First the dot.coms popped, then mortgages. Are student loans and higher education the next bubble, the latest investment craze inflating on borrowed money and misplaced faith it can never go bad?
Some experts have raised the possibility. Last summer, Moody’s Analytics pronounced fears of an education spending bubble “not without merit.” Last spring, investor and PayPal founder Peter Thiel called attention to his claims of an education bubble by awarding two dozen young entrepreneurs $100,000 each NOT to attend college.
Recent weeks have seen another spate of “bubble” headlines — student loan defaults up, tuition rising another 8.3 percent this year and finally, out Thursday, a new report estimating that average student debt for borrowers from the college class of 2010 has passed $25,000. And all that on top of a multiyear slump in the job market for new college graduates.
So do those who warn of a bubble have a case?
The hard part, of course, is that a bubble is never apparent until it bursts. But the short answer is this: There are worrisome trends. A degree is an asset whose value can change over time. Borrowing to pay for it is risky, and borrowing is way up. The stakes are high. You can usually walk away from a house. Not so a student loan, which can’t even be discharged in bankruptcy.
But there are also important differences between a potential “student loan bubble” and an “education bubble.” Furthermore, many economists think the whole concept of a bubble is a misleading way to think about what’s happening, and may actually distract from the real problems. College affordability is a serious issue, but it’s a different one. Borrowing for college and borrowing for, say, a house, are fundamentally different in important ways.
To be sure, there are some classic bubble warning signs:
l Everybody wants in. The idea that higher education is the only way to get ahead has become widely held. College enrollment has surged one-third in a decade. With rising demand, college tuition and fees have more than doubled over that time, outstripping inflation in every other major sector of the economy — energy, health care and housing, even when housing was bubbling itself.
l Those bills are paid with borrowed money. The volume of outstanding student loans is rising rapidly and now exceeds credit card debt, though recent reports of it crossing $1 trillion may be premature. Moody’s Analytics puts the number at about $750 billion. But while credit card debt is declining, student loan debt keeps going up.
l Just like housing, many student loans were made with little or no research into whether borrowers were fit. Federal Stafford loans are basically automatic for college students, and government backing for other types of loans gave other student lenders little reason to be picky.
l Defaults on federal student loans jumped from 7 percent to 8.8 percent in the most recent fiscal year. That measures just recent borrowers who were already behind within two years of their first payments coming due.
Those numbers are all alarming. But putting them in context requires thinking separately about the ideas of a “student loan bubble” and an “education bubble.”
First, one thing that’s important about the possible student loan bubble is that it poses much less of a threat than housing debt did to drag down the entire economy. Yes, many individual borrowers may find themselves in trouble. But total student loans probably amount to less than 10 percent of outstanding mortgages. More importantly, unlike mortgages, Wall Street isn’t knee-deep in securities comprised of bundled student loans, as it was with mortgages. (It also helps that it’s also harder to speculate in student loans; an investor can flip a house, but not a brain.)
The other big difference with student loans is the dominant role the federal government has assumed in the market in the last few years: It accounts for roughly 85 percent of student debt.