College Guide


March 05, 2013 3:54 PM Higher Education Is Not a Bubble

By Daniel Luzer

Some critics of higher education have started to suggest that, with its affiliated student loan debt, college is becoming a bubble like the housing market several years ago. How accurate is this analysis of the situation? Basically, it’s wrong. This is not a bubble.

The bubble people have a compelling argument. As Glenn Harlan Reynolds wrote in the Washington Examiner back in 2010:

Right now, people are still borrowing heavily to pay the steadily increasing tuitions levied by higher education. But that borrowing is based on the expectation that students will earn enough to pay off their loans with a portion of the extra income their educations generate. Once people doubt that, the bubble will burst.

So much of this “it’s a bubble” discussion seems to concentrate not in numbers, but in argument. This is fine but it’s not terribly meaningful. This is an economic analysis. Saying higher education is “just like housing” is simplistic.

It’s not just like housing. Here’s why. As Jordan Weissmann at The Atlantic explains, it’s just not that much money:

We need to put the size of the student loan market in a little context. Relatively speaking, it’s tiny. If the mortgage market was a Costco-sized superstore of exotic investment vehicles, the trade in education debt is more like your local bodega. At the height of the housing bubble, the banks, Fannie Mae, and Freddie Mac combined to issue trillions of dollars worth of mortgage backed securities a year, then placed huge sides bets on them using credit default swaps. By comparison, Sallie Mae (again, the biggest name in private student lending) sold just $13.8 billion worth of student-loan-backed securities in 2012, according to its annual report.

The other important thing to note here is that hazardous student loans are not increasing; they’re actually shrinking. The most risky education debt holders are those who attended for-profit colleges. Those Americans are most likely to go into default, have loans risky terms, earn little money, and fail to graduate from their institutions. But enrollment in for-profit colleges is going down. Enrollment in for-profit colleges declined 7.2 percent in the second half of 2012.

All of this is not to say that students don’t have too much debt and the country wouldn’t be much better off with a specific policy to reduce that debt, but this is not likely to be a structural problem for the U.S. economy any time soon.

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer


  • Doh on March 06, 2013 12:32 AM:

    I could be wrong (especially if it means I am agreeing with Instapundit), but I think when people talk about a bubble in higher education they are usually referring to the cost of college, of which debt is one indicator, not the likelihood that student loan foreclosures will bring down the economy. I think it's more the sense that people are paying more and more for education in the hopes that it will pay off 10 years down the line but that increasingly it appears it is unlikely to pay off, and that college will have to become significantly cheaper.

  • Michael Edelman on March 06, 2013 7:30 PM:

    You say it's not a bubble- but you don't give any arguments to support this contention.You simply state the obvious fact that it's smaller than the housing housing. That doesn't man it isn't a bubble. With the cost of a secondary education rising three times the rate of inflation (and expected future earnings), it's very much a bubble. Is it a "structural" problem? You don't really define what that means in this context. We do know that at some point the costs will be so high that either Universities will themselves have to radically restructure their costs, or the Government will be called in to implement some sort of fix.

  • Amused on March 06, 2013 7:42 PM:

    The higher education finance market is very much a bubble because it defies economic rationality.

    The ROI for a typical college degree is about the same as as 30 year treasury (aside: so tired about hearing about higher lifetime earnings for a college graduate without any consideration of the investment required for those incremental revenues).

    And the notion that since a small portion of student debt is traded that this is harmless or not a bubble... this is the finest liberal thinking and very fashionable. Except the US Treasury can and does experience losses and those losses can and do need to be covered - be it by decreased spending or increased costs. This is not funny money and the author is a TOTAL idiot for appearing to propose same.

  • Jeffrey on March 06, 2013 8:37 PM:

    The "bubble" reference from bloggers like Prof Reynolds is not to financial institutional holdings but to the Colleges themselves. They will find that sooner rather than later people will find that a college education is no longer worth the price tag. That will lead to a collapse in the post K-12 education system in the US.

    Total student loan debt outstanding is now larger than credit card debt outstanding and tops $1 trillion. The figure quoted from Weissmann is not germane to this discussion. Not only that but actual $ amount of loan delinquencies are rising (35% of all student loans are delinquent) and are not dischargable in BK. You have only to look at the % of the population aged 25-35 that owns a home today vs 15 years ago to see that the education debt bubble has had major ramifications on household formation.

    You only have to google terms like student loan debt outstanding and delinquency rate to find this information. Obviously that's too hard for the author of this article.

    Please try harder.

  • Walter Sobchak on March 06, 2013 9:26 PM:

    "this is not likely to be a structural problem for the U.S. economy any time soon."

    Oh Yeah?

    "How the Student Loan Crisis Drags Down Home Prices" By: Paul O'Donnell Published: Monday, 4 Mar 2013

    "The staggering amount of outstanding student debt — nearly $1 trillion owed – is beginning to impede the U.S. economy as a whole, a new report from the New York Federal Reserve suggests, chiefly by robbing the housing market of its richest crop of new buyers: young college graduates. The statistics in the report are dismaying in themselves. With the number of borrowers approaching 40 million nationally, including more than 40 percent of 25-year-olds, the average balance on their loans has risen to $25,000. About 6.7 million of all student borrowers, or 17 percent, are delinquent on their payments three months or more.

    * * *

    "For the average homeowner, the worst news is that these overleveraged and defaulting young borrowers are no longer qualify for other kinds of loans — particularly home loans. ... 'These are the people you'd expect to buy big houses," said student loan expert Heather Jarvis. "They owe a lot because they have a lot of education. They have been through professional and graduate schools, but their payments are so significant, they have trouble getting a mortgage. They have mortgage-sized loans already.'"

    * * *

    "Jarvis sees the average college grads' situation as a Catch-22. "If you don't prioritize your student loan debt you won't be able to get credit in the future," she said, "and if you do pay it, you won't be able to afford anything else.""

  • Andy on March 08, 2013 4:53 PM:

    When the mortgage bubble burst, the value of homes dropped. This is the normal, after-the-fact definition of a financial bubble, from tulips to tech stocks.

    How does that relate to federally-guaranteed student loans? It does not seem to relate. If there is a bubble, and it bursts, does the value of a postsec education drop? Will schools voluntarily slash their tuition/fees sticker price? (I doubt it; I think they would rather slash enrollment then be pressured to reduce their prices).

    When the mortgage bubble burst, underwriting standards tightened significantly. That also doesn’t relate to federally-guaranteed student loans. Loans are awarded based on the federal aid methodology.

    The FFELP securitizations are safe because of the federal guaranty and other subsidies associated with those existing loans. There isn’t a CDO issue in federal student loans.

    Even the Senators who say college is a poor value are sending their kids there. This is a classic, "do as I say, not as I do" scenario. When you stop seeing parents in places like Beverly Hills sending their kids to college, then you can see a major restructuring is about to occur.

    The sticker price of college, which most people do not pay, has been increasing much faster than the rate of inflation for decades, even during periods when there were not federal subsidies and periods when federal student aid was flat. We have gone from a situation where only a tiny percent of the USA thought college was important to a situation where at least 50 percent do. The combination of increased demand and relatively-high fixed costs result in increases in prices that reflect charging what the market will bear. Along with airlines, car rentals, and others, the colleges charge each market segment a different price, based on ability and willingness to pay.

    "35% of all student loans are delinquent"? It is more like 8%. The 35 percent is with an inflated numerator and grossly deflated denominator and only for one age group. There are as many delinquency calculations as hair colors. Always try to find out the definitions of the numerator and denominator.

    As noted economist Herbert Stein once said, "If something cannot go on forever, it will stop." No one has laid out a scenario for that here. Clearly, the wishes of many include college for $6 per credit. Wishing won't make it come true, nor will a burst bubble. People are forgetting that the super-cheap days of bachelor's degree programs were not due to cheap inputs; they were due to higher subsidies from taxpayers, and those resources have shifted toward covering seniors.

    Very few, if any, people are saying that student loans are not a burden on many borrowers. No one, however, has provided a compelling argument that there is a bubble.