The rise and fall of the infamous “dotcom bubble” that began in the late 1990s. Image from the NASDAQ index.
Equating the recent swelling of student debt in this country with the housing bubble that erupted at the end of the last decade is not a new comparison, just go ahead and Google it. As Thursday’s feature article on BreakThru Radio properly cited, the debt accumulation among those paying off student loans in America officially surpassed credit card debt late last year. Subsequently, mass media town criers of all stripes are predicting that unpaid education loans—and to some, higher education at large—could set up our slowly recovering economy for yet another plunge circa 2008.
As with all economic metaphors, there are exceptions in the fine print and no such thing as a perfect match. Stan Liebowitz, economist and professor at the University of Texas who predicted the housing market debacle of the last decade, articulates to BTR the less-than-subtle differences between the two scenarios.
“[Student Debt] is not a bubble in the sense of being an asset that was mispriced at too high a level. It is merely a loan that might not be paid off,” says Liebowitz. “Although mortgages also were not being paid off, it was mostly due to the housing bubble bursting and the lower house prices leading to negative equity in houses, which led to defaults.”
Admittedly, Liebowitz says he hasn’t studied the issue of student loans very closely but his assessment still rings true to those who have. Anya Kamenetz, contributor to the Huffington Post and author of DIY U: Edupunks, Edupreneurs, and the Coming Transformation of Higher Education, agrees. However, she maintains, “The major difference is that a college degree is, as opposed to owning a home, a non-transferable good. No matter how badly you could be in debt, your school can not foreclose on your degree; they can’t take it away from you.”
Kamenetz reinforces her point on the self-evident value of a college degree in an article she wrote for Chelsea Green Publishing titled “Why College is Not A Bubble”—something of a reaction to a recent assessment made by PayPal CEO, Paul Thiel.
In a now-infamous interview with TechCrunch, Thiel stated that “A true bubble is when something is overvalued and intensely believed… Education may be the only thing people still believe in the United States. To question education is really dangerous. It is the absolute taboo. It’s like telling the world there’s no Santa Claus.”
Well, if Santa Claus was the apotheosis of the American dream and gave the gift of possibly ensuring a lifelong sense of fulfillment then sure, why not? Then again, the same can be said of home ownership.
Though the value of a degree can not be nil, it can decrease the same way as home values can according to Alex Usher, economist and CEO of Higher Education Strategies. Before starting his business, Usher wrote and researched several reports for the Educational Policy Institute including one he co-authored titled “On the Brink: How the Recession of 2009 Will Affect Post-Secondary Education.”
“The trouble is a college degree is still, like a home, a positional good,” explains Usher. “As in, the value of my degree depends on other people not having one. Like a house, it’s about location, location, location. Not everyone can have a house in Georgetown.”
The question then becomes whether or not both bubbles make the same pop and if so, is would a student loan debt explosion be of the same destruction as the housing market crash nearly four years ago? As for the latter, Mr. Usher doesn’t think so.
Student loans, he argues, are a form of “consumption smoothing.” In the short term, durable goods (i.e. toilet paper or groceries) could see a slow down but since that money is still being spent within the economy, albeit on education, there’s little cause to expect a major halt. Usher emphasizes that colleges, especially private ones, still need to purchase things like equipment and are likely to invest in increased construction.
Even for those who can access financial aid but can’t afford to pay it back, the idea of ‘defaulting’ on a student loan doesn’t mean the same as defaulting on a home. Thus, it’s hard to imagine a bursting of the student debt bubble that could do substantial, long-term damage to the economy, and for a few other reasons.
While not uncommon, private loans are considered riskier in comparison to widely offered subsidized alternatives. According to a study released by College Board, nonfederal loans constituted 12% of overall funds used to fund post-secondary education in the 2009-10 school year. An even smaller percentage of those private loans are sub-prime, even if the education area of the financial sector could hardly be considered regulated in comparison to home financing. In fact, Lauren Asher, President of the Institute For College Access and Success described the private student loan market as the “wild west” of the financial industry.
As far as other distinctions, Mr. Liebowitz continued, “The mortgage market is considerably larger than the student loan market and I don’t think borrowers can walk away from a student loan as easily as they can from a home mortgage.”
That is, at least not yet, anyway.
Unlike the housing sector, the settlement of all student loans ultimately lies between the borrower and the federal government—even private loans. A growing movement wants to persuade policy makers that if the student debt halts consumer spending, working individuals who can’t afford to pay off their student loans should have that debt be forgiven.
Would an abject student bailout actually stimulate the economy, as its proponents suggest? It wouldn’t hurt, says Mr. Usher who believes that at least some form of delaying payments should take place within reason.
“It’s worth a look at things where they are five years into the work force. Cut it down, give it a one time pay-down, forgive it to the point where it’s a manageable burden. Then again, someone takes on $100,000, it seems as though they’ll just have to live with that for a little while.”