with high school as with college degrees.  People pass at many, if not most, high schools for just showing up.

        • I work at a high school, in the attendance office.  Even just showing up is more than a number of them can handle.  So a HS diploma at least means you’re probably not an habitual truant.  Granted, that’s setting the bar pretty low, but it’s useful information for employers.

      • How this pops: A segment of incoming freshman decide not to be incoming freshman. A lot of articles are written about this. It socially normalizes the idea, and next year, there are even fewer freshman. It doesn’t take very many iterations of this process before the universities find they can no longer live in the manner to which they have become accustomed, and begin getting asked a lot of hard questions about all the money they currently suck up.

        The only really odd part is that enrollment is a discrete process instead of a continuous one, I don’t expect we’ll wake up one February day to discover that 75% of the students in college yesterday just dropped out.

        One other thing is that I’m not sure you’re using “bubble” the same way as most people talking about this. I don’t see very many people predicting a general economic catastrophe. Indeed, if we’re frittering away our resources unproductively on college one would generally expect that all the students failing to enroll and failing to saddle themselves with huge and economically unproductive debt would generally pick the economy up rather than depress it, at least the year or two after. But the higher ed industry itself will experience it as a bubble pop, and it will share enough attributes in common with a bubble pop that I don’t think it’s a misuse of the term. A popping bubble does not imply a major global economic catastrophe, just a major localized one.

        • People forget there are costs to running a uni, and even a small decline in applicants could be disastrous for them.

  • Best thing to happen is to end all student loans. We have too many people in colleges, we have too many cheap degrees, which waters down the value. People trying to start a life saddled with debt is bad news.

    Just think about this. A young person spends four years at university and builds up tremendous debt.  He gets out and can’t find a job for two years, he finally gets a job and it takes four years to get up to a decent salary, Let’s say 80K.

    Another guy goes to trade school for six months and learns welding. He gets a job immediately making 40K, in eight years he works up to 60k.  in the same time period that guy has earned over 400K, while the college grad has earned only about 200K and still owes 40K. 

    Now the college boy might end up making more in the long run, or he might be laid off and his job outsourced. But it sure is a struggle. No wonder so many people end up starting families late, and that has it’s own problems.

  • The most interesting part of the student loan debt is that “under the outstanding leadership of …” Barack Obama, federal backed student loans are now no longer channeled through banks … the federal government does most of these themselves.  While the banks moaned and groaned when this happened, about now, I’m sure they are happy campers.  Something like 2 out of 3 students now emerge from college with a relatively huge debt burden .. many default within years of leaving college.

  • I would rather have a certification as a master welder, carpenter, electrician, etc., than a BA or even an MA in a liberal arts field.
    Lots of marginally “educated” union thugs workers, are making six figures and more.

    • So what’s the average starting salary for a BA graduate in “woman’s studies” ?

      Internship Example

      Interact of Wake County. Staff the Crisis Line and develop programs to assist the victims of sexual assault and domestic violence.
      Womens Center of Wake County. Provide adminstrative assistance in case management to facilitate the empowerment of women to lead self-directed lives.

      You need a college degree to [wo]man a crisis hot line ?

  • Well there is this:

    http://www.nbcconnecticut.com/news/local/New-London-Graduation-Requirement-Speak-English-121883654.html?dr

    Another part of the problem is that students and parents confuse any college degree with a useful college degree. A person with a college degree in (gender, race, womens, etc…)-studies, art history or professional grievance is not likely to outearn someone who starts at McDonalds, becomes a store manager, then a store owner. A degree in stupidity is still stupidity.

  • Boy, some of you guys make it sound soooo easy.
    It’s easy, you suggest, to simply start up your own business, or work your way up to management or franchisee starting from a bus-boy.  It’s a sure fire way, you say, to go to a vo-tech school, become a welder or an electrician and in a few years on the job, you’ll be banking sweet cash.  Hogwash, I say.
    How many of you guys have experience running your own business?  How many know what it is like, even with a good product and a market to sell it, to dig yourself out of years of debt from start-up loans?  To meet a payroll?  To buy health insurance for you and your family?  To pay liability insurance?  Licensing fees?  Keep up with even reasonable regulations?  Then you have all of the equipment that costs huge amounts of money, and the insurance it takes to keep that up.
     
    There is a reason most small businesses fail.  It’s HARD.  And most of your bottom line is completely out of your control.  To be successful in your own small business, it takes one part know-how, one part perseverance, and twenty parts luck.
    Want to become a welder, plumber, or an electrician?  Well get used to staying in queue.  Jobs are scarce, even with vocational certifications.  And the reason that some of these jobs actually pay worth a damn is due to the “union thugs” that most of you condemn.
    A friend/ex-employee of mine is going to school to become a paramedic – a two year degree at a community college.  He tells me the place is littered with certified ex-plumbers, ex-welders, ex-electricians, all of whom in limbo after being laid off, or still working for $10/hr as an “apprentice.”  I’d say not to listen to the fool who tells a young person to go to vo-tech school to become a welder – because there are twenty guys, each with twenty years experience, waiting for the same job you hope to have after 8 months of school at City Vo-Tech.
     
    The best advice is to go to college and pursue a valuable degree in science, math, business, etc.  Sure, you may finish school saddled with debt.  Sure, it may take a few years to find gainful employment in your discipline.  But at least you’ll have a degree.  And unless you possess the know-how, ideas, and fire that it takes to succeed in the world of small business, stick with the tried and true.
    Because if you decide to spend 10 years of hard work, constant uncertainty, and thousands and thousands of dollars on a small business venture and it goes belly-up due to conditions out of your control, you won’t have a degree to fall back on – you’ll only have crushing debt.
     
    Take from me (and many others like me).  After ten years of busting my ass, I still walk a razor-thin line between keeping my head above water, and drowning in failure and debt.  And if you haven’t walked a mile in these worn boots, then you don’t know sh!t.
     
    Cheers.

  • “First, no one can really walk away from student loan debt like they can walk away from a mortgage, so many currently nonperforming loans can be expected to perform again when employment picks up.”

    What happens if they emmigrate?