Bubbling

Over at Diverse Issues in Higher Education, Justin Pope wonders about the future of student loans. As he writes:

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.

I’ve heard this one before, but I’m pretty sure it’s not going to pop. What would that even look like?

Pope points out that there are “disturbing” signs. Student loan debt is rising, even though the salaries for recent graduates aren’t. Defaults on federal student loans are increasing. But this isn’t likely to be a crisis like other debt problems in the last few years. Part of the reason for this is that student loans are much, much smaller market than mortgages. Even if everyone stopped making payments on student loans, that wouldn’t cause the economy to collapse.

In order for the “bubble” to burst Americans would have to collectively decide that higher education just wasn’t worth it. And despite the escalating cost of college, this just isn’t true. As Pope writes: “to imagine the premium on education itself dropping off a cliff is to imagine a world where things have gone so wrong that job skills no longer matter.” This is not going to happen.

Part of what will prevent, or at least curtail, this bubble from popping is that it’s not a normal bubble. Because student loans are backed by the U.S. government, and include generous repayment options, it’s pretty difficult for economic downturns to have a direct, immediate impact on the institutions that actually loan out money.

But what may well happen is that student loans will just become much less available. This will not happen all at once and all across the industry, but it will begin to happen to certain schools and programs. First for-profit schools might be a problem for the student loan industry. Then maybe certain graduate programs, or certain overpriced liberal arts schools.

We really don’t know. Surely something will change in the industry. Both institutions and individuals are starting to understand that financing college through debt is becoming a problem. Until the country comes up with a policy solution, however, this bubble isn’t going to change. Or at least it’s unlikely to change very much.

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