Exploding Student Debt: The Next Big Bubble?

The Calculated Risk Blog — one of the econometric blogs that I follow regularly — posted this graph last month:

Recently, many pundits and politicians have warned of a student debt crises that will dwarf the recent mortgage crises. The next time you hear someone issue these types of warning, make sure to keep the above graph in mind. Student debt is bad but it has never come close to the shear magnitude of household mortgage debt.

Also, since the onset of the recession, the majority of student debt is now owned by the Federal Government — not held by private investment banks or individuals, the way mortgage debt and property assets are distributed. This means, if a student debt crisis ever happens, private banks and individual investments will be relatively shielded, unlike the mortgage crises that caused our recent recession.

Why does this matter?

Because there are people that claim that student debt is the next big bubble. Bubble, they warn! And while there is a well-reasoned argument for this position, the majority of people issuing these tyes of warnings are advocating for policies that will only make the problem worse. Their solutions: more restrictions on issuing student debt, higher interest rates for existing student debt to recoup the cost of delinquency, and less federal and state spending on higher education, which they believe has fueled the increasing cost of higher education. These people are missing the point.

We should be focused on mitigating the factors that caused the dramatic increase in student debt over the past five years, rather than making debt more costly and harder to attain. The question of why college costs have increased over the past three and half decades is complicated, but most of the recent changes in public university costs can be explained by this graph:

Since the beginning of the recession, states have defunded public universities, shifting the cost from the taxpayers to low and middle income students in the form of student debt. Not surprisingly, the amount of debt issued by Sallie Mae since the beginning of the recession has more than quadrupled. The recent increase in student debt is not a symptom of the long-term increases in college costs as much as it is an effect of the recent defunding of public universities by the states.

Joseph Stiglitz said it best in a recent post:
With costs soaring, incomes stagnating and little help from government, it was not surprising that total student debt, around $1 trillion, surpassed total credit-card debt last year.
Some wonder how the American ideal of equality of opportunity has eroded so much. The way we finance higher education provides part of the answer. Student debt has become an integral part of the story of American inequality. Robust higher education, with healthy public support, was once the linchpin in a system that promised opportunity for dedicated students of any means. We now have a pay-to-play, winner-take-all game where the wealthiest are assured a spot, and the rest are compelled to take a gamble on huge debts, with no guarantee of a payoff.
The answer to the student debt crises should include: restoring state and federal funding to public intuitions so tuition becomes affordable again, implementing easier refinancing measures allowing students to benefit from today's ultra-low borrowing rates, at the same time working on long-term solutions to curb the cost of higher education.

As I wrote earlier, the overall cost at some public institutions has remained constant over the past twenty years. The only thing that has changed is the amount the state contributes and the tab that is picked up by individual students. It's time to reverse these changes.


Kareem said...

well said, good points all-around

Art Novice said...

If the education aspect of schooling is increasingly crowdsourced online, I wonder what one is purchasing through the high costs associated with tuition.

Nate Heckmann said...

Re: Art Novice

In my mind, there are two ways to approach this question: from an individualistic point of view (i.e. microeconomic) or from a societal perspective (i.e. macroeconomic).

An individual can look at the cost of obtaining a degree and then compare that to the value said degree would add in terms of workforce competitiveness and wages earned. In the past decade, tuition has ballooned while the average college graduate's wages have stagnated. This makes a college education look like a particularly bad investment, through the lens of this past decade.

From a macro point of view, however, you have to ask how much additional productive capacity a person with a degree has, not only in terms of wages, but in the amount of goods and services they are able to produce. Even if a degree doesn't guarantee you a job or higher wage in today's current job market, it does provide you with more knowledge and a broader skill-set (i.e. more human capital) that should, in theory, translate into a higher productive capacity throughout an individual's life time. Two people can make identical wages, while one may contribute significantly more to the economy.

This macro analysis is often missing when people do cost-benefit analyses for higher education and conclude that a college education isn't worth the money they shell out for it.

That being said, cost containment is imperative and may obviate the micro factors that are increasingly disincentivising people from obtaining higher education. "Crowd-sourcing" higher education through online courses would help with these micro factors without compromising any of the macro benefits that come from a higher education.

Stacy Barbee said...

What makes student debts more stressful is the fact that it can't be discharged in bankruptcy. I personally wouldn't favor the 'less federal and state funding for higher education'. But I would prefer if the deserving got the financial aids rather than turning it all into a waste. Adequate measures should be imposed so that the federal or state grants are doled out only to those meritorious students who need financial aid to continue with their higher education. In spite of all the good intentions, the absence of any set criteria or eligibility for the grants are turning them into waste.

Art Novice said...

Interesting quote from Noam Chomsky on student debt:

"I don’t think you can give an argument that there are economic necessities behind the incredibly high increase in tuition. I think these are social and economic decisions made by the people who set policy. And [these hikes] are part of, in my view, part of a backlash that developed in the 1970s against the liberatory tendencies of the 1960s. Students became much freer, more open, they were pressing for opposition to the war, for civil rights, women’s rights … and the country just got too free. In fact, liberal intellectuals condemned this, called it a “crisis of democracy:” we’ve got to have more moderation of democracy. They called, literally, for more commitment to indoctrination of the young, their phrase … we have to make sure that the institutions responsible for the indoctrination of the young do their work, so we don’t have all this freedom and independence. And many developments took place after that. I don’t think we have enough direct documentation to prove causal relations, but you can see what happened. One of the things that happened was controlling students — in fact, controlling students for the rest of their lives, by simply trapping them in debt. That’s a very effective technique of control and indoctrination. And I suspect — I can’t prove — but I suspect that that’s a large part of the reason behind [high tuitions]."


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