© Josh Sager – September 2013

 

Student loans were originally created to help non-wealthy people to get a higher education, even if they can’t pay for it out of pocket. For years, student loans remained a relatively manageable type of debt and Americans avoided any significant student debt crises.

Unfortunately, a combination of skyrocketing education costs, poor economic prospects for graduates, and characteristics of the loans themselves have created a situation where student loans are becoming the next economic bubble. If this trend keeps up, the student loan bubble will not only cripple the next generation’s economic prospects, but may result in students becoming the functional equivalent to indentured servants.

Every year, millions of Americans attend college, 60% of whom use student loans to pay their tuition costs. As of August 2013, it was estimated that American students owe $1.2 trillion dollars in student loans, averaging around $26,600 per student. Currently, student loan debt has eclipsed all other types of debt except for mortgage debt and is growing quickly.

If student loans continue along their current trajectory and the economic prospects of graduated don’t dramatically improve, it is very likely that the student loan bubble will become unsustainable and will start to burst.

 

Student Debt as a Bubble

An economic bubble forms when many people buy goods which turn out to be worth far less than their purchased value—these people buy the goods at an inflated price (the bubble), which eventually bursts, leading to a dramatic drop in the value of their assets. Such a drop in the value of assets can be immensely damaging, as it often leaves large numbers of people holding worthless assets that they went into debt in order to buy (ex. getting a mortgage for a house that drops in value, leaving the buyer paying the mortgage for the inflated value of the house).

Student loans are an economic bubble in much the same way that mortgages were. People are going into debt in order to buy a college education as an investment, but are unable to get any return on that investment due to poor job opportunities once they graduate.  This disparity between the cost and worth of an education leaves many American youths with huge piles of debt but no ability to pay that debt.

 

Notice the declines in all debt types but student loans in 2008: Quarter 4

The student loan bubble was worsened by a decline in the public (community/state) university system and the increase in the tuition of public schools. In the modern economy, a college education is pretty much required for a good job, thus students often feel obligated to obtain a higher education. With a good and low-cost public education system (made possible through government subsidies), this obligation is manageable, as student can simply default to the low-cost option in order to avoid going into massive debt to get the required education.

According to recent statistics, the average tuition cost of a 4-year public higher education has increased by as much as 78% during the last 5-years alone (Arizona). This case is extreme, but it demonstrates how quickly tuitions can increase, leading to an elimination of the lowest-cost option for higher education. With the lowest cost options increasing in price, students are left with no option but to get loans and put themselves into debt which will haunt them for years.

 

The Sticky Bubble

Unlike with a normal bubble, which bursts and exits the business cycle, the student loan bubble is not actually capable of going bust. Once it reaches its breaking point, this bubble will slowly deflate as people stop getting loans, but those already inside will be stuck in an economic morass Because most student loans are virtually impossible to discharge through normal bankruptcy, they will follow students forever and will indenture them under the yolk of debt until they are paid off (which may never happen).

Ever since federal bankruptcy reforms in 1976, student loans have been very difficult to get out of through bankruptcy. Initially, this reform was intended to prevent students from getting an education (which, unlike a house, cannot be taken away) and then simply declaring bankruptcy in order to avoid ever paying their debts. Unfortunately, this unique lending provision has become extremely damaging, as it prevents many honest Americans from escaping student loan debt that they will never be able to pay back.

If a normal economic bubble is like a soap bubble—a fragile yet inflating bubble that eventually becomes unsustainable and burst very quickly—then the student loan bubble is one of the plastic bubbles that kids buy in tubes—a resilient bubble that expands until it is unsustainable, pops, and slowly deflated until it is just a sticky, worthless, mess.

 

Students who graduate with a nearly worthless degree will still have to pay back the inflated price of their education, but will have few good job prospects. This lack of an ability to pay back loans will lead to many Americans living as though they were indentured serfs—held to work and pay large portions of their income to their “benefactor” with no opportunity to discharge their obligation. The United States has seen exploitation of this type before (ex. sharecroppers) and it rarely works out well for the indentured individual.

Because of this phenomenon, we are seeing older Americans have larger student loan debts than ever before. Previous generations have been able to discharge their student loans in a much shorter time due to their better job prospects and the increased value of their degrees. As the gap between the value of a higher education and the cost increases, it takes longer for Americans to pay back the costs of opportunity.

As this graph clearly shows, Americans are not only taking more loans, but the greatest growth in such loans is happening in the older age brackets.

 

Conclusion

Unless the United States immediately addresses the student loan crisis afflicting our students, everybody will suffer in the long run. Students will have fewer opportunities than their parents and the American education system will fall further behind that of the rest of the world. In the end, we will be left with a generation that has few economic prospects or chances for advancement, yet who has paid a massive price for this lack of opportunity.

In addition to the obvious consequences to the students, the oppressive effects of a student loan crisis will affect the country as a whole.

Students who are heavily in debt have far less buying power and disposable income than those who have manageable debt. If enough of our student are crippled by such a decrease in buying power, the economy as a whole is negatively affected—demand for goods decreases, thus leading to a decrease in hiring and a negative demand-side feedback effect on the economy.

If students are dissuaded from going to college due to the threat of loans, fewer Americans get an education and the United States falls further behind the rest of the world. In order to retain our place in the global technological world, we must have a pool of well-educated individuals to promote development, and this debt crisis acts to stifle the development of such a pool.