What Is the Student Loan Debt Bubble?
The word “bubble” has been in the news a lot lately. You’ve probably heard about the “economic bubble,” the “housing bubble,” or the “mortgage bubble” used in reference to the current economic crisis. Now, some economists are speculating that a “student loan bubble” might be the next economic emergency. But what is a student loan bubble? And what does that projection mean for students?
In traditional economics, the prices of products and assets are determined by supply and demand. The higher the demand for something—and the rarer its supply—the higher the price will be. An economic bubble occurs when a product or service starts costing more than its actual value. The price goes up for a while, but the market can’t support it forever. Eventually prices crash—along with the markets that depend on them.
Economics isn’t science. Some economists aren’t sure that economic bubbles actually exist. Some believe it’s not uncommon for the prices of goods and services to vary from their actual values, and this doesn’t always cause a market crash. However, others point to recent events within the global economy as evidence that bubbles do exist, and their consequences are real.
It’s tough to identify whether a bubble exists until it bursts. But there are signs that we’re well into an economic bubble in the realm of education—and it’s only a matter of time until it bursts. Here are a few.
In a bubble, prices are separated from the intrinsic value of the product or service—and they can rise astronomically. Nobody doubts that the price of college is rising, but many are questioning its value as it gets more expensive. It’s been decades since a college degree meant an easy ticket to a well-paying job—just ask a philosophy major—and many students are finding that they can’t afford their loans once they graduate.
It’s been relatively easy to get financing
Just as in the housing bubble, it hasn’t been historically difficult for families to get funding for education loans. In the past, it’s been common for parents and students to patch together collections of private and federal student loan and grant money to come up with tuition payments.
Before the recession, banks did not thoroughly screen families to make sure they’re lending to parents who can realistically afford the debt—and to students who are likely to make enough to pay it off later. College admissions counselors are typically reluctant to tell parents and students that they can’t afford to go to their school. Since the housing bubble broke, some banks have gotten more strict with their student lending practices. But it’s still to the bank’s financial advantage to lend as much as possible.
Because financing has been relatively easy to get and many families consider college non-negotiable, there have been few checks on colleges’ ability to raise prices. However, it’s created a situation where families have been given funding they couldn’t afford to pay back.
Default rates are rising
Another troubling sign is that the number of students defaulting on their loans is on the rise. According to the US Department of Education, the default rates for student loans were around 7.2% by 2008—up from 6.7% the year before. The default rates were higher for those who attended for-profit schools (at 11%) than those who attended public or private colleges, at 6.2% and 4.1% respectively. The numbers are telling us that for a rising number of graduates, their degree isn’t translating directly into enough value to cover its cost.
Some lenders are leaving the market
Over two dozen lenders have announced they’ve either completely eliminated or scaled back their new loans to students through the Federal Family Education Loan Program (FFEL). This includes Sallie Mae, one of the country’s largest student loan lenders. This is a pretty good indication that lenders are getting nervous about the market—even before there’s been a marked crisis.
The student loan market is like other financial markets in this respect: once the market loses its regulation and market-induced price controls, it’s a very bad sign. For many students, the consequences of that lack of discipline have already been felt—until the last few years, it’s been easy to take out student loans you can’t afford, and it’s very difficult to discharge the debt. It’s likely economists won’t know that there’s a student loan bubble until it’s happened, however—and the best way to prepare is to keep your debt load light.
The Huffington Post: Student Loans; The New Big Bubble
MSN Money: Student Loans; Another Bubble Pops?
Chronicle of Higher Education: Default Rates for Student Loans Continue Steady Climb
Inside Higher Ed: The Next Market Bubble: Student Loans?
More About Understanding Student Loans
- Credit Repair Services You Should Never Pay For
- Questions You Should Ask Before Applying for Student Loan Forbearance
- The Bank on Students Act: What It Is, and How It Could Help Student Borrowers
- How the Death of a Co-Signer Can Affect Your Student Loan
- Peer-to-Peer Student Loans: What They Are, and How They Can Help You Pay for College
- If You're Unable to Work Because of a Disability: What Happens to Your Student Loan?
- New Rules for Debt Collectors: How They Could Affect Your Student Loan
- Having Trouble Repaying Loans? The Department of Education May Be in Touch