Free Markets, Free People

postsecondary education

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.