Free Markets, Free People

student debt

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.

The “higher education bubble”–ready to burst?

More and more it is becoming clear that a college education isn’t all it was cracked up to be in terms of guaranteeing a better lifestyle.  So is it worth the money and the debt?  Some are wondering:

The Project On Student Debt estimates that the average college senior in 2009 graduated with $24,000 in outstanding loans. Last August, student loans surpassed credit cards as the nation’s largest single largest source of debt, edging ever closer to $1 trillion. Yet for all the moralizing about American consumer debt by both parties, no one dares call higher education a bad investment. The nearly axiomatic good of a university degree in American society has allowed a higher education bubble to expand to the point of bursting.

Since 1978, the price of tuition at US colleges has increased over 900 percent, 600 points above inflation. To put that in number in perspective, housing prices, the bubble that nearly burst the US economy,  then the global one, increased only fifty points above the Consumer Price Index during those years. But while college applicants’ faith in the value of higher education has only increased, employers’ has declined. According to Richard Rothstein at The Economic Policy Institute, wages for college-educated workers outside of the inflated finance industry have stagnated or diminished. Unemployment has hit recent graduates especially hard, nearly doubling in the post-2007 recession. The result is that the most indebted generation in history is without the dependable jobs it needs to escape debt.

I was struck by the 900% increase since 1978.  I’ve certainly not seen anything in particular from our college grads – as opposed to those who graduated in 1978 – that would make what they received as a degree worth 900% more than it was in ‘78, have you?  And certainly nothing worth 600% above the inflation rate.

Frankly, the institutions of higher education have been scamming Americans for quite some time.  And this is just my opinion, but many of the colleges and universities in this country are a bit like some college sports teams – they don’t care if you graduate, they just want you to play well for them for 3 or 4 years.  Change “play” to “pay” and you describe many of the schools I’m talking about.  They really don’t give a rip about graduation rates.

And of course, when you have institutions get into marginal study areas like “gender studies”, etc., then it’s no longer about education so much as it is  indoctrination.  Or at least that’s been my experience and the experience of many I know.  And things like this only reinforce that belief.  As for the tolerance for different ideas?  Eh, not so much.  Occurrences like this aren’t as uncommon as one might think.

The question more and more are asking then is whether higher education worth the bucks?  There are plenty of studies that continue to show that college students earn more than their counterparts with a high school education – at least in gross pay.  But in net pay, is it enough to justify the expense?  Maybe not:

 

college premium-thumb-590x427-40405

 

Derek Thompson explains:

Here’s the problem. The college premium isn’t consistent across all industries. Some salaries have flat-lined, while other jobs have simply disappeared thanks to off-shoring and automated technology. Meanwhile, over the same time that the wage premium has doubled, the cost of a four-year college education has more than doubled. Student loan debt is near $900 billion, more than credit card debt in this county.

College education is an effective elevator to bring workers to higher-skilled, higher-paying levels in the labor force. The question is whether the ride is efficient. Today the elevator is so prohibitively expensive that students and workers are uncertain whether the floor they’ll be dropped off justifies the cost of the ride.

That wage premium makes it questionable as to whether or not the cost of the education is worth the investment and debt.  And it is likely to get worse, not better.   So are we in an education bubble?  And if so,  when the bubble finally bursts, will a college education again justify the expense relative to the net pay they can expect to earn over and above those without such education?

Maybe in China.  Because with the highest corporate tax in the world and politicians trying to find a way to raise taxes for everyone, the jobs they do find here aren’t going to be paying that well.

Yup, the more you look around, the bigger and bigger you realize the mess is.  And it isn’t going to get much better anytime soon.

~McQ

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