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.
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