Student Loan Bubble

Student loans are a real financial bubble and this may start to become a big education problem, says a recent report by Moody’s about the student lending industry. According to the credit rating agency:

The long-run outlook for student lending and borrowers remains worrisome. Unlike other segments of the consumer credit economy, student loans have not demonstrated much improvement in performance despite some improvement in the broader economy. Origination volumes have remained elevated and are projected to continue to grow with rising demand.

Students [could] …find themselves in worse financial positions and unable to earn the projected income that justified taking out their loans in the first place. Fewer people may pursue higher education should the returns fall and the required debt burdens continue to rise.

Why is this happening? Perhaps the best explanation comes from Gawker’s Hamilton Nolon, who writes that:

Colleges are steering students towards ever larger private loans, and that, since demand for education actually rises during bad economic times, we’re now smack dab in dynamic consisting of more people taking out more loans for school that will not provide them with a job that will enable them to pay back those loans, leading to higher loan defaults and, ultimately, the risk of a collapsing bubble.

Moody’s recommends that “students limit their debt burdens [and] choose fields of study that are in demand,” which seems like a solution that’s both inefficient and unrealistic, since students are notoriously bad at making those kinds of crucial life decisions at 18.

A more meaningful way to reduce loan burdens without hurting enrollment would be for colleges reduce costs and pass those reductions to students. It’s not students who are responsible for escalating college costs; it’s the institutions themselves. Cheaper college is the real path to decreasing student loan debt.

Daniel Luzer

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