Ever since the financial crisis, Americans have begun to see bubbles everywhere they turn. The damage wrought by the real estate bubble has been so extensive that the nation is rightfully terrified that another asset bubble is inflating beneath our noses, preparing to wreck the American economy at the drop of a hat.
Bubble-phobia has now become issue number one for those who reject Ben Bernanke’s aggressive regiment of monetary stimulus, as they think it may be inflating bubbles in everything from real estate to Treasury bonds. But for frothophobes, the most dangerous bubble going today is in higher education. Don’t believe me? A quick Google search will reveal hundreds of stories foretelling of a crisis when the student loan bubble finally bursts.
But let’s get a grip. When you take a closer look at higher education, you realize that while we do indeed have some problems to address, a bubble situation it is not. Here’s why:
1. The primary issuer of student loans is the federal government.
The classic definition of a bubble is when the market value of a specific asset becomes unmoored from its true “fundamental” value, encouraging further price appreciation until the process becomes unsustainable and precipitates a crash. This is exactly what happened in the real estate market in the 2000s, as both lenders and borrowers were convinced that real estate prices would rise perpetually.
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The thing is, the student loan industry can’t crash, pop, fizzle, or otherwise suddenly deflate because the Department of Education backs at least 85% of all student loans. Of the remaining loans that are privately issued, 90% have cosigners. On top of that it’s nearly impossible for student loan debt — whether owed to the government or to private lenders — to be discharged during bankruptcy. The upshot is that rising delinquency and default rates on student loans, while troubling in many respects, are simply not a serious danger to bank balance sheets and therefore are not going to cause a banking crisis like the real estate bubble did. If default rates do end up being much higher than the government anticipates, it will lead to losses for the federal government, and may even cause some political turmoil, but it will not add up to a financial crisis.
2. There are significant economic benefits to having a robust higher education system.
Those who label higher education a bubble often argue that government subsidies, through grants and loosely underwritten loans, are driving up the price of higher education, just like government subsidies of the housing market did. And they have a point. But what they rarely acknowledge is the significant public benefit we all reap by hosting the best university system in the world. Our universities attract high-skilled immigrants in droves. And the research performed at these universities creates the new processes and technologies that generate high paying jobs.
Subsidizing public education mostly through loans may not be the best way to keep these benefits flowing; but there is a legitimate argument that higher education deserves significant public support.
3. For those who graduate, college is a better deal than ever.
Again, let’s go back to the definition of a bubble: They’re a result of over-valued assets. And while there’s been a lot of talk lately questioning the value of a college education, the truth is that purchasers of college degrees are still by and large making out like bandits. A recent Georgetown University study estimated that college graduates, on average, earn $2.8 million more over their lifetimes than they would if they had just graduated high school. And this earnings differential has actually grown since 1999, by 12%. Even if you end up paying the full sticker price of $250,000 for a degree from one of the most elite institutions in the country, the investment still makes a ton of sense.
That’s not to say we don’t need higher education and student loan reform. Far too many young Americans are taking out loans for degrees they never complete. Others are far too optimistic about their future earning potential and take out mountains of debt for a degree that isn’t worth it in the end. And the attitude that every American child should strive to graduate from a four-year liberal arts school is probably misguided.
But at a time when the American worker’s wages are stagnant, and he is beset from competition from all sides, shouldn’t we be extolling education as one of the few ways one can invest in oneself — and not labeling it a dangerous boondoggle?